7/30/2019 oec final

1/16

1 | P a g e

INTRODUCTION

What is the psychological contract?

The term 'psychological contract' was first used in the early 1960s but became more popular

following the economic downturn in the early 1990s. It has been defined as 'the perceptions of

the two parties, employee and employer, of what their mutual obligations are towards each

other'. These obligations will often be informal and imprecise: they may be inferred from actions

or from what has happened in the past, as well as from statements made by the employer, for

example during the recruitment process or in performance appraisals. Some obligations may be

seen as 'promises' and others as 'expectations'. The important thing is that they are believed by

the employee to be part of the relationship with the employer.

The psychological contract can be distinguished from the legal contract of employment. The

latter will, in many cases, offer only a limited and uncertain representation of the reality of the

employment relationship. The employee may have contributed little to its terms beyond

accepting them.

The psychological contract on the other hand looks at the reality of the situation as perceived by

the parties, and may be more influential than the formal contract in affecting how employees

behave from day to day. It is the psychological contract that effectively tells employees what

they are required to do in order to meet their side of the bargain and what they can expect from

their job. It may not - indeed in general it will not - be strictly enforceable, though courts may be

influenced by a view of the underlying relationship between employer and employee, for

example in interpreting the common law duty to show mutual trust and confidence.

7/30/2019 oec final

2/16

2 | P a g e

Defining the Psychological Contract

Kotter (1973): An implicit exchange between an individual and his organisation whichspecifies what each expects to give and receive from each other in their relationship.

Herriot & Pemberton (1995): The perceptions of both parties to the employmentrelationship, organisation and individual of the obligations implied in the relationship.

Rousseau (1995): Individual beliefs, shaped by the organisation, regarding terms of anexchange agreementbetween individuals and their organisation

Guest and Conway (2000): The perceptions of both parties to the employmentrelationship, organisation and individual of the reciprocal promises and obligations

implied in the relationship

Psychological Contracts Characteristics

Define the employment relationship Manage Mutual Expectations Voluntary Reciprocal Evolving/Dynamic Subjective Relational Transactional

7/30/2019 oec final

3/16

3 | P a g e

The Changing Psychological Contract

Characteristic Old New

Focus Security Employability

Duration Structured Flexible

Scope Broad Narrow

Underlying prin. Tradition Market-focus

Intended Output Loyalty & Commitment Value Added

Employers key

responsibility

Fair Pay for good work High pay for high performance

Employees key

responsibility

Good performance in

present job

Making a difference

Benefits of Psychological Contract

Despite resource implications, theres a significant positive Return on Investment (ROI)from paying close attention to the psychological contracts of principal stakeholders. Not

only does this enhance the performance and retention of key staff and colleagues, but it

also helps them to feel valued and acknowledged. There is a clear link between healthy

psychological contracts and high performance.

Attention to psychological contracts helps people to work smarter, especially whenorganizations are reducing inputs and increasing their demands for outputs.

7/30/2019 oec final

4/16

4 | P a g e

Particularly in times of belt-tightening and change, you will want to achieve yourbusiness goals as cost-effectively as possible. This requires a significant investment of

time end energy in maintaining harmonious relationships within your workforce.

Working to restore or maintain healthy psychological contracts helps to maintain orincrease performance, to attract and retain talent, and to minimize resistance to, or

sabotage of, necessary changes.

The formation of the contract

During the recruitmentprocess, the employer and interviewee will discuss what they each can

offer in the prospective relationship. If an agreement is reached, most employers will impose a

standard form contract, leaving the detail of the employee's duties to be clarified "on the job".

But some of the initial statements, no matter how informal and imprecise, may later be

remembered as promises and give rise to expectations. Whether they are incorporated into the

parallel psychological contract will depend on whether both parties believe that they should be

treated as part of the relationship. The better organized employers are careful to document offers

to reduce the risk of raising false expectations followed by disappointment.

In Common Law the law implies duties requiring the employees to be loyal and trustworthy.

These are imprecise in their definition and uncertain in much of their operation. But, in

psychological terms, issues as to whether promises and expectations have been kept and met, and

whether the resulting arrangements are fair, are fundamental to the trust between the employee

and the employer. The first year of employment is critical as actual performance by the employee

can be measured against claims and promises made during the interview, and the management

has begun to establish a track record in its relationship with the employee at supervisor and

manager level. Feldhiem (1999) reflects these two strands by dividing the psychological contract

into:

transactional: this is the economic or monetary base with clear expectations that theorganization will fairly compensate the performance delivered and punish inadequate or

inappropriate acts; and

http://en.wikipedia.org/wiki/Recruitmenthttp://en.wikipedia.org/wiki/Promisehttp://en.wikipedia.org/wiki/Expectationhttp://en.wikipedia.org/wiki/Common_Lawhttp://en.wikipedia.org/wiki/Common_Lawhttp://en.wikipedia.org/wiki/Expectationhttp://en.wikipedia.org/wiki/Promisehttp://en.wikipedia.org/wiki/Recruitment

7/30/2019 oec final

5/16

5 | P a g e

relational: this is a socio-emotional base that underlies expectations of shared ideals andvalues, and respect and support in the interpersonal relationships.

Maintaining the psychological contract is an essential part ofPositive Employee Relations. The

terms of thepsychological contract require interaction and communication between employer and

employee. Over time, a climate of trust is developed if both parties are consistently fair in their

actions, keep their explicit and implicit promises, and maintain honest, two-way communication.

It is especially important for management to be consistently fair. A climate of trust is usually

easier to develop and maintain in small organizations. Senior managers can get to know

employees personally. While a climate of trust is not unique to non-unionized settings, but it is

especially important in them. Repeated violations of the psychological contract by management

cause dissatisfaction. It is this distrust, and a feeling of powerlessness among employees, whichoften lead them to seek a union to restore equity and fairness in the workplace or to simply leave

for another company.

The import thing to remember is that once the trust line has been severed, it is almost impossible

to repair. It would take an exceptional employee to trust an employer again.

The psychological contract - basic context and implications

In management and organizational theory many employee attitudes such as trust, faith,

commitment, enthusiasm, and satisfaction depend heavily on a fair and balanced Psychological

Contract.

Where the Contract is regarded by employees to be broken or unfair, these vital yet largely

intangible ingredients of good organizational performance can evaporate very quickly.

Where the Psychological Contract is regarded by employees to be right and fair, these positive

attitudes can thrive.

The traditionally dominant and advantageous position of an employer compared to its workforce

(or indeed of any other authority in relation to its followers, 'customers', or members, etc) means

that the quality of the Psychological Contract is determined by the organizational leadership

rather than its followers. An individual worker, or perhaps a rebellious work-group could

http://www.laboursolutions.com/psychological2.htmhttp://www.laboursolutions.com/psychological2.htmhttp://www.laboursolutions.com/psychological2.htmhttp://www.laboursolutions.com/psychological2.htmhttp://www.laboursolutions.com/psychological2.htmhttp://www.laboursolutions.com/psychological2.htm

7/30/2019 oec final

6/16

6 | P a g e

conceivably 'break' or abuse the Psychological Contract, but workers and followers under normal

circumstances are almost always dependent on the organization's leadership for the quality of the

Contract itself.

This last point is intriguing, because in organizations such as employee ownership corporationsand cooperatives, a different constitutional business model applies, in which workers and

potentially customers own the organization and can therefore to a major extent - via suitable

representational and management mechanisms - determine the nature and quality of the

Psychological Contract, and a lot more besides. We see a glimpse here possibly as to how

organizations (and other relationships involving leadership authority or governance) might be

run more fairly and sustainably in future times. We live in hope.

Intriguingly also, several factors within the Psychological Contract - for example employee

satisfaction, tolerance, flexibility and well-being - are bothcauses and effects. Feelings and

attitudes of employees are at the same time expectations (or outcomes or rewards), and also

potential investments (or inputs or sacrifices).

This reflects the fact that employee's feelings and attitudes act on two levels:

1. Employee feelings and attitudes are strongly influenced by their treatment at work (anaspect of the Psychological Contract), while at the same time,

2. Employee feelings and attitudes strongly influence how they see themselves and theirrelationship with the employer, and their behaviour towards the employer (also an aspect

of the Psychological Contract).

The simple message to employers from this - and a simple rule for managing this part of the

Psychological Contract - is therefore to focus on helping employees to feel good and be happy,

because this itself produces a healthier view of the Contract and other positive consequences.

Less sensible employers who ignore the relevance of employee happiness - or the relevance of

the Contract itself - invariably find that the Psychological Contract is viewed more negatively,

and staff are generally less inclined to support and cooperate with the leadership.

Aside from this, a major reason for the increasing significance of, and challenges posed by, the

Psychological Contract is the rapid acceleration of change in business and organised work. This

http://www.businessballs.com/workplace-wellbeing.htmhttp://www.businessballs.com/workplace-wellbeing.htm

7/30/2019 oec final

7/16

7 | P a g e

modern dramatic acceleration of change in organisations, and its deepening severity, began quite

recently; probably in the 1980s. Some leaders do not yet understand this sort of change well, or

how to manage it.

Autocratic leaders, which we might define as 'X-Theory' in style, are probably less likely toappreciate the significance of the Psychological Contract and the benefits of strengthening it.

Modern enlightened people-oriented leaders, which we might regard as Y-Theory in style, are

more likely to understand the concept and to develop a positive approach to it. (See McGregor's

XY-Theory - it provides a helpful perspective.)

An old-style autocratic X-Theory leader might say: "I pay the wages, so I decide the contract..."

Here the Psychological Contract is unlikely to be particularly healthy, and could be an

organizational threat or weakness.

An enlightened Y-Theory leader is more likely to take the view: "People work for many and

various reasons; the more we understand and meet these needs, the better and more loyally our

people will perform..."

Here the Psychological Contract is more likely to be fair and balanced, and is probably an

organizational strength and even a competitive advantage.

The most enlightened and progressive leaders will inevitably now find themselves considering

the deeper issues of employee ownership and representational leadership.

The increasing complexity of the psychological contract

The nature, extent and complexity of the Psychological Contract are determined by the nature,

extent and complexity of people's needs at work.

Work needs are increasingly impacted by factors outside of work as well as those we naturallyimagine arising inside work.

People's lives today are richer, more varied, and far better informed and connected then ever.

People are aware of more, they have more, and want more from life - and this outlook naturally

expands their view of how work can help them achieve greater fulfilment.

http://www.businessballs.com/mcgregor.htmhttp://www.businessballs.com/mcgregor.htmhttp://www.businessballs.com/mcgregor.htmhttp://www.businessballs.com/mcgregor.htm

7/30/2019 oec final

8/16

8 | P a g e

Work itself has become far more richly diverse and complicated too. The working world is very

different to a generation ago.

The employer/employee relationship - reflected in the Psychological Contract - has progressively

grown in complexity, especially since workers have become more mobile and enabled bymodern technology, and markets globalized. These changes began seriously in the 1980s. Prior

to this many modern dimensions of work - such as mobile working, globalization, speed of

change - were unusual, when now they are common.

Below the grid gives examples of how work has changed. The watershed might have been the

1980s, or maybe the 90s, it depends on your interpretation; but the point is that sometime around

the last two decades of the 20th century the world of work changed more than it had changed

since the Industrial Revolution, which incidentally was from about the late-1700s to mid-1800s.

Globalization and technology in the late 20th century shifted everything we knew about

organized work onto an entirely different level - especially in terms of complexity, rate of

change, connectivity and the mobility of people and activities.

There are also significant changes under way specifically involving attitudes to traditional

corporations, markets and governance. Examples of extremely potent 'community' driven

enterprises are emerging. Social connectivity and technological empowerment pose a real threat

to old-style corporate models. Younger generations have seen the free market model and

traditional capitalism fail, and fail young people particularly. Certain industries no longer need a

massive hierarchical corporation to connect supply and demand.

The significance and complexity of Psychological Contract have grown in response to all of

these effects, and given that the world of work will continue change in very big ways, so the

significance and complexity of the Contract will grow even more.

leadership transparency - or lack of..

This is worthy of separate note and emphasis because it's a big factor in organizations of all

sorts.

Lack of leadership transparency results from one or a number of reasons:

7/30/2019 oec final

9/16

9 | P a g e

assumption by leadership that employees already know assumption by leadership that employees aren't interested, or are incapable of understanding thoughtless leadership - not even considering transparency to be a possible issue belief by leadership that employees have no right to know a policy of secrecy - to hide facts for one reason or another

First let's put to one side those situations where a leadership intentionally withholds facts and

operates secretively because it has something to hide. Achieving a healthy Psychological

Contract will neither be an aim or a possibility for such employers.

More commonly in other situations, lack of transparency exists due to leadership negligence, fear

or insecurity, or simply a lazy old-fashioned 'X-Theory' culture, all of which can be resolved

with a bit of thought and effort, and which can produce dramatically positive results, because:

Leadership transparency has a huge influence on two major factors within the Psychological

Contract and its effective management:

employee trust and openness towards the employer employee awareness of facts - enabling employee objectivity in judging the Psychological

Contract

Where leadership is not transparent, employees have no reason to trust the employer, and

according to human nature, will tend not to be open and trusting in return. As discussed

elsewhere in this article, trust is crucial for a healthy Psychological Contract.

And where leadership fails to inform and explain itself openly and fully to employees,

employees will form their own ideas instead, which tend not to be very accurate or

comprehensive. Wrong perceptions, especially when we add misinformation, rumour, etc., thrive

in an information vacuum. Faulty beliefs become hidden factors (among the blue arrows in

the iceberg diagram) which influence the Psychological Contract very unhelpfully. Aside from

this, ignorance and uncertainty make people feel threatened and vulnerable.

http://www.businessballs.com/mcgregor.htmhttp://www.businessballs.com/psychological-contracts-theory.htm#psychological-contracts-iceberg-diagramhttp://www.businessballs.com/psychological-contracts-theory.htm#psychological-contracts-iceberg-diagramhttp://www.businessballs.com/mcgregor.htm

7/30/2019 oec final

10/16

10 | P a g e

Lack of leadership transparency is a particularly daft failing where clear explanation of

organizational position provides real objective justification for a particular organizational action

or inflexibility.

Transparency helps to kick-start a 'virtuous circle' within the Psychological Contract, as well asgiving employees reliable facts about their situation.

The 'virtuous circle' enables trust, openness and tolerance to develop. Reliable facts replace

faulty assumptions and unhelpful perceptions.

Lack of transparency starts a 'vicious circle'. Distrust fosters distrust. Secrecy fosters secrecy.

Employer/employee communications will tend to be closed, not open. Fear and suspicion on

both sides increase, particularly in employees, whose perception of the Contract worsens as a

result, in turn increasing animosity and fear.

'Virtuous and vicious circles' within the Psychological Contract are explained in more detail later

in this article.

Note that this advocation of transparency does not give leaders the right to unburden themselves

constantly of the worries and pressures that typically come with the responsibility of leadership.

Followers expect leaders to be transparent where people are helped by knowing, so that they can

prepare and react constructively.

Transparency here refers to the easy and helpful availability of information about the

organization. It's similar to openness, discussed later, which is more concerned with honest two-

way communications within an organization. These are not fixed definitions of transparency and

openness; just an attempt here to explain two different aspects of organizational and management

clarity.

Transparency tends to be a matter of leadership policy, style, by which clear facts about an

organization's position, activities and decisions are made available to its employees and ideally

also to its customers. Openness tends to refer to the flow of communications in all directions

within the organization, here especially the feelings, ideas and needs of employees. Good general

levels of openness in communications may have no influence at all on improving

http://www.businessballs.com/psychological-contracts-theory.htm#virtuous-circle-vicious-circlehttp://www.businessballs.com/psychological-contracts-theory.htm#openness-of-communicationshttp://www.businessballs.com/psychological-contracts-theory.htm#openness-of-communicationshttp://www.businessballs.com/psychological-contracts-theory.htm#virtuous-circle-vicious-circle

7/30/2019 oec final

11/16

11 | P a g e

leadership/organizational transparency, especially if the organization chooses not to be very

transparent. Transparent organizations find it much easier to foster open communications.

Psychological Contract & OE

Organizational citizenship behavior (OCB) has been defined as employee behavior that isextra-role, that promotes organizational effectiveness, and that is not formally recognized

by an organizations reward system (Organ, 1988).

In recent years, as organizational structures have become more flexible, much attentionhas been given to the role that employee citizenship behavior plays in improving

organizational functioning (Borman & Motowidlo, 1993; Van Dyne, Cummings &

McLean Parks, 1995).

Robinson and Morrison (1995a) suggest that psychological contracts are an especiallyimportant lens through which to view organizational citizenship behavior.

Organs (1990, p. 63) social exchange interpretation of OCB suggests that OCBsprovide employees a means through which they might reciprocate the positive actions of

employers who treat them well.

Social exchange theory suggests that employees are motivated to engage in extra-rolebehaviors when they perceive that their employment relationship is based upon the

foundation of a fair social exchange (Moorman, 1991; Organ, 1988, 1990).

7/30/2019 oec final

12/16

12 | P a g e

Literature Review

The literature on the psychological contract has expanded considerably over the past 10 years,

primarily under the influence of Rousseau (1989; 1995; 2001). However, the concept has a much

longer and deeper pedigree, with its antecedents evident in earlier work on social exchange

theory. Central to this theory is that social relationships have always been comprized of

unspecified obligations and the distribution of unequal power resources (Blau, 1964). In terms

of organizational analysis, social exchange constructs are clearly evident in the work of Argyris

(1960), Levinson et al. (1962), and Schein (1965; 1978). Argyris (1960) used the term

psychological work contract to describe an embeddedness of the power of perception and the

values held by both parties (organization and individual) to the employment relationship.

Significantly, this earlier literature illustrates the point that employment relationships are shaped

as much by a social as well as an economic exchange (Fox, 1974). Developing this further,

Levinson et al. (1962: 21) saw the psychological contract as a series of mutual expectations of

which the parties to the relationship may not themselves be dimly aware but which

nonetheless govern their relationship to each other. According to Schein (1978), these

expectations between the organization and individual employee do not only cover how much

work is to be performed for how much pay, but also a whole set of obligations, privileges and

rights. Scheins insightful contribution alerts us to the idea that labour unrest, employee

dissatisfaction and worker alienation comes from violations of the psychological contract that

are dressed up as explicit issues such as pay, working hours and conditions of employment

which form the basis of a negotiable rather than a psychological agenda.

Yet in spite of this earlier interest in the construct of the psychological contract, a more

expansive consideration of its application to management theory did not fully emerge until the

1990s. Interest in the psychological contract at this time was driven by a desire among academics

and practitioners to search for new and more innovative people management practices amidst a

context of economic restructuring, heightened international competition and changing labour

market dynamics. This renaissance in the psychological contract was led first and foremost by

Rousseau (1989; 1990), whose use of transactional psychological contracts - where

employees do not expect a long-lasting relational process with their organization based on

7/30/2019 oec final

13/16

13 | P a g e

loyalty and job security, but rather perceive their employment as a transaction in which long

hours are provided in exchange for high contingent pay and training seemed to capture the

mood of the day concerning labour market flexibility and economic restructuring of the

employment relationship.

It is important to acknowledge the contextual factors which contributed towards cultivating

the psychological contract literature, as much of it has underpinned subsequent research and

analysis (Herriot, 1992). Arising from these contextual dynamics was a series of changes which

seemingly called into question many of the assumptions of traditional employment relations

systems. Guest (2004) articulates the view that workplaces have become increasingly

fragmented because of newer and more flexible forms of employment. At the same time,

managers have become increasingly intolerant of time-consuming and sluggish processes of

negotiation under conventional employment relations systems. Consequentially, promises and

deals which are made in good faith one day, are quickly broken due to a range of market

imperatives. With the decline in collective bargaining and the rise in so-called individualist

values amongst the workforce, informal arrangements are becoming far more significant in the

workplace. As a result, the traditional employment relations literature is argued to be out of

touch with the changing context of the world of work. Given the increasingly idiosyncratic and

diverse nature of employment, a framework like the psychological contract, reflecting the

needs of the individual with implicit and unvoiced expectations about employment, can easily

find favour as an appealing, alternative paradigm for studying people at work.

While some of this debate could be seen to be wrapped in an Anglo-Saxon term of reference,

similar debates have nevertheless taken place in the US, across Europe and in Australia and

Asia (Leisink et al. 1996; Kitay and Lansbury, 1997; Kalleberg and Rogues, 2000; Allvin and

Sverke, 2000; Lo and Aryee, 2003). Such literature discourse has evidently served as a fertile

breeding ground upon which an analytical framework like the psychological contract could prove

productive.

It seems then, that with its emphasis upon the informal and the perceptual, the theory of the

psychological contract is often regarded in the literature as a germane conceptual lens that fits

with the changing contours and pressures emanating from global economics and shifting

employment patterns (Herriot, 1992). It seeks to go beyond the limitations of the legal contract

7/30/2019 oec final

14/16

14 | P a g e

of employment - which focuses exclusively upon the formalised aspects of work - and instead

considers some of the subjective and normative elements associated with people management

(Arnold, 1996). Moreover, it appears particularly useful in acknowledging that the economic

and formal aspects of employment are inevitably influenced by informal social interactions. It

also recognises that employment includes implicit and unspecified expectations which provide

the relationship with a strong element of indeterminacy. In that sense, managing people at work

is portrayed as containing a strong social dynamic, rather than a purely static and once-off

economic transaction. Conceptually and theoretically, the literature surrounding the

psychological contract has helped to understand the ever changing parameters of employment

relations. Although as we argue below, a lot more needs to be done and existing

conceptualizations require more critical and engaging frames of analysis.

7/30/2019 oec final

15/16

15 | P a g e

Conclusion

Based upon these arguments, it is expected that employees perceptions of the extent to

which their organizations have fulfilled the psychological contract will impact the extent to

which they engage in OCBs and thus improves the organizations effectiveness and change.

7/30/2019 oec final

16/16

16 | P a g e

References

Organ, (1988),Organizational citizenship behavior (OCB), (Borman & Motowidlo, 1993; Van Dyne, Cummings & McLean Parks,

1995).psychological contract: an overview

Robinson and Morrison (1995),Psychological Contract and organization Organs (1990, p. 63) social exchange interpretation of OCB Moorman, (1991); Organ, (1988, 1990). Social exchange theory Kotter (1973), Psychological Contract and organization Herriot & Pemberton (1995), organization effectiveness and psychological contract Rousseau (1995),Psychological contract a determinant of organization effectiveness Guest and Conway (2000),Psychological Contract and organization