link between hr practices, psychological contract fulfillment, and organizational...

8/10/2019 Link Between HR Practices, Psychological Contract Fulfillment, And Organizational Performance_MEDIATING.variABL

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793FEATURE ARTICLE

Correspondence to: Dr. Anastasia A. Katou, Lecturer in OB and HRM, Department of Marketing and Operations Management, University of Macedonia,540 06 Thessaloniki, Greece, 0030-2310-819921 (phone), [email protected].

Published online in Wiley Onl ine Library (wileyonlinelibrary.com)

2012 Wiley Periodicals, Inc. DOI: 10.1002/tie.21504

The Link Between HR

Practices, PsychologicalContract Fulfillment,and Organizational

Performance:The Caseof the Greek Service

SectorBy

Anastasia A. Katou

Pawan S. Budhwar

The purpose of this study is to investigate the impact of human resource (HR) practices on organiza-

tional performance through the mediating role of psychological contract (expressed by the inuence

of employer on employee promises fulllment through employee attitudes). The study is based on a

national sample of 78 organizations from the public and private services sector in Greece, including

education, health, and banking, and on data obtained from 348 employees. The statistical method

employed is structural equation modeling, via LISREL and bootstrapping estimation. The ndings of


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794 FEATURE ARTICLE

Thunderbird International Business Review Vol. 54, No. 6 November/December 2012 DOI: 10.1002/tie

However, most literature refers to the employeremployee

relationship in terms of attitudinal consequences and less

on its effect on organizational performance (Nelson &

Tonks, 2007; Pate, Martin, & McGoldrick, 2003).

Psychological contract research has tended to focus

on the implications of psychological contract violationrather than psychological contract fulfillment (Grimmer

& Oddy, 2007; Nelson & Tonks, 2007). Psychological

contract violation occurs when employees believe that

the organization has failed to fulfill its promises (also

see Baker, 2009). This study, however, is focused on the

employer promise fulfillment as perceived by employ-

ees, who are likely to reciprocate by fulfilling their own

promises (Conway & Briner, 2005; de Jong, Schalk, &

de Cuyper, 2009). This is because it is argued that the

outcomes of the psychological contract are more strongly

related to the fulfillment of promises than to promises

per se (Lambert, Edwards, & Cable, 2003).However, it is further argued that:

When psychological contracts are sound and perceived

to be honored, it does not necessarily mean that

performance levels will be enhanced. Rather, when a

contract is not sound and is perceived not to be hon-

ored or is somehow unbalanced, then it will act as a

de-motivator and result in various levels of withdrawal

behavior (Sparrow, 1998). It must be said, however,

that there is a conceptual ambiguity surrounding the

causal association in the employment relationship, and

the actual empirical relationship for this relationshipis scant (Guest, Conway, Briner, & Dickman, 1996).

(Westwood, Sparrow, & Leung, 2001, p. 624)

Research has also suggested, though perhaps not

strongly empirically tested, that HR practices may be a

key predictor of employee perceptions of the psycho-

logical contractboth employer and employee fulfill-

ment of their obligations. Specifically, it is argued that

a major function of human resource management is to

Introduction

Psychological contract is defined as an individu-

als system of belief, shaped by the organiza-

tion, regarding terms of an exchange agreement

between him/herself and the organization (Rousseau &Greller, 1994, p. 385). Psychological contract is impor-

tant because previous research has shown it to influence

important employee and organizational outcomes, such

as employee attitudes and organizational performance.

Specifically, it is argued that changes in psychological

contract may have an impact on employee attitudes such

as motivation, commitment, and satisfaction (Robinson &

Morrison, 1995; Shore & Tetrick, 1994; Sparrow, 1998).

Accordingly, changes in employee attitudes may have an

influence on organizational performance (Boselie, Dietz,

& Boon, 2005; Guest, 1997; Paauwe & Richardson, 1997).

the study suggest that employee incentives, performance appraisal, and employee promotion are

three major HR practices that must be extensively employed. Furthermore, the study suggests that

the organization must primarily keep its promises about a pleasant and safe working environment,

respectful treatment, and feedback for performance, in order for employees to largely keep their

own promises about showing loyalty to the organization, maintaining high levels of attendance, and

upholding company reputation. Additionally, the study argues that the employee attitudes of motiva-

tion, satisfaction, and commitment constitute the nested epicenter mediating construct in both the HR

practicesperformance and employeremployee promise fulllment relationships, resulting in superior

organizational performance. 2012 Wiley Periodicals, Inc.

Psychological contract is

important because previ-

ous research has shown

it to influence important

employee and organizationaloutcomes, such as employee

attitudes and organizational

performance.


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The Link Between HR Practices, Psychological Contract Fulllment, and Organizational Performance: The Case of the Greek Service Sector 795

DOI: 10.1002/tie Thunderbird International Business Review Vol. 54, No. 6 November/December 2012

FIGURE1 An HR PracticesPsychological ContractOrganizational Performance Linkage Framework

HR Practices

Resourcing Training Rewards Relations

Employee

Attitudes

Satisfaction Commitment Motivation

Organizational

Performance

Effectiveness Efficiency Development Innovation Quality

Employer

Promises

Fulfillment

Transactional Relational

Employee

Promises

Fulfillment

Transactional Relational

Organizational Contingencies: Ownership, Size Individual Contingencies: Gender, Age, Seniority, Position

Psychological Contract Fulfilment

The unmediated HR Practices effect?

The unmediated Employer Promises Fulfillment effect?

cultivate a positive psychological contract that will lead

to greater employee commitment and satisfaction and

thus to improved organizational performance. Particu-

larly, Suazo, Martinez, and Sandoval (2009) describe the

means by which human resource practices can create psy-

chological contracts, and argue that research on HRM

practices as antecedents to psychological contracts is in

need of further development (p. 160), something that

we propose to investigate in this study. On the whole,

taking into consideration that the psychological contract

in this study is reflected on the degree that employee

promise fulfillment is influenced by employer promise

fulfillment, we further assume that HR practices are ante-

cedents of employer and employee promise fulfillment

(Suazo et al., 2009).

Although the concept of psychological contract has

been largely investigated over the past years, more

research is needed in order for it to become a reasonable

framework for understanding the interactions betweenemployers and employees (Guest, 2004). Specifically,

there is a lack of empirical work in the field (Pate

et al., 2003) investigating causal orderings between the

relationships involved (Aryee, Budhwar, & Chen, 2002;

Cropanzano & Mitchell, 2005; Coyle-Shapiro & Shore,

2007), and there is a need for more studies examining

both employer and employee perspectives of the psy-

chological contract (Baker, 2009). Therefore, the study

aims to test a model hypothesizing a mediating role for

employee perceptions of both employer and employee

fulfillment of their psychological contract obligations in

the relationship between HR practices and organizationalperformance.

Moreover, considering that there is poverty of

research on psychological contract outside Western econ-

omies (Westwood et al., 2001, p. 648) we also propose

to extend previous US-centric psychological contract

research into a previously untested cultural/societal

context, such as the Greek services sector. Greece is a

peripheral country in the European Union that both

influences, and is influenced by, the Balkan and the Black

Sea countries. The Greek, Balkan, and Black Sea coun-

tries cultural and economic context is rather differentfrom the West European countries context. Therefore,

it would be interesting to extend the debate on the role

of human resource management (HRM) and psychologi-

cal contract in improving organizational performance to

countries such as Greece.

Overall, there is a lack of previous psychological con-

tract research treating organizational performance as the

ultimate dependent variable (de Jong et al., 2009). There

is also a lack of psychological contract research referring

to employer and employee promise fulfillment (Grimmer

& Oddy, 2007; Nelson & Tonks, 2007). Further, there is

a scarcity of research considering that HR practices areantecedents of employer and employee promise fulfill-

ment (Suazo et al., 2009), especially for non-Western

contexts investigating the HR practicespsychological

contractorganizational performance relationship (Pate

et al., 2003). Therefore, the aim of this study is to inves-

tigate the impact of HR practices on organizational

performance through the mediating role of psychologi-

cal contract, expressed by the influence of employer on

employee promise fulfillment in the Greek service-sector

context.

Research Model and Hypotheses

Building on the contributions of Guest and Conway

(2004) and Purcell, Kinnie, and Hutchinson (2003),

Figure 1 presents an operational model linking HR


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796 FEATURE ARTICLE


Relational contracts involve long-term, less specific, and

monetary- and non-monetary-in-nature beliefs such as

job security, loyalty, training and development, career

development, commitment, and trust (Cavanaugh &

Noe, 1999; Robinson, Kraatz, & Rousseau, 1994; Rous-

seau, 1990).

Psychological contract literature, further, argues thatfulfillment of the employer promises will be reciprocated

by employee satisfaction, commitment, and motivation

(Coyle-Shapiro & Kessler, 2000). For example, Robinson

and Rousseau (1994) and Guest et al. (1996) support the

view that employer contracts influence job satisfaction

and organizational commitment. Bies and Tripp (1995)

argue that the state of the psychological contract in terms

of fulfillment or breach will result in positive or nega-

tive employee attitudes, respectively, which in turn will

have an impact on employees in fulfilling their promises.

Coyle-Shapiro and Kessler (2000), Robinson (1996), and

Sturges, Conway, Guest, and Liefooghe (2005) supportthe view that employer promise fulfillment is positively

related to employee commitment, supporting addition-

ally that these attitudes will bring significant benefits

to the organization in the form of increased efficiency.

Generally, in cases where employees are satisfied, com-

mitted, and motivated, they will keep their promises to

the organization.

Accordingly, we hypothesize that:

Hypothesis 1: Employee attitudes will mediate the relationship

between employer promise fulfillment and employee promise

fulfillment.

The HR Practices System

It is argued that HR practices, such as employee resourc-

ing, development, rewards, and relations, influence psy-

chological contracts by shaping employer and employee

practices, psychological contract, and organizational per-

formance. The proposed operational model assumes

that the state of the psychological contract mediates the

relationship between HR practices and organizational

performance. Specifically, the model is constituted by two

related systems: the psychological contract system and the

HR practices system. The first system refers to psychologi-cal contract that is expressed by the relationship between

employer promise fulfillment (e.g., transactional, rela-

tional) and employee promise fulfillment (e.g., transac-

tional, relational) mediated by employee attitudes (e.g.,

satisfaction, commitment, motivation). This system is

based on the notions of reciprocity and social exchange,

whereas if the employer upholds his side of the bargain,

this will make employees satisfied, committed, and moti-

vated, and so they will reciprocate by upholding their

side of the bargain (Coyle-Shapiro & Kessler, 2003; Rous-

seau, 1995). The second system refers to the relationship

between HR practices (e.g., resourcing, development,rewards, relations) and organizational performance (e.g.,

effectiveness, efficiency, development, innovation, qual-

ity). This system is based on the high performance HR

practices concept, whereas HR practices influence orga-

nizational performance because of psychological contract

fulfillment (Rousseau, 1995). In particular, the specific

systems of the proposed model are explained below.

The Psychological Contract System

Employees keep their promises according to the behavior

of the good employer, or the history of the orga-

nization in keeping its promises to employees (Purcell& Hutchinson, 2007; Rousseau, 1995). Specifically, in

the context of the employment exchange relationship,

employees keep their promises if employers also keep

their promises (Coyle-Shapiro, 2002; Coyle-Shapiro &

Kessler, 2003). Reciprocityconstitutes a core component in

the psychological contract, meaning that employees posi-

tively respond to favorable behavior from their employ-

ers (Rousseau & McLean Parks, 1993). In cases where

employees believe that employers have broken their given

promises, this will have a negative effect on employee

promises fulfillment (Coyle-Shapiro & Kessler, 2000).

In the proposed model, employer and employee

promise fulfillments are two related parts of psychological

contracts. However, although psychological contracts are

highly subjective (McDonald & Makin, 2000), there are

some common features that categorize psychological con-

tracts into transactionaland relationalcontracts (MacNeil,

1985; Rousseau, 1990). Transactional contracts involve

short-term, specific, and monetary-in-nature beliefs such

as competitive wage rates and performance-based pay.

Generally, in cases where

employees are satisfied,committed, and motivated,

they will keep their promises

to the organization.


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and thus on organizational performance (Cavanaugh

& Noe, 1999; Guest & Conway, 2004).

Overall, based on the social exchange theory and

the theories of reciprocity, the coherent story explain-

ing our proposed model supports the view that the state

of the psychological contract mediates the relationship

between HR practices and organizational performance.Furthermore, in terms of the proposed model, the cat-

egorization of psychological contracts into transactional

versus relational may be used to clarify the empirical

contribution of the study by measuring the degree of the

influence on organizational performance of the various

items that constitute employer and employee promise

fulfillment. This is because the study area for testing the

proposed model is Greece, where the current economic

crisis from 2008 onward has affected its workplace, by

substantially increasing its unemployment rate due to the

downsizing of organizations, by significantly changing the

nature of jobs, due to the preference of organizations touse more flexible employment contracts, and by consider-

ably changing processes and production technology, due

to the efforts the organizations put in order to produce

more innovative products that will meet the constant

change of markets. Thus, considering the psychologi-

cal contract system, the proposed model may also add

promise fulfillment (Suazo et al., 2009). Specifically,

employee resourcing, being the beginning of the employ-

ment relationship, transmits the employment terms and

conditions of the organization to the potential job

applicants (Rynes, 1991). The emphasis the organiza-

tion is putting on employee training and development

usually reflects the view that the organization considersemployees as being part of its permanent employment

(Gomez-Mejia, Balkin, & Cardy, 2004). Each of the com-

ponents of employee rewards is capable of producing

psychological contract by establishing the belief that the

organizations employees are worth their long-term sala-

ries (Gomez-Mejia et al., 2004). Good employee relations

produce positive feelings in employees, who accordingly

keep their promises to organizations (Robinson et al.,

1994). Consequently, HR practices are likely to influence

psychological contracts. This is because the appropriate

use of HR practices will create a positive organizational

environment that will influence the degree of employerand employee promise fulfillment (Marchington, 2001;

Purcell et al., 2003; Suazo et al., 2009). Thus, HR prac-

tices determine the status of psychological contracts by

shaping the day-to-day behaviors of the members in an

organization (Rousseau, 1995).

Consequently, a major function of HR practices is to

cultivate a positive psychological contract that will lead to

improved organizational performance (Pate et al., 2003;

Suazo et al., 2009). This means that HR practices produce

positive psychological contracts, reflected in the positive

attitudinal reactions with respect to organizational com-

mitment (Rousseau, 1990; Robinson & Rousseau, 1994;Robinson et al., 1994; Lemire & Rouillard, 2005), work

satisfaction (Sutton & Griffin, 2004), and motivation

(Lester, Claire, & Kickull, 2001), which consequently

will improve organizational performance. Therefore, we

hypothesize that:

Hypothesis 2: Psychological contract fulfillment will mediate

the relationship between HR practices and organizational

performance.

Contingencies

Several organizational contingencies, such as ownership

(e.g., public, private), and size, and individual contin-

gencies, such as gender, age,years in organization (senior-

ity), and position in organization (e.g., management,

worker), may influence the HR practicespsychologi-

cal contractorganizational performance relationship.

This means that organizations do not operate in a

vacuum, but contingencies may have a positive or nega-

tive impact on HR practices and psychological contract

Overall, based on the socialexchange theory and the

theories of reciprocity, the

coherent story explaining

our proposed model supports

the view that the state of the

psychological contract medi-ates the relationship between

HR practices and organiza-

tional performance.


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798 FEATURE ARTICLE


involvement, communication) referring to the usual four

key areas of resourcing, development, reward, and rela-

tions, developed by Armstrong (1996). The items were

measured on a scale ranging from 1 (low use) to 5 (high

use). Specifically, the respondents were asked, How

would you rate the use of the training and development policy

in your organization?

Fulllment of Employer Promises

The construct of fulfillment of employer promises com-

prised ten items, following the Chartered Institute of

Personnel and Development (CIPD, 2008) psychological

contract fact sheet, which contains items from both the

traditional and the new psychological contract. Specifi-

cally, items that have been used in the past to reflect the

transactional nature of employer promises in the psycho-

logical contract were pay commensurate with performance

and an attractive benefits package, while items that have

been used in the past to reflect the relational nature ofemployer promises in the psychological contract were

opportunities for training and development, opportunities for

promotion, recognition for innovation for new idea, feedback

on performance, interesting tasks, respectful treatment, reason-

able job security, anda pleasant and safe working environment

(McDonald & Makin, 2000). Responses were made on

a five-point scale ranging from 1 (very low) to 5 (very

high). Specifically, the respondents were asked, How

would you rate the fulfillment of the employer prom-

ises with respect to the opportunities for promotionin your

organization?

Fulllment of Employee Promises

The construct of fulfillment of employee promises com-

prised ten items, following the CIPD (2008) psychological

contract fact sheet, which contains items from both the

traditional and the new psychological contract. Specifi-

cally, items that have been used in the past to reflect the

transactional nature of employee promises in the psy-

chological contract were work hard, maintain high levels

of attendance and punctuality, and work extra hours when

required, while items that have been used in the past to

reflect the relational nature of employee promises in the

psychological contract were uphold company reputation,

show loyalty to the organization, develop new skills and update

old ones, be flexible, be courteous to clients and colleagues, be

honest,and come up with new ideas (Robinson et al., 1994).

Responses were made on a five-point scale ranging from

1 (very low) to 5 (very high). Specifically, the respondents

were asked, How would you rate the fulfillment of the

employee promises with respect to working hard in your

organization?

information to the literature by measuring the strength

of the influence of employers on employees promise

fulfillment in terms of the transactional and relational

associations.

Method

Sample

Data for this research were collected in April and May

2008 by means of a questionnaire survey that was admin-

istered to the employees of public and private firms in

the service sector, including education, health, and bank-

ing, covering the entire country of Greece. The samplers

were 120 executives attending development programs

at a Greek business school who helped to collect data

from their organizations. The samplers were asked to

concentrate on six respondents from each firm; two at

the management level (one from the HRM/Personnel

Department and one from the Finance Department) andfour at other employees level (i.e., 720 questionnaires

altogether). This is because psychological contracts are

based on the perceptions and beliefs of individuals

(McDonald & Makin, 2000). Thus, with respect to respon-

dents, the study refers to multiple actors (e.g., managers,

employees) and to multiple raters (e.g., different raters

per unit of analysis) (Boselie et al., 2005), consider-

ing that all structural variables reflect perceptions of

individuals. Three hundred forty-eight usable question-

naires were returned from the employees in 78 firms, a

response rate of 65 percent at firm level and 48 percent

at employee level.Of the sample of 78 firms, 61.5 percent had 20 to

100 employees, and 38.5 percent had more than 100

employees; 42.3 percent were public and 57.7 percent

were private. Of the sample of 348 respondents, 48.3

percent were male and 51.7 percent were female. The

average age was 38.9 years old, and the average senior-

ity was 10.3 years. The job status of the respondents was

management 25.0 percent and other employees 75.0

percent. The sector category of the respondents was 32.8

percent public and 67.2 percent private. Finally, 69.8

percent of the respondents were from firms having 20 to

100 employees, and 30.2 percent from firms having more

than 100 employees.

Measures

HR Practices

The construct of HR practices comprised 12 items (e.g.,

recruitment, selection, flexible work arrangements, work

design, performance appraisal, training and develop-

ment, compensation, promotion, incentives, participation,


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TABLE

1

MeansandStanda

rdDeviations,ConsistencyandReliabilityMeasures,andBivariateCorrelationsforAlltheVariablesUsed

Mean

(standard

deviation)

Cronbach

Alpha

Percentage

ofvariance

explained

Construct

Reliability+

1

2

3

4

5

6

7

8

9

10

11

1

HR

practices

3.429

5

(0.843

85)

0.922

57.46

0.940

[0.754]++

2

Employerpromise

fulllment

3.509

7

(0.901

77)

0.930

67.44

0.958

0.732*

[0.812]

3

Employeepromise

fulllment

3.835

2

(0.743

38)

0.897

60.43

0.924

0.544*

0.641*

[0.743]

4

Attitudes

3.668

6

(0.951

79)

0.875

87.59

0.930

0.580*

0.681*

0.680*

[0.903]

5

Organizational

performance

3.975

7

(0.850

33)

0.911

83.35

0.944

0.666*

0.783*

0.729*

0.754*

[0.882]

6

Ownership

0.481*

0.410*

0.352*

0.369*

0.480*

1

7

Size

0.258*

0.258*

0.283*

0.288*

0.295*

0.256*

1

8

Gender

0.057

0.009

0.033

0.161*

0.081

0.049

0.202*

1

9

Age

0.028

0.028

0.069

0.058

0.002

0.029

0.054

0.329*

1

10

Seniority

0.128**

0.111**

0.115**

0.119**

0.117**

-0.201*

0.058

0.248*

0.732*

1

11

Position

0.274**

0.284**

0.068

0.121**

0.206*

0.191*

0.143*

0.199*

0.500*

0.317*

1

*Correlationissignicantatthe0.01level.

**Correlationissignicantatthe0.05level.

+C

onstructreliability=

(

)

+

i

2i

2

i

i

2

i

i

-1

/

whereli=standardizedloading.

++D

iagonalguresinbracketsrepre

sentsquaredrootaveragevarianceextracted(AVE).


9/17



validity (Hair et al., 2008). Construct composite reliabilitywas

assessed by examining the calculated composite reliability

scores (Pavlou & Gefen, 2005). The figures in Table 1

indicate that the degree of construct reliability is accept-

able, since all reliability scores exceed 0.90. Construct

discriminant validity was assessed by examining whether

the correlation coefficients between pairs of constructswere significantly different from unity, and by examining

whether the square root of each factors AVE is larger

than its correlations with other factors (Gefen & Straub,

2005). Table 1 presents the correlation coefficients of

all constructs used in the study. It is seen that the cor-

relation coefficients are significantly different from unity,

and they are smaller than the square root of each factors

AVE, providing thus evidence for separate constructs.

Although the correlation matrix highlights some high

correlations, multicollinearity among these constructs is

not a serious concern since all relevant checks such as

condition index (largest CI = 5.484 less than 10), toler-ance values (smallest TOL = 0.356 significantly greater

than zero), and variance inflation factors (largest VIF =

2.806 less than 10) did not suggest evidence of significant

multicollinearity (Kleinbaum, Kupper, & Muller, 1988).

Similarly, the Koenker and Basett (1982) chi-squared test

(x 2(1) = 0.696 not significant at 0.05 level) indicated that

there is no heteroskedasticity in the error terms.

To reduce the common method bias threat in the

survey design, we asked multiple respondents from each

organization to answer the questions of the questionnaire

(Lindell & Whitney, 2001). However, taking into consid-

eration that some correlation coefficients were ratherhigh, Harmans (1967) single-factor test was used to

examine the likelihood of common method bias threat.

According to this test, the simultaneous loading of all

items in a factor analysis revealed six factors, and not just

one, with the first factor covering only 18.106 percent of

total variance explained, indicating thus that the com-

mon method bias in the data was rather limited.

Statistical Analysis

To test the raised research questions of the proposed

framework, the methodology of structural equation mod-

els (SEMs) or latent variable models (Hair et al., 2008)

was used, via LISREL and bootstrapping estimation (see

Jreskog & Srbom, 2004). SEM is effective when testing

models that are path analytic with mediating variables,

and include latent constructs that are being measured

with multiple items (Luna-Arocas & Camps, 2008). We

used bootstrapping because this method is considered

to be the most appropriate method for testing mediation

due to the fact that it does not require the normality

assumption to be met (Shrout & Bolger, 2002). However,

the general rule for SEM, that is, that the number of

observations needed for each parameter is estimated to be

between 8 and 12 observations (Hair et al., 2008), is not

fulfilled in the present study. Although we could fulfill this

rule by following procedures (Aryee et al., 2002) to reduce

the number of items by creating fewer indicators for eachconstruct, we decided not to do so in order to have a gen-

eral picture about all the items used in the study.

We assessed the overall model fit following Bollens

(1989) recommendation to examine multiple indices,

since it is possible for a model to be adequate on one fit

index but inadequate on many others. We used the chi-

square test (with critical significant levelp> 0.05) and the

normed-chi-square ratio (with critical level no more than

3), the goodness of fit index (GFI; with critical level not

lower than 0.80), the normed fit index (NFI; with critical

level not lower than 0.90), the comparative fit index (CFI;

with critical level not lower than 0.90), and the root meansquared error of approximation (RMSEA; with critical

level not more than 0.08) (Bentler, 1990).

Results

Table 1 presents the means and the standard deviations

of all the constructs used in the study, derived as weighed

averages of confirmatory factor analyses applied to each

group of relevant items. Furthermore, Table 1 displays

the bivariate correlation coefficients between all con-

structs used in the study. We observe strong, positive, and

We observe strong, posi-

tive, and significant correla-

tions between HR practices,

organizational performance,

employee attitudes, andemployer and employee prom-

ise fulfillment, supporting the

hypotheses of the study.


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802 FEATURE ARTICLE


The goodness-of-fit indexes confirmed the validity of

this less parsimonious operational model (chi-square =

1870.60, df = 1260,p-value = 0.000, normed-chi-square =

1.48, RMSEA = 0.037, CFI = 0.99, NFI = 0.93, GFI = 0.83).

In this case, we also considered that the value of the

normed-chi-square is less than 3, in order to support the

validity of the model.Comparing the results of the more parsimonious model

(Figure 2) and the less parsimonious model (Figure 3),

we see that the fit statistics of the results in Figure 3 are

better than the results in Figure 2. Thus, we conclude

that the complete model may be more preferred than the

more parsimonious model, and, consequently, the rest of

the study is devoted to the results of Figure 3. Consider-

ing that both the direct and the indirect standardized

effects are significant, we see that employee attitudes

partially mediate the relationship between employer and

employee promise fulfillment. Additionally, consider-

ing that all indirect standardized effects of the variablesinvolved in the study are significant, we may infer that

psychological contract fulfillment partially mediates the

relationship between HR practices and organizational

performance. However, we must note here that although

the fit statistics for the model containing direct effects are

stronger, the differences are only very small. Thus, the

model fits the data very well, and therefore it could be

argued for the sake of parsimony that the model, rather

than the more complex model containing direct and

indirect effects, is more preferable.

Special reference should be made with respect to the

contingencies used in estimation. Although we acknowl-edge that there is no sound theoretical rationale to

consider organizational contingencies and individual con-

tingencies as distinct factors,we still use these factors for

estimation purposes only in order to isolate the impact

of the independent variables on organizational perfor-

mance (Boselie et al., 2005). Additionally, we must note

here that although we tried all possibilities connecting

contingencies with all the other constructs (Paauwe &

Richardson, 1997), the only significant results obtained

are those reported in Figures 2 and 3.

Discussion

Implications for Theory

The theoretical significance of this study is fivefold.

First, this study confirms and extends existing empiri-

cal evidence concerning the basis of the HR practices

psychological contractorganizational performance

relationship. This is because a major finding of this

relationship is that employee attitudes such as employee

significant correlations between HR practices, organiza-

tional performance, employee attitudes, and employer

and employee promise fulfillment, supporting the hypoth-

eses of the study. With respect to organizational and

individual contingencies, we see in Table 1 that generally

there is a variety of correlations between contingencies

and the rest of the variables used in the study.However, results based on correlations, although

interesting, may be misleading due to the interactions

between several variables. Therefore, in order to isolate

the possible links between the variables involved in the

operational model presented in Figure 1, the estimated

path diagram for this proposed framework is presented in

Figure 2. These results refer to full mediation, where the

links with question marks are not present, reflecting thus

a more parsimonious model. The circles represent the

related latent variables, and the bold arrows indicate the

structural relationships between the corresponding vari-

ables. The numbers that are assigned to each arrow showthe estimated standardized coefficients. All coefficients

are significant at the 0.001 level, except the coefficient

linking individual contingencies with employer prom-

ises fulfillment that is significant at the 0.10 level. The

excellent goodness-of-fit indexes confirmed the validity

of the operational model (chi-square = 1943.96, df = 1262,

p-value = 0.000, normed-chi-square = 1.54, RMSEA = 0.039,

CFI = 0.98, NFI = 0.93, GFI = 0.82). However, it must be

noted here that the chi-squares being significant indi-

cates that the proposed model is not an adequate pre-

sentation of the entire set of relationships. But taking

into account that chi-square statistics may be inflatedby high sample sizes, the value of the normed-chi-

square (i.e., value of chi-square/degrees of freedom)

was used instead. In our case, this value is less than

3, confirming the validity of our model (Pedhazur &

Pedhazur-Schelkin, 1991).

Considering that all the standardized coefficients

are significant and the fit statistics of the model are

acceptable we may conclude that the two hypotheses of

the study are supported. This means that employee atti-

tudes (fully) mediate the relationship between employer

and employee promises fulfillment, and psychological

contract fulfillment (fully) mediates the relationship

between HR practices and organizational performance.

However, Figure 3 represents the estimated path dia-

gram of the complete model presented in Figure 1 (i.e.,

including the links with question marks), reflecting thus

partial mediation. All standardized coefficients in Fig-

ure 3 are significant at the 0.001 level, except the coef-

ficient linking individual contingencies with employer

promises fulfillment that is significant at the 0.10 level.


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FIGURE2 Estimation Results of the Hypothesized Model (Full Mediation)

HR

Practices

Employee

Promises

Fulfillment

Employer

Promises

Fulfillment

Employee

Attitudes

Organisational

Performance

Work

hard

Uphold

company

reputation

Maintain

high

levels of

attendance

Show

loyalty to

the

organisation

Work extra

hours

when

required

Develop

new skills

and update

old ones

Be

flexible

Be

courteous to

clients and

colleagues

Be

honest

Come up

with new

ideas

0.55 0.58 0.40 0.55 0.32 0.48 0.520.38 0.61

Pay

commensu-

rate with

performance

Opportuni-

ties for

training and

development

Opportuni-

ties for

promotion

Recognition

for

innovation

and new idea

Feedback for

performance

Interesting

tasks

An

attractive

benefits

package

Respectful

treatment

Reasonable

job security

A pleasant

and safe

working

environment

0.54 0.55 0.53 0.57 0.46 0.53 0.59 0.55 0.610.52

Recruitment

Selection

Flexible work

arrangements

Work design

Performance

appraisal

Training and

development

Compensation

Promotion

Incentives

Participation

Involvement

Communication

0.34

0.40

0.48

0.59

0.54

0.46

0.59

0.41

0.57

0.51

0.58

0.51

Effectiveness

Efficiency

Quality

Development

Innovation

0.63

0.58

0.62

0.89

0.66


0.94

Individual

Contingencies

Gender

Age

Seniority

Position

Organizational

Contingencies

Ownership

Size

-0.17

0.89

0.49

0.61

0.52

0.91

Chi-Square = 1943.96 df = 1262 p-value = 0.000 Normed Chi-Square = 1.54 RMSEA = 0.039 CFI = 0.98 NFI = 0.93 GFI = 0.82

0.99

0.86

0.61

-0.37

0.50

-0.11

0.58 0.56

0.06

satisfaction, commitment, and motivation, constitute the

heart (Boxall & Purcell, 2002) or the epicenter of thisrelationship. All other relationships are activated around

this epicenter, meaning that employee attitudes are influ-

encing employee promises fulfillment and organizational

performance and being influenced by employer promises

fulfillment and HR practices. Specifically, in view of the

standardized coefficients of the items constituting the

initial driving construct in Figure 3, it is seen that the HR

practices of incentives, performance appraisal, promo-

tion, participation, and training and development have

the highest influence on psychological contract and orga-

nizational performance. These findings not only support

the theory that HR practices have a positive impact onorganizational performance but also extend the literature

referring to the HRMperformance relationship in a non-

US/UK context such as that of Greece.

Second, the study provides evidence of the recipro-

cal influence that occurs in the exchange relationship

between employers and employees. This is because, in

view of the standardized coefficients of the items con-

stituting the employer promises fulfillment construct

These findings not only sup-

port the theory that HR

practices have a positive

impact on organizational

performance but also extend

the literature referring to theHRMperformance relation-

ship in a non-US/UK con-

text such as that of Greece.


12/17

804 FEATURE ARTICLE


FIGURE3 Estimation Results of the Hypothesized Model (Partial Mediation)

HR

Practices

Employee

Promises

Fulfillment

Employer

Promises

Fulfillment

Employee

Attitudes

Organisational

Performance

Work

hard

Uphold

company

reputation

Maintain

high

levels of

attendance

Show

loyalty to

the

organisation

Work extra

hours

when

required

Develop

new skills

and update

old ones

Be

flexible

Be

courteous to

clients and

colleagues

Be

honest

Come up

with new

ideas

0.57 0.61 0.42 0.57 0.31 0.49 0.520.41 0.63

Pay

commensu-

rate with

performance

Opportuni-

ties for

training and

development

Opportuni-

ties for

promotion

Recognition

for

innovation

and new idea

Feedback for

performance

Interesting

tasks

An

attractive

benefits

package

Respectful

treatment

Reasonable

job security

A pleasant

and safe

working

environment

0.55 0.55 0.53 0.57 0.46 0.54 0.59 0.55 0.610.52

Recruitment

Selection

Flexible work

arrangements

Work design

Performance

appraisal

Training and

development

Compensation

Promotion

Incentives

Participation

Involvement

Communication

0.34

0.40

0.48

0.59

0.54

0.45

0.59

0.40

0.57

0.50

0.57

0.50

Effectiveness

Efficiency

Quality

Development

Innovation

0.64

0.57

0.61

0.89

0.66


0.59

Individual

Contingencies

Gender

Age

Seniority

Position

Organizational

Contingencies

Ownership

Size

-0.17

0.90

0.49

0.62

0.53

0.56

Chi-Square = 1870.60 df = 1260 p-value = 0.000 Normed Chi-Square = 1.48 RMSEA = 0.037 CFI = 0.99 NFI = 0.93 GFI = 0.83

0.99

0.79

0.65

-0.36

0.50

-0.11

0.62 0.60

0.07

0.42

0.28

in Figure 3, it is seen that the employer promises of

fulfillment with respect to keeping a pleasant and safe

environment, respectful treatment, feedback for perfor-

mance, opportunities for training and development, and

pay commensurate with performance have the highest

influence on employee motivation, satisfaction, and com-

mitment. These attitudes will make employees positively

react by keeping their promises with respect to showing

loyalty to the organization, maintaining high levels of

attendance, upholding company reputation, develop-

ing new skills and updating old ones, and being honest.

This finding indicates that in a country such as Greece,

where individualism is rather low (Hofstede, 1994), and

power-distance is also low (Ng, Sorensen, & Yim, 2009),

psychological contract is relatively strong (Sahinidis &

Bouris, 2008).

Third, the study confirms and extends Rousseaus

(1995) argument on the centrality of reciprocity with

respect to how exchange relationships are governed

(Coyle-Shapiro & Kessler, 2003). This is because the

major property of the conceptual model of the study is

that the relationship between HR practices and organiza-

tional performance is partially mediated by psychological

contract fulfillment, and employee attitudes are partially

nested in this psychological contract. Although extensive

empirical research has been carried out linking HR prac-

tices with organizational performance through employee

attitudes, still little justification has been presented for

how HR practices influence individual attitudes (Allen,

Shore, & Griffeth, 2003). This study considers that the

history of the organization in terms of keeping its prom-

ises to employees, being contingent on the HR practices

employed, shapes both employee attitudes and the degree

of employee promises fulfillment to the organization (see

also Rousseau, 1995). This finding may give some light

to the so-called black-box referring to the mechanisms

that exist between HR practices and organizational perfor-

mance (Hutchison & Purcell, 2003; Purcell et al., 2003).


13/17



Fourth, this study provides evidence with respect to

the importance of transactional versus relational con-

tracts. The average values of the standardized loadings

reported in Figure 3 are equal to 0.56 for transactional

and 0.55 for relational employer promises fulfillment,

and to 0.48 for transactional and 0.52 for relational

employee promises fulfillment. Considering that thereare no significant differences between these values, we

argue that the elasticity of transactional employee prom-

ises fulfillment with respect to employer promises fulfill-

ment is equal to the elasticity of relational employee

promises fulfillment with respect to employer promises

fulfillment in the Greek context. Therefore, we may say

that changes in the fulfillment of employer promises

are equally associated with changes in transactional and

relational employee promises fulfillment. Furthermore,

this finding means that both the transactional and the

relational parts of the psychological contact equally

influence employees. However, it is argued that althoughtransactional contracts constitute an indispensable con-

dition in the employment relationship, relational con-

tracts are more appreciated by employees, due to the

fact that transactional contracts, because they have a

short-term nature, do not influence employees as much

as relational contracts do, which have a long-term nature

(Rousseau & Tijoriwala, 1998; Sturges et al., 2005). This

may not be true in countries such as Greece, where the

unemployment rate has risen fast due to the current

financial crisis. In these cases, although individuals

appreciate the long-term relational contracts, they are

more interested in the short-term transactional contractsto cover their current needs. Additionally, we cannot

argue that our finding contradicts the result of Robin-

son et al. (1994), who found that violation of promises

by employers more strongly decrease the relational than

the transactional promise fulfillment by employees. This

is because in our case the testing refers to the fulfillment

of employer promises that may empower the relations

between employers and employees, while Robinson et al.

(1994) refers to the opposite case where the violation

of employer promise fulfillment will destroy the whole

relationship between employers and employees. There-

fore, our findings support the view that the fulfillment

of psychological contract, or the absence of violations

in psychological contract, may sustain both the trans-

actional and relational employee promise fulfillment.

We agree that transactional aspects of the psychological

contract must be fulfilled before relational aspects can

be addressed (Millward & Brewerton, 1999) because

transactional aspects drive relational aspects due to their

cause-and-effect association (Pate et al., 2003).

Fifth, this study provides evidence with respect to

the universalistic versus contingency models, referring to

the HR practicespsychological contractorganizational

performance relationship. Contrary to the suggestion

of de Jong et al. (2009, p. 347) to search for a univer-

sal theory of psychological contracts, the findings with

respect to contingencies support the view that there isnot any universalistic model,referring to the HR practices

psychological contractorganizational performance rela-

tionship, which if applied to organizations will improve

their organizational performance. In contrast, the study

supports the view that there are contingency modelsdepend-

ing on organizational and individual factors influencing

the HRMpsychological contractorganizational perfor-

mance relationship. Specifically, the positive factor load-

ing of ownership reveals that organizational performance

in private organizations is higher than in public orga-

nizations in the Greek service sector. In contrast, the

negative factor loading of size reveals that organizationalperformance does not follow the economies-of-scale

rule, as it is usually hypothesized (Tzafrir, 2005), and

it supports Delbridge and Whitfield (1999), who argue

that size is negatively related to employee satisfaction

and thus, to organizational performance. Furthermore,

gender and position negatively influence psychological

contract, meaning that the influence of women and work-

ers is lower. Additionally, the findings show that age and

seniority indicate that the influence of older people and

people working more years in the organization is higher.

These results support the positive influences of age and

seniority to organizational performance, through motiva-tion (Guest, 1999), commitment (Scholarios, Ramsay, &

Harley, 1999), and satisfaction (Boselie & Van der Wiele,

2002).

Implications for Practice/Management

The study has clear implications for both managers

and decision makers in the Greek service sector. It

The study has clear implica-tions for both managers and

decision makers in the Greek

service sector.


14/17

806 FEATURE ARTICLE


identifies employee incentives, performance appraisal,

and employee promotion as three major HR practices

potentially capable of sending signals that may lead to the

creation of psychological contract fulfillment. Although

it may be difficult to know exactly what constitutes the

psychological contract of an employee (Suazo et al.,

2009), managers primarily must keep their promisesabout a pleasant and safe working environment, respect-

ful treatment, and feedback for performance, in order

for employees to largely keep their own promises about

showing loyalty to organization, maintaining high lev-

els of attendance, and upholding company reputation.

Finally, managers need to develop skills that will allow

them to improve the employee attitudes of motivation,

satisfaction, and commitment, because they constitute

the nested epicenter mediating construct in both the HR

practicesperformance and employeremployee prom-

ises fulfillment relationships, which will improve organi-

zational performance.

Limitations

This study has some limitations. First, the data was collected

using a questionnaire at a single point in time. As a result,

the study does not allow for dynamic causal inferences

(Cavanaugh & Noe, 1999). Second, a potential limitation

of the study concerns the measurement of some latent

variables, such as the attitudes, with only three aggregate

general observable variables that may restrict the validity

of the construct (Luna-Arocas & Camps, 2008). Third, a

limited number of items that usually have been hypoth-

esized to be part of a new psychological contract have beenincluded in the study, due to estimation purposes. Fourth,

to minimize possible common method bias concerns data

should be gathered from independent sources (Podsa-

koff & Organ, 1986). Fifth, the study was applied in the

context of Greece which has unique labor relations and

institutional conditions, and thus the findings from the

Greek sample may not generalize across borders (de Jong

et al., 2009). However, despite these limitations, this study

provides a greater understanding of the process by which

psychological contract mediates the relationship between

HR practices and organizational performance.

Conclusion

Past research has provided extensive evidence on the

positive relationship between HR practices and orga-

nizational performance in an effort to reveal a positive

impact of HR practices (Wright, Gardner, Moynihan, &

Allen, 2005). This study is partially in line with Purcell

and colleagues (2003) high-performance model, where

employee attitudes mediate the relationship between

HR practices and organizational performance, and with

Guest and Conways (2004) psychological contract model,

where HR practices have a major influence on the state of

the psychological contract, indicating that a positive psy-

chological contract will lead to improved organizational

performance. Thus, this study, which considers HR prac-tices to be part of a high-performance organization, is

attempting to provide proof that these practices cause

organizational high performance through psychological

contract fulfillment.

Specifically, with respect to the scope of the study, we

may say that HR practices through psychological contract

have a positive effect on organizational performance in

the Greek service sector, indicating further that this effect

is higher in the private sector. Additionally, the study sup-

ports the observation that changes in the fulfillment of

employer promises are equally associated with changes in

transactional and relational employee promise fulfillmentin the Greek service sector. Moreover, the study supports

the view that employee attitudes (satisfaction, commitment,

Although this study refers

to the causal link between

HR practices, psychologi-cal contract, and organi-

zational performance in the

Greek service sector, future

research should concentrate

on other sectors and con-

texts of different countries,in order to be able to verify

and extend the present

results.


15/17



the present results. This is because contextual factors are

keys to understanding the psychological contract (Pate

et al., 2003, p. 571).

Acknowledgments

An earlier version of this article was presented at the11th International Human Resource Management Con-

ference, June 912, 2010, Birmingham, United King-

dom. The authors thank the two conference reviewers

and the conference participants for their useful com-

ments. Also, the very constructive comments of the

two anonymous reviewers of this journal are greatly

acknowledged.

motivation) constitute the epicenter-mediating construct

in both the HR practicesorganizational performance

and employer promise fulfillmentemployee promise

fulfillment relationships. Finally, the study supports the

view that there is no universalistic model, but, in contrast,

there are contingency models depending on organiza-

tional and individual factors influencing the HR prac-ticespsychological contractorganizational performance

relationship.

Although this study refers to the causal link between

HR practices, psychological contract, and organizational

performance in the Greek service sector, future research

should concentrate on other sectors and contexts of dif-

ferent countries, in order to be able to verify and extend

Anastasia A. Katou is a lecturer in the Department of Marketing and Operations Management at the University

of Macedonia, Thessaloniki, Greece. Her research interests include human resource management, organizational

behavior, and business strategies, with a focus on organizational performance. She received a BA and an MBA

from the University of Sunderland, United Kingdom, and a PhD and a PgD from Cardiff University, Wales. She

has published numerous articles in academic journals, such as the International Journal of Human Resource Man-

agement, Thunderbird International Business Review, Employee Relations, Global Business and Organizational

Excellence, Multinational Business Review, European Journal of International Management, European Manage-

ment Journal, Personnel Review, International Journal of Human Resources Development and Management,

Management Research Review, andJournal of World Business.

Pawan S. Budhwaris a professor of international HRM and Associate Dean Research at Aston Business School.

He is also director of the Aston India Foundation and president of the Indian Academy of Management. He receivedhis doctorate from Manchester Business School. Prior to joining Aston in 2003, he was on the faculty at Cardiff

Business School for six years and at MD University, India, for ve years. Pawan has published over 75 articles

in a number of leading journals (such as theJournal of Human Resource Management, Organizational Behavior

and Human Decision Processes,Journal of International Business Studies, Journal of Organizational Behavior,

Human Relations, Organization Studies, Journal of World Business,Thunderbird International Business Review,

and International Journal of Human Resource Management) on international HRM/OB related topics with a specic

focus on India. He has also written and/or co-edited books on HRM-related topics on Asia-Pacic, Middle East,

performance management, India, developing countries, research methods, major works in international HRM, and

doing business in India. Pawan is on the editorial board of over ten journals and at present is associate editor of

Human Resource Managementand International Journal of Cross Cultural Management.He is also an advisor to

the Commonwealth Commission for scholarships and fellowships and a Fellow of the Higher Education Academy.

He is also a chartered member of the Chartered Institute of Personnel and Development and a council member of

the British Academy of Management.

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