the psychological contract-1

Theano Mamai

How useful is the concept of the psychological contract to today’s HR practitioners?

Abstract

The concept of the psychological contract has attracted much attention and concern in recent decades. Many researchers have argued about its existence and effects that can create within an organization. This paper examines the concept of the psychological contract by presenting both sides of the argument, including, the limitations and benefits of the psychological contract as identified by many researchers. The main objective of the paper is to provide evidence of the usefulness of the psychological contract to contemporary human resources (HR) practitioners. Current economic conditions play an important role in how HR specialists should treat the different needs of individuals and try to find and implement new strategies and techniques in order to achieve better results for both the employee and the organization.

Introduction

Changing economic conditions, global competition and technology have altered

the way both organizations and employees function. There are different arguments

concerning the value of the psychological contract to practitioners nowadays and this

work considers both positive and negative interpretations. However, nowadays,

changing expectation of both employees and employers have led to differences between

the ‘old’ and ‘new’ psychological contract.

According to Knights & Kennedy (2005 p.57) “the origins of the psychological

contract date back to the writings of Argyris (1960) and Schein (1980)”.

Argyris (1960) used the concept in order to explain an agreement between a group of

employees and their supervisor. Schein (2009) perceives the psychological contract as a

valuable construct for understanding the terms and conditions between employees and

their organization, and how that relationship can vary across organizations and time.

The psychological contract is an unwritten contract between an employer and an

BIRKBECK COLLEGE, UNIVERSITY OF LONDON 1

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employee and each party has expectations that need to be fulfilled in order to achieve

the desired outcome. Although as a concept it has emerged from theories such as the

social exchange theory (Blau 1964) and the equity theory (Adams 1964), “the

psychological contract is somewhat awkwardly within conventional psychological

analysis. It is not a theory; nor is it a measure” Guest (1998 p. 650).

Psychological contracts are exclusive to each individual and as Guzzo and

Noonan (1994) state, they are therefore highly dependent on the individual’s personality

and perceptions. Concern has been raised in previous decades regarding the

psychological contract, Rousseau (1989) explored its content thoroughly and suggested

that the psychological contract is “an individual's belief regarding the terms and

conditions of a reciprocal exchange agreement between the focal person and another

party. A psychological contract emerges when one party believes that a promise of

future returns has been made, a contribution has been given and thus, an obligation has

been created to provide future benefits” (p.123).

In addition to the theoretical background and the existing literature on

psychological contract, in this essay I examine the substance of the psychological

contract and question its value to HR practitioners nowadays.

Arguments For The Psychological Contract

As Cullinane and Dundon (2006, p.113) mention, even though the psychological

contract has not emerged from the field of Human Resource Management (HRM) it is a

vital component to understanding it. As it is previously discussed, the psychological

contract is an unwritten contract between an employer and an employee and each party

has different obligations and criteria in order to meet mutual expectations and is highly


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dependent on trust and perceived fairness. The psychological contract is formed by the

time an individual is hired; the individual then forms specific impressions about the

nature of the work and it outcomes. Similarly, the employer expects a certain

performance from the employee in order to fulfill his/her expectations. At the heart of

these ‘negotiations’ are managers, and especially HR professionals. As Rousseau (1990)

mentions, the perceptions of those newly employed differ depending on the type of

employment, meaning the intentions of the individual to stay, long-term or short-term in

the organization and suggests the psychological contract is “a construct relevant to

employment”(p.398).

Over the years several searchers have treated the psychological contract at great

length and have concluded that it can generate to specific results. For example, Shore

and Tetrick (1994) suggest that the psychological contract can decrease employees’

uncertainty by creating a mutual agreement in the workplace; it can ‘shape’ employees’

behaviors without intense supervision and it can also provide the employee with the

feeling that they can influence the organization and achieve recognition by fulfilling all

the necessary obligations.

Moreover, it is argued (e.g. Sturges et al. 2005, McDonald and Makin 2000) that

the psychological contract can have a serious impact on employment relationships,

organizational commitment, job satisfaction and organizational performance.

According to (Knights & Kennedy, 2005 p.58), job satisfaction is the individual’s

expectations concerning payment, job appraisal, training, security, career development

and understanding from the organization. Similarly the employer has several

expectations of the employee, for example being effective in the workplace, being ready


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to work extra hours if necessary, being committed to the firm, working for at least two

years in the organization and treat the company’s information confidentially. These are

some general expectations that both sides may have and they are dependent on trust and

perceived fairness.

As it is written in the report ‘the psychological contract’ by CIPD (2010) Guest

suggests that there are several points about the psychological contract that should be

emphasized nowadays. First, the level of people management practices that a company

implements has a strong influence on the psychological contract. These practices are

highly dependent on HR practitioners and the human resource strategies and techniques

that a company implements. In addition, employees’ perception of fairness and trust can

lead to valuable outcomes for both parties. Compliance with the psychological contract

can result in job satisfaction and benefits for both employees and the organization. It is

suggested (CIPD 2005) that managing the psychological contract is an ongoing process

for human resources managers nowadays in order to make the mission and vision of the

company clear and maximize employees’ performance.

As Guest (2004, p.545) states, “the notion of psychological contracts (e.g. Shore

& Tetrick, 1994; Rousseau, 1995) has proved useful for understanding employment

relations, since many of their important aspects are based on perceptions: most

employment relations are implicit or at least not written, and thus parties may have

different understandings about them”. The effectiveness of the psychological contract

can be found in the results of the study by Guest and Conway (2002). They concluded

that the presence of the psychological contract in organizations is beneficial in relation

to employment relationships. More specifically, they imply that the psychological


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contract is valuable in order for senior managers meet employees’ needs and for

employees to fulfill their responsibilities, which enhance job satisfaction and employee

commitment. When the organization fails to fulfill promises and obligations towards an

employee, a breach of the psychological contract occurs and violation of the contract is

the employee’s response to the breach. Both parties can experience a psychological

contract violation or breach at some point (Robinson and Rousseau, 1994). Violation

may lead to a lowering of the individual’s performance and a lack of commitment

toward the organization. As mentioned before psychological contracts are explicit to

each individual, so (Chen et al. 2008) it is very unusual that all employees would have

similar reactions to contract breach as well as not all supervisors would react in the

same way to the violation.

Aichinger and Barnes (2010, p.190) suggest that since the mid 1990s the literature

on the psychological contract has evolved significantly. Some of the reasons that have

contributed to this change are economic conditions, intense competition, evolution of

technology and long working hours. The psychological contract can play a significant

role in the maintenance of good employee relations and organizational performance.

Nowadays, job descriptions may include long working hours and through the use of

technology constant work even outside the office. However, HR practitioners should

ensure that employees maintain a balance between work and life, otherwise a breach of

the individual’s psychological contract can occur and this can have a negative impact on

the employee’s performance and to the company as a whole.

As CIPD (2005) mentions, in ‘Managing change: the role of the psychological

contract’, the psychological contract can play an important role in organizational


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relationships given the today’s need for change and is viewed as an accepted term

among contemporary HR practitioners. As it is suggested, psychological contract can

facilitate HR managers to implement beneficial practices and policies concerning

people’s management during this period of change and monitor effectively the

implementation and results of those practices.

Arguments Against The Psychological Contract

On the other hand, it has been highlighted that the psychological contract refers

to the subjective interpretation and perception of the individual; it is not an objective,

universal approach that managers can take into consideration in order to achieve the

desired outcomes, such as strong organizational performance and employee

commitment. This is considered to be one of the major limitations concerning the

psychological contract and its usefulness to an organization.

Moreover, throughout the extensive literature on the psychological contract,

greater emphasis is given to employees’ perspective. Most articles refer to the

individual’s subjective expectations of the organization and the results if these are not

met. This statement can be associated with the opinion of Guest (2004) who suggests

that a potential challenge of the psychological contract is that there is not a lot of

research on the perspective of the employer and how the organization reacts to the

violation of expectations by the employee. Rousseau (1990) distinguishes between the

expectations and obligations of both parties and argues that not all expectations are

considered to be obligations. An employee’s expectations concern the general nature of

working conditions, while obligations that are not fulfilled can have an emotional effect

on the employee.


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At this point it is crucial to introduce the two different types of psychological

contracts. Anderson and Schalk, (1998, p.641) identify these as transactional and

relational contracts, which are influenced by five dimensions. The first is focus, which,

refers to the scope of the employee. Is his motivation based solely on money or are

emotional and social needs included? It is very important for a HR manager to

understand the different needs of individuals. The second dimension is time, which

refers to the agreed length of the contract between the individual and the organization.

Third is stability. Transactional contracts are stable and inflexible while relational

contracts are more adaptable and dynamic in relational contracts. Forth, scope indicates

the level of influence of the work on the individual. Fifth, is tangibility, which varies

between relational and transactional contracts. Employees’ responsibilities are more

abstract in relational contracts, whereas in transactional contracts the expectations of

employees are clear and specific.

Psychological contracts can therefore differ depending on the nature of the

organization and the type of contracts and this is why it is very difficult for HR

practitioner to place great emphasis on psychological contracts. Age and work

experience play an important role in shaping employees beliefs and opinions and alter

the way individuals comprehend mutual obligations within the organization. Thomas

and Feldman (2009) suggest that there is a definite gap and thus further research is

required on psychological contracts, specifically the different interpretations and

perceptions at different stages of an employee’s life and work experience in order for

HR managers be able to understand them. Contemporary global social and economic

changes imply a shift in traditional organizational management and thus there is


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adjustment in the way people form psychological contracts. There are significant

differences between the old and new psychological contracts. In the former, the

organizational relationships were much simpler; the employee wanted job security and

the job was considered for “life”. Nowadays, managers have to deal with several other

issues, including employee training and development, perceived fairness by the

individual, work-life balance. Furthermore change is an ongoing process and thus the

psychological contract may fail to be indentified by HR practitioners.

It is said (e.g. Dulac et al., 2008 and Conway and Briner 2002) that at some

point, all psychological contracts will be violated by both parties. If the consequences of

breach or violation have a great impact on employee commitment and organizational

performance, the hypothesis of the psychological contract implies that there will be a

decline in the performance of all organizations at some point. As Robinson and

Rousseau (1994) present in their article ‘Violating the psychological contract: not the

exception but the norm’, some aspects of the psychological contract need more in depth

investigation. For instance, they suggest that “employee behavior goes beyond the

contract, in terms of ‘extra-role’ behavior and organizational citizenship behavior (e.g.

Organ, 1998,1990)” and that in addition to breach by the employer there should be a

focus on the employee’s violation of the contract.

Arnold (1996, p.518) concludes that although the in-depth focus on the

psychological contracts in recent years has led to key findings, the ‘concept’ seems to

have some gaps. There is a collective acceptance that the psychological contract derives

from explicit subjective individual perception of the organization, and this is why there

cannot be general guidance about how human resource manager should deal with the


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contracts of different employees. Moreover, he argues that it is not totally clear whether

the concerned parties are even conscious of the existence of these contracts and that that

is why he recommends further research.

Discussion

Throughout this essay I have provided evidence for and against the clarity and

usefulness of the psychological contract. Although there is extensive background on the

subject and researchers offer definitions and highlight the impact of the psychological

contract on individuals and organizations, they suggest that further research needs to be

conducted because some points are vague. The main issue of the psychological contract

is that it is based on individuals’ perceptions and each employee can have different

needs and perceptions. For this reason the psychological contract cannot be generalized

and have collective acceptance. On the other hand, research on managing the

psychological contract has proved to be useful for human resources practitioners in

understanding how it can be used to enable employees to achieve job satisfaction that

can have a positive impact on organizations’ performance and growth. There are some

empirical challenges concerning the subjectivity of these contracts, meaning that they

depend on the personality of the individual and different interpretations can be made

upon justice or fairness can appear to different employees that a human resource

professional may fail to identify.

Although further research is needed in order to clarify the content of the

psychological contract and how HR specialists should manage it, it is nevertheless

already a vital tool for the effectiveness of a company. That is why nowadays while the

whole world is in recession and organizations and people are facing the impacts of


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global crisis, it is important for human resources managers to ensure that bottom-up

communication exists within organizations. In addition to, taking into consideration

what employees want, they should also take into account the changing needs of the

organization. Thus, they should have a dual perspective that psychological contracts

may lack. With cuts in wages and the uncertainty that has overcome employees it is

useful to take into consideration the needs of people in order not to breach

psychological contracts and face the negative results of violation. HR professionals

should engage people in the changing process and not leave them uninvolved. As Sims

(1994 p.380) states, the “psychological contract requires an emphasis on talking with

people, not at people”. Moreover he suggests that HR professionals should implement

pioneering strategies that enhance employees’ motivation and take account of the

distinctive needs of each individual in order to achieve a desirable outcome for both

parties. This should include career-planning programs, as well as workshops, and

communicate messages throughout the organization in order to be sure that all

employees have a clear understanding of the changes and current conditions that an

organization is facing. (CIPD 2005) Managing change is very challenging for

contemporary organizations and the psychological contract can play a significant role.

Notwithstanding some limitations that need to be clarified, I believe that the

psychological contract is useful for today’s HR professionals and is an essential tool for

successfully managing the changing needs of organizations arising from current

economic conditions.


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