Psychological Contract – Meaning and Importance

The psychological contract is certainly an important aspect of the employment relationship as it invisibly binds the employer and the employee through a set of expectations. For the individual in an organisation, the psychological contract is mostly relevant as it directly affects the level of motivation, commitment and morale of that person. Moreover, a positive psychological contract helps to boost the productivity and performance of an employee.

Thus, to gain the commitment and loyalty of individual employees, it becomes essential that organisations put in place appropriate systems to foster the identification of employee expectations and ways to fulfill them. However, expectations are not easily identified, both on the employers and employees side. These often give rise to breaches on behalf of either one or both parties.

The maintaining of a positive psychological contract with all members of an organisation thus becomes a primary focus of the HR practitioner and HR practices play an important part in that if those are carefully linked to the psychological contract.

Definition of Psychological Contract

A psychological contract, in its broad sense, consists of a set of unwritten expectations that exist between each individual employee and their employer. The psychological contract consists of the “perceptions of both parties” to issues such as the employment relationship, the organisation and the individual, of mutual promises and obligations implied in that relationship between those two parties, that is, the employer and the employee.

Moreover, the essence of the psychological contract pertains to the fact that there constantly exists a plethora of unwritten expectations that forms part of the interaction between each member of an organisation and their employer. Thus, the psychological contract constitutes of a system made up of beliefs and which regroups all those actions that are expected from the employee and of the outcome that those employees expect from their employer in return.

Psychological Contract

The psychological contract often works in parallel with a written employment contract. It is however, different from the legal employment contract in the sense that the contract of employment outlines the terms and conditions of employment, remuneration arrangements and the basic rules governing the employment relationship. The psychological contract on the other hand, pertains to broad expectations regarding what each party is seeking from the relationship. It is not a written document but exists wholly within the parties heads.

Moreover, the ideal employment contract should be providing details with regards to the expectations of both the employer and the employee. However, this is not the case as the organisational environment is constantly changing which makes it almost impossible to be specific about all the working conditions right from the start of employment. It is therefore, left to the employee and the employer to form their own psychological contract. The psychological is implicit and dynamic as it develops as time goes by and experience is accumulated and as the employment conditions are altered or as employees start reconsidering their expectations.

Formulation of the Expectations

There are two main questions in the psychological contract which individuals must ask about the employment relationship and these are as follows:

  1. What can I reasonably expect from the organisation?
  2. What should I reasonably be expected to contribute in return?

Therefore the employment relationship should be understood by either party and the aspects of the employment relationship covered by the psychological contact will include, amongst others, some of those aspects of the expectations from the employee’s point of view:

  • How they are treated in terms of fairness, equity and consistency.
  • Security of employment.
  • Scope to demonstrate competence.
  • Career expectation and the opportunity to develop skills.
  • Involvement and influence.
  • Trust in the management of the organisation to keep their promises.

From the employer’s point of view, the psychological contract covers such attitudinal and behavioral aspects of the employment relationship as competence, effort, compliance, commitment and loyalty.

Changes to the Psychological Contract

The nature of the psychological contract is changing due to changes in the internal and external environment of businesses. Those changes can also be explained by a shift in paradigm from personnel management to human resource management. The previous or “old” psychological contract focuses more on imposed relationship using compliance, command and control while the new psychological contract`s core is mutual relationship which lays more emphasis on commitment, participation and involvement.

Moreover, the old psychological contract also focused on permanent employment relationships, on promotion, finite duties, the ability to meet job requirements, job security and the employees loyalty to the company and training provided by the organisation. The permanent employment relationship has evolved to focus more on variable employment relationship. Therefore, the talent of people are obtained and retained only when that is required.

With the evolution of the psychological contract the expectation for promotion has shifted to lateral career development, finite duties has been replaced by multiple roles, employees are also expected to add value rather than only meeting their job requirements. Employees moreover, expect to remain employable and they prefer to remain loyal to their own career rather than to the company. Employees also seek opportunities for self-learning rather than being sent for training by the organisation.

The emerging psychological contract is one which is short-term and situational. The parties involved do not depend as much as each other for growth and survival as it was the case before.

Development of Psychological Contract

The development of the psychological contract is linked to individual and organisational factors. The individual aspect includes experience and expectations about the employment relations, which might have been created before hiring, during the recruitment process, during the stage where the employees are socializing or from the experiences during employment. Other factors affecting the individual determinants are age, gender, level of education, union membership, the level of commitment to the job, job insecurity and need for greater employability, personality traits, the individual’s ability to cope with changes or ideology.

The organisational factors affecting the development of the psychological contract include human resource policies and practices which can contribute to making certain promises or obligations on the part of the employer and expectations of employees.

A positive psychological contract is worth taking seriously because it is strongly linked to higher commitment to the organization, higher employee satisfaction and better employment relations. Again this reinforces the benefits of pursuing a set of progressive HRM practices.

The importance of a high-involvement climate and HRM practices such as the provision of opportunities for learning, training and development, focus on job security, promotion and careers, minimizing status differentials, fair reward systems and comprehensive communication and involvement processes will all contribute to a positive psychological contract. The steps required to develop a positive psychological contract are shown below:

  1. Define expectations during recruitment and induction programmes.
  2. Communicate and agree expectations as part of the continuing dialogue that is implicit in good performance management practices.
  3. Adopt a policy of transparency on company policies and procedures and on management’s proposals and decisions as they affect people.
  4. Generally treat people as stakeholders, relying on consensus and cooperation rather than control and coercion.

The importance of communication in shaping the psychological contract, especially at the recruitment and induction stage when promises and commitments can be made by employers on such matters as interesting work, learning and development opportunities, not to make unreasonable demands on employees, feedback on performance, fair treatment, work life balance, a reasonable degree of security and a safe working environment. Following the recruitment and induction stage, communication is most effective if it is personal and job-related. Top-down communication is less important. A positive psychological contract can only be achieved if management keeps its word – if it does not breach the contract.

Violations of Psychological Contracts

Breaches of  can take three forms: inadvertently, disruptive, or reneging. Whether the victims identify the source of the breach to be unwillingness or inability to comply, impacts on how breach is experienced and what victims do in response.

  1. Inadvertent: able and willing to comply, occurs due to divergent interpretations
  2. Disruption: Willing but unable – inability to fulfill contract
  3. Breach of contract: Able but unwilling – break a promise

Psychological contracts are tacit – that is, they are understood or implied without being spoken or written. It is thus likely that they contain vague beliefs and unverified assumptions. Violation of psychological contract, which is when an employee feels that the organisation has failed to deliver on its promises, has major consequences.

Psychological contract breach is a subjective occurrence as it is one’s perception that another has failed to fulfill satisfactorily the promised obligations of the psychological contract. The employee has the belief that a breach has occurred and that affects his or her behavior and attitudes, regardless of whether that belief is valid or not.

“Self-serving biases” occurs when employees evaluate themselves and their own contributions positively and the contributions of the employer less positively. With such preconceived notions, whenever the psychological contract is fulfilled, the employee who generated the contract will take the credit for its fulfillment. And when breaches of the contract occur, these employees lay their own non-fulfillment of a contract onto external conditions, such as other people in the organisation, the global economy, or the organisation. 

Psychological contract violation may result in a number of attitudinal responses. Attitudinal responses consist of reduced organisational commitment, job satisfaction and increased cynicism. The five stages of employee response to employer contract breach are: complaining, lowered job involvement, retaliation, appeals to union and legal assistance, and resignation. These are all attempts at evening out the contract.

Employee cynicism has been described as a negative attitude and involves a belief that their organisation lacks integrity, negative emotions towards the organisation and a tendency for employees towards critical behavior of their organisation. The aims of employee cynicism are usually senior executives, the organisation in general and organizational policies. Breach of psychological contract may also create behavioral changes, in reduced effort and commitment and thus leading to significant implications for employee and organisational performance. This can lead to feelings of injustice, deception or betrayal among employees.

Employees with different understandings of their psychological contracts respond differently to contract violation and to planned organisational change.

Link between HR Practices and Psychological Contract

Competition has compelled organisations to find new ways to bring about various changes to maintain financial control. Organisations concluded that to maintain such type of control, they need to remove typical benefits usually involved in the “exchange relationship” between employer and employee. Such traditional benefits as lifelong security, guaranteed pay increases and assured career opportunities should no more be provided to employees.

Nowadays, the new tendency is that employees no more have security in their respective jobs even though they show commitment to the organisation. The employees hard work for simply having a job and this can eventually have a systematic effect on the employee-employer relationship resulting in the transformation of the established “trust, loyalty commitment and long-term relationship”.

For employers to obtain what they really expect from their employees, they should give them appropriate inducements. Employees who are satisfied and feel part of the organisation will be more willing to make effort to do their job to achieve organisational objectives and will be more apt to sort out problems arising in the organisation. Yet, employers have had to face many difficulties to assess the expectations of employees and which kind of inducements will influence employees to make desired contributions. 

Psychological contract has been early defined as an “unconscious assumption” as regards to the employee/employer relationship. Nowadays, psychological is said to be the type of agreement that is formed based on the exchanged promises between the employee and the employer. However, it is to be noted that each employee’s psychological contract is unique in nature and each employee’s perception of the relationship differs from each other.

Moreover, HR practices and psychological contract are both linked to the organisation strategy. HR practices firstly affect employee’s skills, attitudes and behaviors that consecutively have an effect on organisational performance. HR practices drive strong messages to individuals regarding what the organisation expects of them and what they can expect in return. HR practices is also said to convey promises and future aims on behalf of the organisation through recruitment, reward and development practices and these are viewed as a specific form of contract.

Furthermore, HR practices impact firm performance by creating structural and operational efficiencies and having a “strong HR system” tends to improve employee’s satisfaction towards their job. It is also assumed that having such a system in an organisation reduces exhaustion in employees. In simple terms, it can be stated that the business strategy and employment strategy have an impact the way of HR practice designs and this eventually shape the psychological contract of employees.

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