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Performance, Rewards and the New Psychological Contract

John ShieldsWork & Organisational Studies

School of BusinessUniversity of Sydney

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Heaven, Hell and the Late HR Manager

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The Psychological Contract

Perceptions of mutual obligations by which both parties to the employment relationship interpret, act and respond to each other.

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The Psychological Contract (Management Perspective) (Adapted from Denise Rousseau, 1995)

Old Deal – ‘Relational’A fair day’s work for a fair day’s pay

If you: are loyal work hard do as you are told

We’ll provide: a secure job steady pay increases financial security

And you’ll be part of: a dull but safe organisation

New Deal – ‘Transactional’A flexible, mutually beneficial partnership

If you: develop the competencies we need apply them in ways that help us to

succeed behave consistently with our new

values

We’ll provide: a challenging work environment development support employability rewards for your contribution

And you’ll be part of: a revitalised, dynamic organisation

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Typical Negative Psychological Contract (Employee Perspective)

The Real Deal – ‘Diabolical’

More work and more risks for the same pay

If you: Stay Do your job plus someone else’s Volunteer for extra tasks

We’ll provide: A job if we can Gestures that we care The same pay

And you’ll be part of: An untrustworthy organisation with

change fatigue

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The Employee Psychological Contract: Determinants & Outcomes

(Adapted from Guest 1998)

State of the

Employee Psychological

Contract(+ or -)

Personal Determinants:Prior experienceValuesExpectations

Organisational Determinants:Workplace CultureLeadership styleHR Practices Work relationships

Attitudinal Outcomes:TrustFairnessReward SatisfactionJob SatisfactionMotivationCommitment

Behavioural Outcomes: MembershipTask performanceCitizenship behaviour

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Shifting Employee Expectations: A New Psychological Contract?

Commitment to own career rather than to organisation

Employees expecting greater job satisfaction

Belief that changing jobs is necessary for career growth

Employees assuming personal responsibility for career growth

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Commitment @Work 2003(Aon Consulting)

Research questions: How committed are employees to

their organisations? How effective are current workplace

practices in meeting employee needs and expectations?

Which practices have the greatest influence on employee commitment?

How confident are employees about their organisation’s current & future success?

How effective are HR departments in taking care of employees?

How effective are the organisation’s senior leaders?

Survey methodology: Second annual Australian survey Conducted in USA since 1997,

Canada since 1999 and UK since 2000

1,200 phone interviews in May-June Randomly selected national sample,

weighted to reflect gender distribution in each state

Respondents had to be over 18, working at least 20 hours per week and not self employed

80 questions Five point Likert scales:

Disagree/Well Below, through Neutral/Meets to Agree/Well Above.

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Commitment@Work: Research Model

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2003 Findings: Commitment Level(Comparable 2002 figures shown in brackets)

Productivity: 53% (37%) believed that their co-workers make efforts to improve their skill, and 55% (40%) agreed that co-workers made personal sacrifices to assist group success.

Pride: Although 62% (48%) would recommend their organisation’s products and services, only 44% (33%) would recommend their organisation as one of the best places to work.

Retention: 59% (54%) intended to stay with current employer for several years, but only 39% (36%) would stay if offered a similar job elsewhere with slightly higher pay. 28% would leave for a 10% pay increase and 58% would leave for 20% increase.

Responsibility: 78% feel responsible for helping the organisation to succeed and 63% feel responsible for helping their supervisor to succeed.

Trust: Only 48% share the values of their organisation while just 40% trust its leaders.

Overall: Commitment Index up to 94.0 (91.5) but commitment is inconsistent and polarised, with more feeling responsibility toward the organisation and supervisor and greater pride in produces/services, but less than half share their organisation’s values, trust its leaders, would recommend it as a good place to work, or would resist external pay opportunities.

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2003 Findings: Commitment Demographics

Groups with lowest overall

commitment levels:

Workers under 30 Men Workers in production or operations Workers with postgrad. degrees Workers in organisations with 1001-

4,999 employees Workers with 1-5 years of tenure

with the organisation Workers working >60 hours per

week Workers without onsite child care or

paid maternity leave Workers who prefer working alone

Groups with highest overall

commitment levels:

Workers over 60 Women Senior management/executive Workers with PhD Workers in small and very large

organisations Workers with <1 year or >5 years of

tenure Workers working 31-35 hours per

week Workers with on-site child care & paid

maternity leave Workers who prefer working in team

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2003 Findings: Commitment Drivers(Effectiveness =negative response rate <17%; ineffectiveness = negative response rate > 24%)

Safety/Security: Expectations met or exceeded regarding: fairly treatment (94% positive), safe secure workplace

(89%), workplace health & safety (89%), work environment free from fear, intimidation & harassment (81%).

Expectations not met regarding: stress-free work environment (39% negative), organisation’s concern about their job security (24%), OHS (23%).

Rewards: Expectations met or exceeded regarding: communication of reward package (88%). Expectations not met regarding: communication of benefits options (31%negative), pay program’s

encouragement of ownership and loyalty (39%), pay & benefits encouragement of performance (40%); link between performance and pay (30%).

Although most organisations do not offer a share plan, 52% of employees say that they would participate if one was offered.

Affiliation: Expectations met or exceeded regarding: trust shown in employees to do what is right for company

(84% positive). Expectations not met regarding: employee retention (33% negative), employee involvement in

planning change (33%), open candid communication (25%), people taking responsibility for the results of their actions (21%).

Growth: Expectations not met regarding: personal growth opportunities arising from job and training provided

(28% negative), communication of career opportunities (32%), efforts to create climate of learning (22%), managing and communicating change (37%), ability to attract new workers (29%), and ability to retain key staff (29%).

Work/Life harmony: Expectations not met regarding: management’s recognition of the importance of personal or family life

(26% negative).

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Commitment Drivers: Average Success Rates 2002 & 2003

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Implications for HR Practice: A Balanced Psychological Contract?

Main shortcomings are in the middle-order drivers (rewards, affiliation, growth)

Don’t neglect lower level needs (safety/security & financial rewards) Provide pay and benefits packages that encourage a sense of loyalty and

ownership. Dom more to involve employees in meaningful decision-making and change

management. Be more effective in linking performance and pay and in communicating the

link. Create an organisational work environment that minimises stress. Manage and communicate changes in a way that encourages employee

alignment with the organisation’s core values and strategic goals. Provide more effective opportunities for in-house learning and growth. Recognise the importance of personal and family lives. Accentuate strategies designed to address employees’ higher order needs

(personal growth, work/life balance).

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Aligning Risk Expectations and Rewards

Transactional/Risk-Inclined:

Performance-based salary increases

Variable pay Equity incentives Transferable self-managed

benefits Independent self-managed

career (external LM) Work/life balance

Relational/Risk Averse:

Graded pay Guaranteed annual salary Superannuation CPI increased Fixed working hours Hierarchical career

progression (internal LM) In-house competency

development

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Aligning Reward Practices and Psychological Contracts(Adapted from Denise Rousseau)

Performance- Reward

Highly Specified/High Risk

Link

Unspecified/Low Risk

Short term

Duration of Employment

Transactional:

Pay based on short term results

e.g. STIs in ‘prospector’ firms

Transitional:

Pay not performance-linked; total pay static; retrenchment packages

e.g. pay in turn-around firms

Relationship

Long term

Balanced:

Mix of person-based base pay, STIs and LTIs

e.g. high involvement ‘analyser’ firms

Relational:

Seniority-based pay

e.g. traditional ‘defender’ firms