Managing the psychological contract

Originally issued May 2003; latest revision December 2004

This factsheet gives introductory guidance. It:

defines what is meant by the 'psychological contract' explains how a positive psychological contract contributes to business performance considers what research into the psychological contract tells us about the changing

employment relationship, and whether there is a 'new contract' outlines some learning points for managers gives the CIPD viewpoint.

Research into the psychological contract between employer and employees has produced a number of important messages for managers and students of people management. Despite the academic origins of the term, many managers believe that the idea of the psychological contract offers a valid and helpful framework for thinking about the employment relationship against the background of a changing labour market.

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'1. 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 later 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 nature and content of the legal contract may only emerge clearly if and when it comes to be tested in an employment tribunal.

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.

A useful model of the psychological contract is offered by Professor David Guest of Kings College London (see table below). In outline, the model suggests that:

the extent to which employers adopt people management practices will influence the state of the psychological contract

the contract is based on employees' sense of fairness and trust and their belief that the employer is honouring the 'deal' between them

where the psychological contract is positive, increased employee commitment and satisfaction will have a positive impact on business performance.

A model of the psychological contract(adapted from Guest1)

Inputs Content

Outputs

employee characteristics

fairness employee behaviour

organisation characteristics

trust performance

HR practices delivery

What happens if the contract is broken?

Research evidence shows that, where employees believe that management have broken promises or failed to deliver on commitments, this has a negative effect on job satisfaction and commitment and on the psychological contract as a whole. This is particularly the case where managers themselves are responsible for breaches, eg where employees do not receive promised training, or performance reviews are badly handled. Managers cannot always ensure that commitments are fulfilled - for example where employment prospects deteriorate or organisations are affected by mergers or restructuring – but they may still take some blame in the eyes of employees.

Managers need to remember:

Employment relationships may deteriorate despite management’s best efforts: nevertheless it is managers’ job to take responsibility for maintaining them.

Preventing breach in the first place is better than trying to repair the damage afterwards.

But where breach cannot be avoided it may be better to spend time negotiating or renegotiating the deal, rather than focusing too much on delivery.

What has persuaded people to take the psychological contract seriously?

Changes currently affecting the workplace include:

the nature of jobs: more employees are on part time and temporary contracts, more jobs are being outsourced, tight job definitions are out, functional flexibility is in

organisations have downsized and delayered: 'leanness' means doing more with less, so individual employees have to carry more weight

markets, technology and products are constantly changing: customers are becoming ever more demanding, quality and service standards are constantly going up

technology and finance are less important as sources of competitive advantage: 'human capital' is becoming more critical to business performance in the knowledge-based economy

traditional organisational structures are becoming more fluid: teams are often the basic building block, new methods of managing are required.

The effect of these changes is that employees are increasingly recognised as the key business drivers. The ability of the business to add value rests on its front-line employees, or 'human capital'. Organisations that wish to succeed have to get the most out of this resource. In order to do this, employers have to know what employees expect from their work. The psychological contract offers a framework for monitoring employee attitudes and priorities on those dimensions that can be shown to influence performance.

Employer brand

Employees in large organisations do not identify any single person as the 'employer'. The line manager is important in making decisions about day-to-day working but employees are also affected by decisions taken by the chief executive and HR department. In many cases employees may often have little idea who, if anyone, is personally responsible for decisions affecting their welfare or the future of the business. Unsurprisingly surveys confirm that employees tend to feel more confidence in their line manager, whom they see on a regular basis, than in anonymous members of senior management.

In order to display commitment, employees have to feel they are being treated with fairness and respect. Many organisations have concluded they need to create a corporate personality, or identity, that employees as well as customers will recognise and relate to. This leads them to identify a set of corporate values or set down the organisation's mission. The purpose of creating an 'employer brand' (sometimes referred to as the employment proposition) is to outline the positive benefits for employees of buying into the relationship with that employer. In practice the employer brand can be seen as an attempt by the employer to define the psychological contract with employees so as to help in recruiting and retaining talent.

How do HR practices impact on performance?

The model of the psychological contact suggests that by adopting 'bundles' of HR practices employers are likely to improve business performance. Research into high performance working by Professor John Purcell and his colleagues2 underlines how this process can occur. Many employees have substantial discretion as to how to do their jobs: it is more likely that they will use their discretion positively if they feel that they are being fairly treated. Simply adopting positive HR polices is not enough: policies need to be translated into practice if they are to influence employees' behaviour. The way in which they are implemented by line managers is critical to the way in which employees respond.

The changing employment relationship: is there a new contract?

The traditional psychological contract is generally described as an offer of commitment by the employee in return for the employer providing job security - or in some cases the legendary 'job for life'. The recession of the early 1990's and the continuing impact of globalisation are alleged to have destroyed the basis of this traditional deal since job security is no longer on offer. The new deal is said to rest on an offer by the employer of fair pay and treatment, plus opportunities for training and development. On this analysis, the employer can no longer offer security and this has undermined the basis of employee commitment.

But is this the case, and is there a 'new contract'? Research suggests that in many ways the 'old' psychological contract is in fact still alive. Employees still want security: interestingly labour market data suggest that there has been little reduction in the length of time for which people stay in individual jobs. They are still prepared to offer loyalty, though they may feel less committed to the organisation as a whole than to their workgroup. In general they remain satisfied with their job.

The kinds of commitments employers and employees might make to one another are given in the box below:

Employees promise to: Employers promise to provide:

Work hard Pay commensurate with performance

Uphold company reputation Opportunities for training and development

Maintain high levels of attendance and punctuality

Opportunities for promotion

Show loyalty to the organisation Recognition for innovation or new idea

Work extra hours when required Feedback on performance

Develop new skills and update old ones Interesting tasks

Be flexible, for example, by taking on a colleague’s work

An attractive benefits package

Be courteous to clients and colleagues Respectful treatment

Be honest Reasonable job security

Come up with new ideas A pleasant and safe working environment

A study of collective agreements in the last few years suggests that employers recognise employee concerns about security. Such agreements often state that compulsory redundancy will be used only as a last resort. However employers know they are unable to offer absolute security and employees do not necessarily expect it. Younger people - the so-called 'generation X' - want excitement, a sense of community and a life outside work. They are not interested, as some of their fathers and mothers were, in a 'job for life', nor do they believe any organisation can offer this to them. They expect to be treated as human beings.

The state of the psychological contract

Press reports suggest that UK employees are dissatisfied, insecure and lacking in commitment. Major national surveys, including those undertaken by CIPD between 1996 and 20023, show that this picture is at best distorted:

a majority of employees consistently report that they are satisfied with their jobs. four out of five employees are not worried about losing their job, and most expect

that if they did lose their job they would be able to find another one at similar pay without having to move house.

levels of commitment have not shown any significant trend - whether up or down - in recent years.

however, trust in the organisation has declined somewhat, particularly in the public sector.

there are widespread concerns about long hours and work intensity.

But research findings suggest that managers can usefully focus on other issues. In particular:

employability: Although job security cannot be guaranteed, employers can recognise employees' need to build up a 'portfolio' of skills and competencies that will make them more marketable. Employees can be helped to develop occupational and personal skills, become more pro-active and take more responsibility for their own careers.

careers: Early comments on the likely impact of labour market change suggested that employers were no longer able to provide 'careers' and that this was bound to sour the employment relationship. Research suggests that, while organisations have been de-layering and reducing the number of middle management posts, most employees have in fact adjusted their career expectations downwards. Many will be

satisfied if they believe that their employer is handling issues about promotion fairly. They may also benefit from the opportunity to negotiate alternative career options.

empowerment: Despite some cynicism about employers' willingness to delegate responsibility, and employees' enthusiasm for accepting it, high-performing organisations demand that employees make an important contribution to decisions that would formerly have been seen as the sole prerogative of management. This is partly an issue of the way in which jobs are designed and partly of helping managers adopt new behaviours.

work-life balance: There is an important link between employee feeling that they have got a satisfactory balance between work and the rest of their life, and having a positive psychological contract. Employers need to think through how employees can be helped to achieve such a balance. (See the factsheet on Work-life balance for further information).

How do managers get commitment from employees?

The importance of commitment emerges clearly from the research into the impact of people management on performance. Traditional management theory focuses on reward and particularly pay as a prime source of motivation. But Herzberg4 thought that employees were motivated to higher levels of performance by less material incentives such as interesting work and the opportunity to develop their skills. Modern management thinking suggests that badly designed pay systems can de-motivate employees but that getting pay right is no guarantee of commitment.

Research suggests that in order to feel committed employees must feel satisfied with their work. Job satisfaction is more likely to be achieved where the employer offers employees what they want. Surveys consistently show that employees generally want interesting work, opportunities to develop, fair treatment and competent management. The line manager has a key role to play in maintaining commitment. Employers need to focus on tapping in to what employees are looking for and how they feel about their work. They need to involve and engage them. And they need to train line managers in how to manage people.

How important is communication?

CIPD research into employee 'voice'5 shows the importance of communication and specifically of dialogue in which managers are prepared to listen to employees' opinions. Managers need to manage expectations, for example through systems of performance management which provide for regular employee appraisals. HR practices also communicate important messages about what the organisation seeks to offer its employers. But employee commitment and 'buy-in' come primarily not from telling but from listening.

Employers are experimenting with a range of attitudinal and behavioural frameworks for securing employee inputs to management thinking as part of the decision-making process. This can be done face-to-face, for example through 'soap box' sessions, which encourage employees to speak their minds. Employee attitude surveys can also be an effective tool for exploring how employees think and feel on a range of issues affecting the workplace. In times of rapid change, managers and employees frequently hold contrasting opinions about what is going on. Two-way communication, both formal and informal, is essential as a form of reality check and a basis for building mutual trust.

What does employee commitment mean in practice?

Line managers have high expectations of employees. For example, they may expect employees to:

make every effort to attend work get to work on time concentrate on their work get as much done as possible while at work work to the best of their abilities be willing to take on tasks outside their job descriptions be flexible in the hours they work to suit the organisation be a good team player develop and improve existing skills.

The list goes on. Importantly it is likely to include being polite and courteous to customers and clients at all times, and exceeding the performance expectations of their job. This is a tall order but surprisingly managers say that employees generally meet or exceed their expectations. Managers feel that employees are rather better at delivering on their side of the deal than is the employer.

Strategic implications of the psychological contract

Basically the psychological contract offers a metaphor, or representation, of what goes on in the workplace, that highlights important but often neglected features. It offers a framework for addressing 'soft' issues about managing performance; it focuses on people, rather than technology; and it draws attention to some important shifts in the relationship between people and organisations.

Most organisations could benefit from thinking about the psychological contract. The first priority is to build the people dimension into thinking about organisational strategy. If people are bottom-line business drivers, their capabilities and needs should be fully integrated into business process and planning. The purpose of business strategy becomes how to get the best return from employees' energies, knowledge and creativity.

Employees' contribution can no longer be extracted by shame, guilt and fear: it has to be offered. Issues about motivation and commitment are critical. Yet many of the levers which managers have relied on to motivate employees are increasingly unreliable.

The psychological contract may have implications for organisational strategy in a number of areas, for example:

process fairness: People want to know that their interests will be taken into account when important decisions are taken; they would like to be treated with respect; they are more likely to be satisfied with their job if they are consulted about change. Managers cannot guarantee that employees will accept that outcomes on eg pay and promotion are fair, but they can put in place procedures that will make acceptance of the results more likely.

communications: Although collective bargaining is still widely practised in the public sector, in large areas of the private sector trade unions now have no visible presence. It is no longer possible for managers in these areas to rely on 'joint regulation' in order to communicate with employees or secure their co-operation. An effective two-way dialogue between employer and employees is a necessary means of giving expression to employee 'voice'.

management style: In many organisations, managers can no longer control the business 'top down' - they have to adopt a more 'bottom up' style. Crucial feedback about business performance flows in from customers and suppliers and front-line employees will often be best able to interpret it. Managers have to draw on the strategic knowledge in employees' heads.

managing expectations: Employers need to make clear to new recruits what they can expect from the job. Managers may have a tendency to emphasise positive messages and play down more negative ones. But employees can usually distinguish rhetoric from reality and management failure to do so will undermine employees' trust. Managing expectations, particularly when bad news is anticipated, will increase the chances of establishing a realistic psychological contract.

measuring employee attitudes: Employers should monitor employee attitudes on a regular basis as a means of identifying where action may be needed to improve performance. Some employers use indicators of employee satisfaction with management as part of the process for determining the pay of line managers. Other employers, particularly in the service sector, recognise strong links between employee and customer satisfaction. But employers should only undertake surveys of employee attitudes if they are ready to act on the results.

Top tips for managers

Following are some of the key lessons that emerge from research into the psychological contract:

1. Avoid redundancies whenever possible: redundancies lower morale. 2. Re-state the organisation's values: employees don't trust the organisation. 3. Train line managers in people management skills: employees are more likely to trust

their line manager. 4. Ensure managers commit to key messages: mixed messages will have a negative

influence on employee attitudes. 5. Inform and consult employees about proposed changes: they are more likely to see

the outcome as fair. 6. Take care to fulfil commitments you make to employees: managers say employees

show more commitment to their employer than vice versa. 7. Consider if you need to renegotiate what employees are entitled to expect: otherwise

they may feel let down when circumstances change. 8. Put more effort into managing change: employees believe change is badly managed. 9. Give employees more responsibility: autonomy increases satisfaction. 10. Use employee attitude surveys to get a clear idea of what is happening in the

organisation: employees often do not share senior managers' views of reality. 11. Don't use tight management and close supervision: this will reduce employee

satisfaction. 12. Use recruitment and appraisal processes to clarify the 'deal': employee expectations

are influenced by a number of factors. 13. If you can't keep a promise, explain why: failure is often punished by loss of trust. 14. Trust employees to do a good job: most are highly motivated to do so and will

respond to the trust you show in them. 15. Don't rely on performance management systems to motivate employees: you need

to engage hearts and minds. 16. Be aware of changing expectations: for example, more employees now want to work

for organisations that behave responsibly. 17. Ensure consistency of treatment: perceived unfairness undermines trust. 18. Hold team meetings and focus groups: two-way dialogue will help flag issues at an

early stage. 19. Review procedures for handing workplace conflict: mediation may offer a better

outcome for both sides than an employment tribunal. 20. Encourage the growth of ‘relational’ contracts: if you want employees to develop a

long-term emotional attachment to the organisation.

CIPD viewpoint

Public interest in the psychological contract has been stimulated by fears about job insecurity. Survey evidence suggests that, although such fears have been exaggerated, employers should nevertheless be paying more attention to restoring employees' trust in their organisations. This means clarifying what is on offer, meeting commitments or if necessary explaining what has gone wrong, and monitoring employee attitudes on a regular

basis.

The psychological contract does not supply a detailed model of employee relations but it offers important clues about how to maintain employee commitment. With the decline in collective bargaining, attention is more clearly focused on relations between the organisation and individual employees. The psychological contract reinforces the need for managers to become more effective at the communications process. Consultation about anticipated changes will help in adjusting expectations and if necessary renegotiating the deal.

Employees are becoming both more critical to business performance and more demanding of the organisations for which they work. In a 'winner takes all' economy, doing a good job is no longer enough: outstanding performance is essential to survival. This level of performance cannot be achieved by downsizing or cost-control: it will only come from persuading employees to make a willing contribution.

The psychological contract provides a convincing rationale for 'soft HRM', or behaving as a good employer. It offers a perspective based on insights from psychology and organisational behaviour rather than economics. It emphasises that employment is a relationship in which the mutual obligations of employer and employees may be imprecise but have nevertheless to be respected. The price of failing to fulfil expectations may be serious damage to the relationship and to the organisation.

References1. GUEST, D.E. and CONWAY, N. (2002) Pressure at work and the psychological

contract. London: CIPD.  2. PURCELL, J., KINNIE, N.; and HUTCHINSON, S. (2003) Understanding the people and

performance link: unlocking the black box. Research report. London: CIPD.  3. For a full list of the CIPD annual surveys and research on the psychological contract

see our website.  4. HERZBERG, F. (1987) 'One more time: How do you motivate employees?'. Harvard

Business Review. Vol 65, No 5, September/October. pp109-120.  5. MARCHINGTON, M., WILKINSON, A. and ACKERS, P. (2001) Management choice and

employee voice. Research report. London: CIPD.

The Psychological ContractA Sloan Work and Family Encyclopedia Entry

byJanet Smithson, Ph.D.

Department of Psychology and Speech Pathology, Manchester Metropolitan University

Sue Lewis, Ph.D.Department of Psychology and Speech Pathology,

Manchester Metropolitan University

Back to WF Encyclopedia Index   Go to Recommended Readings on this topic   Go to Suggested Class Activities

Basic Concepts & Definitions

History and Definitions of the Concept: The notion of the "psychological contract" was first coined by Argyris (1960) to refer to employer and employee expectations of the employment relationship, i.e. mutual obligations, values, expectations and aspirations that operate over and above the formal contract of employment. Since then there have been many attempts to develop and refine this concept. Historically, the concept can be viewed as an extension of philosophical concepts of social contract theory (Schein, 1980; Roehling, 1997). The social contract, which deals with the

origins of the state, supposes that individuals voluntarily consent to belonging to an organised society, with attendant constraints and rights. Argyris (1960) used the concept to describe an implicit agreement between a group of employees and their supervisor. Other influential early writers such as Levinson, Price, Munden, and Solley (1962), used the concept to describe the set of expectations and obligations that individual employees spoke of when talking about their work experience. They identified a number of different types of employee expectations, held both consciously (for example expectations about job performance, security, and financial rewards) and unconsciously (for example being looked after by the employer). Roehling (1997) credits Levinson et al (1962) with explicitly recognising the dynamic relationship of the psychological contract: contracts evolve or change over time as a result of changing needs and relationships on both the employee's and the employer's side. Schein (1965) emphasised the importance of the psychological contract concept in understanding and managing behaviour in organisations. He argued that expectations may not be written into any formal agreement but operate powerfully as determinants of behaviour. For example, an employer may expect a worker not to harm the company's public image, and an employee may expect not to be made redundant after many years' service. Like Levinson et al (1962), Schein emphasised that the psychological contract will change over time.

Recent developments in psychological contract theory are largely dominated by Rousseau (e.g. 1989; 1995; 2001). Rousseau argues the psychological contract is promise-based and, over time, takes the form of a mental model or schema which is relatively stable and durable. Rousseau (1989) explicitly distinguished between conceptualisations at the level of the individual and at the level of the relationship, focusing in her theory on individual employees' subjective beliefs about their employment relationship. Crucially, the employer and employee may not agree about what the contract actually involves, which can lead to feelings that promises have been broken, or, as it is generally termed, the psychological contract has been violated.

Rousseau's conceptualisation of the psychological contract focuses on the employee's side of the contract, so can be termed a "one-way contract". Much recent work has focused on the employee's understanding of the explicit and implicit promises regarding the exchange of employee contributions (e.g. effort, loyalty, ability) for organisational inducements (e.g. pay, promotion, security) (Rousseau, 1995, Conway & Briner, 2002). The employer's perspective has received less attention.

Rousseau also distinguished between "relational contracts" which implicitly depend on trust, loyalty and job security, and "transactional contracts" where employees do not expect a long lasting relationship with their employer or organisation, but instead view their employment as a transaction in which, for example, long hours and extra work are provided in exchange for high pay, and training and development (Rousseau & Wade-Benzoni, 1995). This will be considered further in section "State of the Body of Knowledge" below.

It is important to recognise that researchers have used the concept of the psychological contract in a variety of different ways (Roehling, 1997). Significant elements of all definitions of the psychological contract include:

1.

Incorporation of beliefs, values, expectations and aspirations of employer and employee, including beliefs about implicit promises and obligations, the extent to which these are perceived to be met or violated and the extent of trust within the relationship.

2.

These expectations are not necessarily made explicit. It can be regarded as the implicit deal between employers and employees. It implies fairness and good faith.

3.

An important aspect of the notion of a psychological contract is that it can be continually re-negotiated, changing with an individual's, and an organisation's, expectations, and in shifting economic and social contexts. It is not static, but dynamic and shifting. However, most research provides only a snapshot of one point in time thereby capturing only one stage in this social process.

4.

Because it is based on individual perceptions individuals in the same organisation or job may perceive different psychological contracts, which will, in turn, influence the ways in which they perceive organisational events (e.g. redundancies or developing or modifying a flexitime system).

Some, but not all, definitions of the psychological contract stress that it implies mutuality and reciprocity, based on the perceptions of both parties (employee and employer or its agent e.g. managers). The notion of mutuality, however can be problematic, especially where there is a large power differential between contractors. This allows for the emergence of multiple psychological contracts, some of which may be rather one-sided rather than mutual, with employees not able to include their expectations and hopes. For example, when employees feel constrained in what they can expect from employers, due to factors such as job insecurity, they may develop what have been termed "compliance contracts" (Lewis et al, 2002; Smithson and Lewis, 2000). This implies a mutual understanding that employees will do whatever is necessary to retain their jobs. It is a pragmatic response that does not involve loyalty on either side.

Violation of the Psychological Contract: An important element of the concept of the psychological contract in the literature is the notion of contract violation, and its consequences (Rousseau, 1995; Morrison & Robinson, 1997). Usually research focuses on employees' perceptions of the breach of expectations by the employer, for example in relation to job security, opportunities for development or ethical principles, referred to as violation of the contract. This can lead to feelings of injustice, deception or betrayal among employees (Morrison & Robinson, 1997). Specific circumstances, such as organisational timing, and labour market factors (for example, whether there is a perceived market need for redundancies or cutbacks) are associated with employees feeling that their psychological contract has been violated (Turnley & Feldman, 1999a; 1999b). There is also evidence that employees with different understandings of their psychological contracts respond differently to contract violation and to planned organisational change (e.g. Herriott et al, 1997; Rousseau, 2001b). For example, employees in Singapore, with an unstructured labour market and many short term contracts, and "transactional" psychological contracts, show a lower sense of obligation to employers than US employees, and less perceived violation when changes are introduced (Ang, Tan & Ng, 2000).

Violation has implications for employee trust (Robinson & Rousseau, 1994) performance (Robinson & Wolfe-Morrison, 1996) and behaviour (Nicholson & Johns 1985). However, the psychological contract is viewed in the literature as dynamic and changing. Most research on contract violation focuses on one point in time and therefore we know less about the long-term implications of psychological contract violation for individual employees or organisations. Moreover, research has also focused on employee perceptions of contract violation. We know less about employer perspectives (Rousseau, 2001a). Thus we have evidence of contract violation from the perspective of the victim not the perpetrator. Further criticisms of focusing on contract violation are addressed in the Implications section of this entry.

Importance of Topic to Work-Family Studies

The psychological contract is a useful concept for understanding what employees and employers expect of a job and a work environment, including not only expectations of tenure or promotion but also sense of entitlement to work-life benefits and flexible working arrangements. Indeed, it has recently been argued that work-life balance or

integration can be a key factor in establishing a positive psychological contract (i.e. based on mutual trust) (Coussey, 2000). However, consideration of work-life issues and policies seldom appear in psychological contract research and merit much more attention. Moreover, very little work in the work-family research area has explicitly utilised psychological contract theory.

While few studies of work-life issues explicitly use psychological contract theory, it is implicit in recent studies relating work-life policies or practices to measures of employee satisfaction, loyalty and commitment. For example, Roehling, Roehling and Moen (2001) studied the relationship between work-life policies, informal support and employee loyalty over the life course, concluding that flexible time policies are consistently related to employee loyalty, and most strongly for parents of young children. Perceptions of informal support were also strongly related to employee loyalty. Some research has begun to address the relationship between the psychological contract and remote working (Harwood, 2003) and part time working (Conway and Briner, 2002). Recent UK research (Management Today, 2003) suggests that employees now have a higher sense of entitlement to flexible working arrangements than in the past (at least in Britain), and that they feel the psychological contract may be violated when flexible working or work-life benefits are not available to them. Smithson and Lewis (2001) looked at the impact of work-life issues on the psychological contract for younger employees, some of whom accepted a balanced lives contract in which employees accept lack of long term security and less than optimum conditions in exchange for flexibility and reasonable hours, in order to accommodate their family or personal lives.

The role of gender within psychological contract theory has received little attention, though it is sometimes suggested that women have a difference notion of the contract than men, expecting less in terms of pay and promotion and trading these benefits for flexibility (Herriot et al, 1997). However, studies of young adults have shown little gender difference in psychological contract expectations, suggesting that as women and men's expectations of work converge, so may their experiences of the psychological contract (Smithson & Lewis, 2000).

Psychological contract theory is a potentially useful tool in work-life research as it provides a way of considering employees' and employers' expectations of work-life support, balance and valuations in the context of their other expectations of the working relationship. Given the growing evidence that work-life policies alone have a limited impact on workplace practices and cultures or on individual employee behaviour (Lewis, 1997; 2001; Rapoport et al, 2002), this approach is also useful for shifting the focus away from policies towards individual employees' expectations and understandings of such initiatives.

State of the Body of Knowledge

The emerging links between psychological contract theory and work life research reflects changes in the composition of the workforce since the 1960's, changes in the expectations of younger workers, and changes in societal expectations of work-life integration. For example, some younger workers are prepared to challenge norms of long hours of work and feel violated if expected to work what they perceive as excessive hours, particularly for an organisation which offers them little long term security (Tulgan, 2000; Brannen et al, 2002). Meanwhile, others do not incorporate direct work-family concerns in their interpretation of the psychological contract at their particular stage in the life cycle, often, trading long work weeks and low salaries for training opportunities and challenging work (Rousseau, 1995; Turner and Feldman, 1999).

Another trend which has been reflected in psychological contract theory and also has implications for work-family research relates to job insecurity and the changing

nature of the employment relationship, as flexibility is thought to take over from "jobs for life" (McLean Parks & Kidder, 1994; Turnley & Feldman, 1999b). This has been reflected in changing definitions of the psychological contract, with a growing emphasis on transactions rather than relationships, as discussed below.

Relational versus Transactional Definitions: Traditionally many employers encouraged the expectation of long-term employment relationships by, for example, adding various benefits, such as low mortgages. In return for this security of employment, an organisation expected loyalty and commitment. It has been argued that workers today experience a "new psychological contract" (Herriot, 1992), reflecting their own experiences and expectations, societal attitudes and changing work situations.

For example Hudson et al (1998) describe a current version of the psychological contract in terms of employees expecting to be 'looked after' through the course of their employment in return for their loyalty, hard work and commitment, without expecting long term security. However this implies a uniformity of expectations and overlooks diversity. MacNeil (1985) introduced the idea of conceptualising contracts along a relational-transactional continuum. Rousseau and Wade-Benzoni (1995) suggest that the more traditional "relational contracts", implicitly depending on trust, loyalty and a degree of job security, are being replaced by "transactional contracts" in some contexts, where employees provide for example, long hours and extra work in exchange for high pay, and training and development. Transactional definitions recognise that an organisation may not be able to provide job security but can still provide employability, or may be perceived as offering high levels of personal support (Sparrow, 2000). Other types of contract identified by Rousseau and Wade-Benzoni include "balanced" contracts, where both worker and firm contribute to each other's advantage, and "transitional" contracts, reflecting a temporary state during organisational change (Rousseau & Wade-Benzoni 1995).

There are important implications of the rise in "transactional contracts" for work-family studies, particularly concerning perceived and actual entitlement to work-life policies and practices. Employees who expect less security and fewer benefits from an organisation may feel less entitled to request or take up "family friendly" working practices (Lewis & Smithson, 2001). Short term transactional contracts often explicitly exclude workers from statutory rights such as maternity and paternity benefits, (where these are available) which those in more traditional "relational contracts" take as an automatic right (Lewis & Smithson, 2001). While transactional contracts can be used to advantage by some highly skilled and employable individuals for managing work and family in ways of their choice, for example by insisting on certain working patterns before accepting a job, this is impossible for lower skilled workers.

Factors Associated with Psychological Contract Development: Both individual and organisational factors appear to be associated with the development of the psychological contract. Individual determinants include experiences and expectations which may have been formed about the employment relationships, prior to employment, during recruitment, during early organisational socialisation or from experiences in the course of employment (Rousseau, 2001a). These experiences and expectations may vary according to individual difference factors such as age, gender, level of education, union membership, non work commitments etc (Guest & Conway, 1998). Organisational factors influencing the development of the psychological contract include human resource policies and practices which may indicate certain promises or obligations on the part of the employer and expectations of employees (Guest & Conway, 1998). Noer (2000) argues that many organisations are operating a cultural lag from the old psychological contract. They want the flexibility of "new" contracts but retain the artefacts of a traditional contract e.g. career paths, benefits etc. This indicates a need for employers to be clearer, more explicit on mutual obligations and to communicate them unambiguously.

Generational and Life Cycle Change in the Psychological Contract: With the ageing of the workforce recent research has also focused on generational differences in the psychological contracts. There is evidence that older members of the workforce feel that the psychological contract, as they understand it, has been violated, and have lost trust in their organisations (Herriot et al, 1997), while younger workers may have different expectations (Turnley & Feldman, 1999b; Smithson & Lewis, 2001). The assumptions feeding into the psychological contracts perceived by these young adults thus appear to reflect the changing realities of the labour market and the employment relationship (Brannen, Lewis, Nilsen & Smithson, 2002). Supporting this view, there is some evidence that perceptions of contract violations have decreased, as people have more "realistic" expectations, and more is communicated (Harwood, 2003). Alternatively, it could be argued that sense of violation is related to different expectations or perceived promises. There may, for example, be less sense of violation if people lose their jobs or job descriptions change, and a higher sense of violation for omission of quick advancement or challenging work (Turnley and Feldman, 1999b) or for lack of support for work-life needs (Brannen et al, 2002).

Debates about the usefulness of the concept: Finally there is some debate about the usefulness of the concept. For example, Sparrow and Marchington (1998) argue that the psychological contract concept has been useful in capturing the complex changes at work in times of uncertainly. It acts as an organisation wide framework of analysis and captures concerns over new employment practices. However, Guest (1998) argues that it is operationalised to include so many different psychological variables, with very little known about the relationships between them, that the psychological contract becomes an analytic nightmare. Guest and Conway (1998) suggest that it is best viewed as a useful metaphor for helping make sense of the state of the employment relationship and plotting significant changes in this relationship. They use the notion as a tool for change for practitioners by referring to the goal of healthy psychological contracts- reflecting a range of management practices which they argue will lead to improved employee motivation and commitment.

Debates about the usefulness of the concept also focus on measurement issues. As research has tended to focus on the use of the concept of the psychological contract for explaining research findings, or for informing management practice less attention has been paid, to date, to explicitly considering how the concept is to be measured, (Roehling, 1997). Often the psychological contract is measured indirectly, for example via commitment and loyalty, which is contentious, or in terms of contract breach (eg Kickul, 2001; Kic kul, Neuman, Parker & Finkl, 2001). Some recent research has devised measures in which, the content of the psychological contract is typically broken down into various objective and subjective components which are then measured on survey questionnaires. For example, Westwood, Sparrow and Leung (2001) measured the promises and commitments perceived to have been made by organisations and the obligations which employees perceive they have made. Other research, especially on work-family issues, takes a more qualitative approach to this subjective concept. However, there remains a lack of agreement about how the psychological contract should be measured.

In conclusion on the state of the body of knowledge, the concept of the psychological contract has attracted considerable academic and management interest and is currently utilised in a variety of ways in a wide range of situations. Recent debates about the salience of relational versus transactional contracts, and about the existence of other forms of contracts, need to be resolved by further empirical work. Where almost all recent work on the concept is in agreement is that understandings of the content and violation or breach of the psychological contract is changing as the nature of work changes, and also due to changes across employees' life cycle and employment situations. It is possible that, in the light of social and employment trends work-life issues will become increasingly significant in contemporary

understandings of psychological contracts.

Implications for Policy and Practice

While the violation of the psychological contract has received much attention, research into fulfilment of the contract has been neglected. Specifically, it will be important for future research to identify and understand those factors which give rise to 'mutuality', the agreement of commitments between employer and employee (Rousseau, 2001b), recognising that there is already a fair amount of mutuality in the workplace. A related research field considers the concept of "fit". Larwood, Wright, Desrochers and Dahir (1998) asked employees questions about their perceptions of fit with regard to the psychological contract, and found that greater fit was associated with higher job satisfaction and a reduced intention to quit. Future research may shed light on the factors that account for or increase mutuality or fit and examine in more details the role of work-life aspirations and needs in this process.

Key issues for future research include:

• More attention is needed to understanding the development of psychological contracts over the life course (rather than at one point in time), to the gender element, and to employers' perspectives on psychological contracts and especially their violation.

• Psychological contract theory, like much work-life research, tends to be individualistic. Future research should focus more on the role of collective understandings of employment relations and the role of work-life issues.

• More needs to be known about the role of work-life policies and practices in psychological contracts. To what extent and in what ways do policies and practices, or perceptions of organisational supportiveness for work and family, impact on psychological contracts, and with what consequences for individuals and organisations?

Key issues for employers to consider include:

• There is a need to take account of employees' perspectives and perceptions of the employer- employee relationship in designing work-life policies and practices.

• Permanent staff as much as non-permanent can become demotivated when colleagues are enjoying better pay and conditions for comparable work. Fairness all around, rather than uniformity in types of formal employment contracts, must be the goal. Thus any development which addresses work-personal life issues need to be introduced in a way which includes all employees.

• Employers need to be clearer and more explicit on mutual obligations and expectations and communicate them unambiguously. For example, they need to be explicit about measures of productivity - are people valued by time put in or by outputs achieved, or by other measures? Is flexible working a problem if you want promotion, or not?

• Organisational change initiatives need to consider how to change psychological contracts to avoid perceptions of contract violations.

Researchers and employers need to work together to consider how mutuality in psychological contracts can be formalised and clarified in ways which lead to a "dual agenda" of work-personal life integration and organisational effectiveness (Rapoport et al, 2002).

Locations in the Matrix of Information Domains of the Work-Family Area of

Studies

The Editorial Board of the Teaching Resources section of the Sloan Work and Family Research Network has prepared a Matrix as a way to locate important work-family topics in the broad area of work-family studies. (More about the Matrix ...)

Concepts related to the psychological contract are relevant to the several domains in the Matrix of Information Domains of the Work-Family Area of Study. In particular, key concepts related to the psychological contract are relevant to "Domain F: Theoretical Underpinnings."

Note: The domain areas most closely related to this topic are presented in full color. Other domains, represented in gray, are provided for context.

Domain A:Antecedent Descriptives

Domain B:Work-Family Issues and

Experiences

Domain C:Covariates

Domain D:Responses to W-

F Issues and Experiences

Domain E:Outcomes and

Impacts

IndividualAntecedents

Individual Experiences:

Needs & Priorities;

Problems & Concerns

Individual Covariates

Individual Decisions & Responses

Individual Outcomes &

Impacts

Family Antecedents

FamilyExperiences:

Needs & Priorities;

Problems & Concerns

FamilyCovariates

FamilyDecisions & Responses

FamilyOutcomes &

Impacts

Workplace Antecedents

Workplace Experiences:

Needs & Priorities;

Problems & Concerns

Workplace Covariates

Workplace Decisions & Responses

Workplace Outcomes &

Impacts

Community Antecedents

Community Experiences:

Needs & Priorities;

Problems & Concerns

Community Covariates

Community Decisions & Responses

Community Outcomes &

Impacts

Societal Antecedents

Societal Experiences:

Needs & Priorities;

Problems & Concerns

Societal Covariates

SocietalDecisions & Responses

SocietalOutcomes &

Impacts

Domain F: Theoretical Underpinnings to All Domains

 

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10/19/03

Understanding the Psychological ContractSuggested Work and Family Class Activity

Content contributed byJanet Smithson, Ph.D., Manchester Metropolitan University

Name of activity

Understanding the Psychological Contract

Type of activity

Paired interviews/Group discussion

Related encycl. topic

The Psychological Contract

Purpose To reflect on the psychological contract and to relate it to experiences of employment

Steps Ask members of the class to interview other students in the class who currently have or have in the past had paid employment. The interviews can be in pairs, or several students could interview one person, depending on how many have students had paid employment experience.

The interviewers should explore questions, such as:

1.

What sort of employment contract did/do you have? (permanent, temporary, part time, holiday etc). What were the official terms of employment?

2.

What did your employer expect from you? Which expectations were explicit? Which ones implicit?

3.

What did you expect from your employer? In general, and concerning work and family or flexibility?

4.

Have you any experience of the employer violating your expectations? How did it affect your attitudes and behaviour at work?

5.

Have you had any experiences where the employer did more than you expected? How did this affect your attitudes and behaviour?

6.

Can you relate your experience to any of the forms of psychological contract described in the reading?

7.

What will you expect from a future employer:

a. in general?

b.

concerning work and family or flexibility?

8.

Are there any gender differences in the experiences and expectations in this group? Why might this be?

9.

Do you think the Psychological Contract is a useful way of looking at employment experiences and expectations?

Suggestion submitted by

Janet Smithson , Ph.D.Manchester Metropolitan University

For Business and Technical Writers

What's Up With Your Psychological Contract?Joan Marques, MBA, Doctoral Student

http://www.joanmarques.com

Whenever we enter a work environment, we establish a psychological contract with our employer. Although there are many definitions of what a psychological contract really is, they all trickle down to more or less the same idea. In a general sense a psychological contract can be defined as "An individual's belief regarding the terms and conditions of a reciprocal exchange agreement between that focal person and another party ... a belief that some form of promise has been made and that the terms and conditions of the contract have been accepted by both parties" (Robinson & Rousseau, 1994)

More focused toward the business environment, Schermerhorn (2002) formulates it as follows, "a psychological contract is the set of expectations held by an individual about working relationships with the organization" (p.389).  Schermerhorn further explains, that "a healthy psychological contract offers a balance between contributions made to the organization and inducements received in return" (p. 389). In this perspective contributions are the values a person brings into the organization (skills, effort, time, creativity, loyalty), and inducements are the ones offered by the organization in return (pay, benefits, training, opportunities, advancement).

In fact a psychological contract is a transactional type of agreement that exists in the mind of an employee focused on his or her employer. Needless to say that this contract may vary from one person to another, even if they all work in similar positions at the same workplace. Robinson & Rousseau (1994) clarify this by asserting that "an individual may form beliefs pertaining to their expectations and obligations in an organization as soon as they enter the recruiting phase, or even before."

It is therefore not so strange that some may perceive a violation of their psychological contract while others are perfectly fine with theirs. It's all about perception and personal experiences. In cases where people conclude violation of their psychological contract, Robinson & Rousseau (1994) distinguish 4 main courses of action to be taken: 1) Exit. Often the last resort when

dealing with contract violations. It entails voluntary termination of the violated relationship. 2) Voice. Voicing any feelings to help reduce losses and restore trust. 3) Silence. A form of non-response, which reflects a willingness to endure or accept unfavorable circumstances in the hope that they may improve. 4) Destruction/Neglect. This can vary from neglect of one's duties to the detriment of the interests of the organization by performing counterproductive behaviors like vandalism, theft and work slowdowns.

Seen within the scope of its reciprocity organizations can, from their side, also undertake actions if they register a violation of the psychological contract. In line with the 4 aforementioned courses of action that an individual can take, the organization or its management could deal with perceived violation of the psychological contract as follows: 1) Firing. Often executed when the employee has behaved in ways that are entirely unacceptable to the organization's mission and strategies. 2) Voicing. This can, depending on the seriousness of the registered violation, be done through a verbal reprimand, or a written warning or suspension. 3) Silence. For several reasons, such as fear of race- and gender-related issues, the organization may decide not to take any action, in the hope that things will improve. 4) Degrading/Setting up to fail. The employee can either be assigned low-level jobs that damage his or her esteem in the eyes of fellow workers, or difficult tasks, which he or she will not be able to accomplish. In both cases the pay remains the same. However, the purpose of the action is to elicit the employee's voluntary exit.

Good managers understand the principle, and hence, the importance of a psychological contract, and will attempt to establish a relationship with their subordinates where there is at least enough mutual trust to voice dissatisfactions, and at most an appropriate settlement with each worker, so that there is no violation to be perceived by any party involved.Closely related to the phenomenon of the psychological contract is work-satisfaction, which, in turn, is linked to "meaning at work."

Look at it this way: an employee who is happy at work is one who finds meaning in what he or she does. Therefore, he or she will perceive his or her psychological contract as a fulfilling one. It's one of the eternal vicious cycles that you can think of when discussing workplace relationships.

And while we're at it, we may as well briefly sum up what a manager could generally do to maintain a solid psychological contract:

Making sure the fit between the worker and his/her job is right

Making sure that people feel comfortable in approaching their manager

Making sure there is appropriate communication under all circumstances, but definitely when changes are about to happen.

Making sure people are recognized for good performance, but at the same time, realizing that this recognition should be done in a way that the particular worker appreciates. Not everyone wants to be publicly put on a pedestal.

Now, it may not always be possible to find the right approach toward each and every worker, but the majority will be appreciative of the above-mentioned attitude. Understanding is the key to solving most problems. And a psychological contract, more than any tangible document, gets positively influenced by a good understanding between worker and manager. So, what's up

with your psychological contract?

Copyright (c) 2002 by Joan Marques. All Rights Reserved.

Introduction

The term “psychological contract” was first used in the 1960s.

It means the set of expectations and obligations that employees regard as part of their work experience.

It is different (and sometimes very different) from the details included in a formal job description.

An employee’s expectations can include :

Security

Financial rewards Informal recognition from the manager or employer Promotion opportunities A flexible approach to the “work-life” balance giving sufficient priority to personal

or family needs (eg time off for family illnesses).

Obligations can include:

Working to a certain level of performance

Being seen to agree with the company “ethos” Loyalty to the business and colleagues Real commitment to achieving business aims.

This package of obligations and expectations has a very powerful effect on productivity and staff retention.

When the contract works well...

If the managers in a business have a clear and accurate understanding of the issues affecting each person’s contract then the effect on the business can be very positive.

See The Safeway story as an example of the way the psychological contract can be used to good effect.

The contract will  change over time. Managers also need to be alert to this and take steps to regularly review or understand the current contract as viewed by the staff in the business.

When the contract goes wrong...

If managers think they understand the contract as viewed by their staff, but actually misjudge it, then things can go badly wrong.

All staff will have their own individual psychological contract. If this is, in their view, violated then staff can feel a sense of injustice, deception or betrayal.

Staff can become sullen or leave the business. Or they might tolerate the ‘discomfort’ they feel in the business but loose all enthusiasm. They’ll say to friends, family and themselves - “it’s just a job”. They are more likely to leave promptly as soon as as the working day finishes.

What’s the contract in your business ?

Determining the way the contract is seen by each staff member is easier said than done.

Staff can be reluctant to divulge their views and “lay their cards on the table”. Managers need to be both open and act with total integrity.

It can sometimes be easier to use an external team to determine the current views and psychological contracts of staff. Adelphi Associates specialists use a range of interview techniques and a structured approach to analysis of the business. Please contact us if you’d like and informal discussion of this option.

Some suggestions for business managers

All the evidence points to significant benefits that can be achieved when managers take care to :

understand the psychological contracts as perceived by their staff and...

use this understanding to influence management decisions.

More specifically managers can :

Take care when recruiting - many expectations have their origin in discussions during recruitment and shortly after a new employee starts.

Take account of real employee perceptions in deciding work-life policies and practices.

Ensure fairness throughout your business. Staff can be very demotivated if they see that comparable work does not result in similar pay & conditions.

Managers need to be clear on their expectations and the employee’s obligations. Ensure existing psychological contracts are honoured or at least taken into account

when a business goes through major changes

The Safeway Story

The benefits achieved at Safeway in taking account of the psychological contract have been widely reported in the UK press. Whilst Adelphi Associates were in no way involved their experiences underline the benefits to be gained.

As at December 2003, Safeway, a UK food retailer, are the subject of a takeover battle. Staff, on hearing this news, could easily have been very troubled by the future of the business with many of them heading to the exit door.

However by taking a number of measures the expected exodus of staff did not materialise. One of the issues they paid careful attention to was management of the psychological contract in the business. They kept a lot of focus on the expectations between the business and the staff.

Through this approach they were able to avoid a breakdown in the psychological contract by maintaining an open dialogue and a continuing contract that staff could understand and relate to.

The result of all the initiatives has been better than expected staff retention and increased morale.