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Thepsychologicalcontract
Employeerelations
RevisedMay2010

Thisfactsheetgivesintroductoryguidance.It:

definesthepsychologicalcontract
considerswhatresearchintothepsychologicalcontracttellsusaboutthechangingemployment
relationship
looksatthestrategicimplications
includestheCIPDviewpoint.

Whatisthepsychologicalcontract?
Researchintothepsychologicalcontractbetweenemployerandemployeeshasproducedanumberof
importantmessages.Despitetheacademicoriginsoftheterm,manymanagersbelievethattheideaofthe
psychologicalcontractoffersavalidandhelpfulframeworkforthinkingabouttheemploymentrelationship
againstthebackgroundofachanginglabourmarket.
Theterm'psychologicalcontract'wasfirstusedintheearly1960s,butbecamemorepopularfollowingthe
economicdownturnintheearly1990s.Ithasbeendefinedas'theperceptionsofthetwoparties,employee
andemployer,ofwhattheirmutualobligationsaretowardseachother'1.Theseobligationswilloftenbe
informalandimprecise:theymaybeinferredfromactionsorfromwhathashappenedinthepast,aswellas
fromstatementsmadebytheemployer,forexampleduringtherecruitmentprocessorinperformance
appraisals.Someobligationsmaybeseenas'promises'andothersas'expectations'.Theimportantthingis
thattheyarebelievedbytheemployeetobepartoftherelationshipwiththeemployer.

Thepsychologicalcontractcanbedistinguishedfromthelegalcontractofemployment.Thelatterwill,inmany
cases,offeronlyalimitedanduncertainrepresentationoftherealityoftheemploymentrelationship.The
employeemayhavecontributedlittletoitstermsbeyondacceptingthem.Thenatureandcontentofthelegal
contractmayonlyemergeclearlyifandwhenitcomestobetestedinanemploymenttribunal.

Thepsychologicalcontractontheotherhandlooksattherealityofthesituationasperceivedbytheparties,
andmaybemoreinfluentialthantheformalcontractinaffectinghowemployeesbehavefromdaytoday.Itis
thepsychologicalcontractthateffectivelytellsemployeeswhattheyarerequiredtodoinordertomeettheir
sideofthebargain,andwhattheycanexpectfromtheirjob.Itmaynotindeedingeneralitwillnotbe
strictlyenforceable,thoughcourtsmaybeinfluencedbyaviewoftheunderlyingrelationshipbetween
employerandemployee,forexampleininterpretingthecommonlawdutytoshowmutualtrustand
confidence.

AusefulmodelofthepsychologicalcontractisofferedbyProfessorDavidGuestofKingsCollegeLondon(see
tablebelow).Inoutline,themodelsuggeststhat:

theextenttowhichemployersadoptpeoplemanagementpracticeswillinfluencethestateofthe
psychologicalcontract
thecontractisbasedonemployees'senseoffairnessandtrustandtheirbeliefthattheemployeris
honouringthe'deal'betweenthem
wherethepsychologicalcontractispositive,increasedemployeecommitmentandsatisfactionwill
haveapositiveimpactonbusinessperformance.

Amodelofthepsychologicalcontract
(adaptedfromGuest1)

Inputs
employeecharacteristics

Content

fairness employeebehaviour

organisationcharacteristics trust
HRpractices

Outputs
performance

delivery

Whathappensifthecontractisbroken?
Researchevidenceshowsthat,whereemployeesbelievethatmanagementhavebrokenpromisesorfailedto
deliveroncommitments,thishasanegativeeffectonjobsatisfactionandcommitmentandonthe
psychologicalcontractasawhole.Thisisparticularlythecasewheremanagersthemselvesareresponsiblefor
breaches,forinstancewhereemployeesdonotreceivepromisedtraining,orperformancereviewsarebadly
handled.Managerscannotalwaysensurethatcommitmentsarefulfilledforexamplewhereemployment
prospectsdeteriorateororganisationsareaffectedbymergersorrestructuringbuttheymaystilltakesome
blameintheeyesofemployees.

Managersneedtoremember:

Employmentrelationshipsmaydeterioratedespitemanagementsbestefforts:neverthelessitis
managersjobtotakeresponsibilityformaintainingthem.
Preventingbreachinthefirstplaceisbetterthantryingtorepairthedamageafterwards.
Butwherebreachcannotbeavoideditmaybebettertospendtimenegotiatingorrenegotiatingthe
deal,ratherthanfocusingtoomuchondelivery.

Whathaspersuadedpeopletotakethepsychologicalcontractseriously?
Changescurrentlyaffectingtheworkplaceinclude:

Thenatureofjobs:moreemployeesareonparttimeandtemporarycontracts,morejobsarebeing
outsourced,tightjobdefinitionsareout,functionalflexibilityisin.
Organisationshavedownsizedanddelayered:'leanness'meansdoingmorewithless,soindividual
employeeshavetocarrymoreweight.
Markets,technologyandproductsareconstantlychanging:customersarebecomingevermore
demanding,qualityandservicestandardsareconstantlygoingup.
Technologyandfinancearelessimportantassourcesofcompetitiveadvantage:'humancapital'is
becomingmorecriticaltobusinessperformanceintheknowledgebasedeconomy.
Traditionalorganisationalstructuresarebecomingmorefluid:teamsareoftenthebasicbuilding
block,newmethodsofmanagingarerequired.

Theeffectofthesechangesisthatemployeesareincreasinglyrecognisedasthekeybusinessdrivers.The
abilityofthebusinesstoaddvaluerestsonitsfrontlineemployees,or'humancapital'.Organisationsthat
wishtosucceedhavetogetthemostoutofthisresource.Inordertodothis,employershavetoknowwhat
employeesexpectfromtheirwork.Thepsychologicalcontractoffersaframeworkformonitoringemployee
attitudesandprioritiesonthosedimensionsthatcanbeshowntoinfluenceperformance.

Employerbrand
Employeesinlargeorganisationsdonotidentifyanysinglepersonasthe'employer'.Thelinemanageris
importantinmakingdaytodaydecisionsbutemployeesarealsoaffectedbydecisionstakenbysenior
managementandHR.Employeesmayhavelittleideawho,ifanyone,ispersonallyresponsiblefordecisions
affectingtheirwelfareorthefutureofthebusiness.Unsurprisinglysurveysconfirmthatemployeestendto
feelmoreconfidenceintheirlinemanager,whomtheyseeonaregularbasis,thaninmembersofsenior
management.

Inordertodisplaycommitment,employeeshavetofeeltheyarebeingtreatedwithfairnessandrespect.
Manyorganisationshaveconcludedtheyneedtocreateacorporatepersonality,oridentitywithasetof
corporatevaluesorastatedmissionanemployerbrandthatemployeesaswellascustomerswillrecognise
andrelateto.Inpracticetheemployerbrandcanbeseenasanattemptbytheemployertodefinethe
psychologicalcontractwithemployeessoastohelpinrecruitingandretainingtalent.Formoreinformation
seeourfactsheetanddetailsofourresearchintoemployerbranding.
Thechangingemploymentrelationship
Thetraditionalpsychologicalcontractisgenerallydescribedasanofferofcommitmentbytheemployeein
returnfortheemployerprovidingjobsecurityorinsomecasesthelegendary'jobforlife'.Therecessionof
theearly1990sandthecontinuingimpactofglobalisationareallegedtohavedestroyedthebasisofthis
traditionaldealsincejobsecurityisnolongeronoffer.Thenewdealissaidtorestonanofferbytheemployer
offairpayandtreatment,plusopportunitiesfortraininganddevelopment.Onthisanalysis,anemployercan
nolongeroffersecurityandthishasunderminedthebasisofemployeecommitment.

Butisthisthecase,andistherea'newcontract'?Researchsuggeststhatinmanywaysthe'old'psychological
contractisinfactstillalive.Employeesstillwantsecurity:interestinglylabourmarketdatasuggestthatthere
hasbeenlittlereductioninthelengthoftimeforwhichpeoplestayinindividualjobs.Theyarestillprepared
toofferloyalty,thoughtheymayfeellesscommittedtotheorganisationasawholethantotheirworkgroup.
Ingeneraltheyremainsatisfiedwiththeirjob.
Thekindsofcommitmentsemployersandemployeesmightmaketooneanotherandreflectinan
employmentpropositionare:
Employeespromiseto:

Employerspromisetoprovide:

Workhard

Paycommensuratewithperformance

Upholdcompanyreputation

Opportunitiesfortraininganddevelopment

Maintainhighlevelsofattendanceandpunctuality

Opportunitiesforpromotion

Showloyaltytotheorganisation

Recognitionforinnovationornewidea

Workextrahourswhenrequired

Feedbackonperformance

Developnewskillsandupdateoldones

Interestingtasks

Beflexible,forexample,bytakingonacolleagueswork

Anattractivebenefitspackage

Becourteoustoclientsandcolleagues

Respectfultreatment

Behonest

Reasonablejobsecurity

Comeupwithnewideas

Apleasantandsafeworkingenvironment

Manyemployersrecogniseemployeeconcernsaboutsecurityandindicatethatcompulsoryredundancywill
beusedonlyasalastresort.Howeveremployersknowtheyareunabletoofferabsolutesecurityand
employeesdonotnecessarilyexpectit.Youngerpeoplethesocalled'generationY',orincreasinglynow
millennialswantexcitement,asenseofcommunityandalifeoutsidework.Theyarenotinterested,as
someoftheirfathersandmotherswere,ina'jobforlife',nordotheybelieveanyorganisationcanofferthisto
them.Theyexpecttobetreatedashumanbeings.

Thestateofthepsychologicalcontract
Earlycommentsonthelikelyimpactoflabourmarketchangesuggestedthatemployerswerenolongerableto
provide'careers'andthatthiswasboundtosourtheemploymentrelationship.Researchsuggeststhat,while
organisationshavebeendelayeringandreducingthenumberofmiddlemanagementposts,manycontinueto
offercareers:andmostemployeeshaveadjustedtheircareerexpectationsofindividualemployers
downwards.Manywillbesatisfiediftheybelievethattheiremployerishandlingissuesaboutpromotionfairly.
Theymayalsobenefitfromtheopportunitytonegotiatealternativecareeroptions.
PressreportshaveoftensuggestedthatUKemployeesaredissatisfiedandinsecure.Majornationalsurveys,
includingthoseundertakenbyCIPDbetween1996and20042,showthatthispictureisatbestdistortedwitha
majorityofemployeesconsistentlyreportingthattheyaresatisfiedwiththeirjobandnotworriedaboutlosing
it.Howevertherecessionhashadanincreasinglynegativeimpactonemployeeattitudes,includinginrelation
tosatisfactionandjobsecurity.Thissuggeststhatmanagerswillhaveaseriouschallengetorestoreand
maintainemployeescommitmentasorganisationsemergefromrecession.Currentstatisticsonthesetopics
canbefoundinourquarterlyEmployeeoutlooksurveys.
Otherthingsbeingequal,apositivepsychologicalcontractwillsupportahighlevelofemployeeengagement.
Howevertheconceptofengagementgoesbeyondemployeesattitudesandunderlinestheneedformanagers
todrawouttheirdiscretionarybehaviour.
Forafulllistofourannualsurveys,andresearchonemployeeengagementandthepsychologicalcontract,
visitourresearchprojectspages.
Howimportantiscommunication?
CIPDresearchintoemployee'voice'2showstheimportanceofcommunicationandspecificallyofdialoguein
whichmanagersarepreparedtolistentoemployees'opinions.Seeourfactsheetonemployeevoiceand
employeecommunicationformoreinformation.
Managersneedtomanageexpectations,forexamplethroughsystemsofperformancemanagementwhich
provideforregularemployeeappraisals.HRpracticesalsocommunicateimportantmessagesaboutwhatthe
organisationseekstoofferitsemployers.Butemployeecommitmentand'buyin'comeprimarilynotfrom
tellingbutfromlistening.

Employersareexperimentingwitharangeofattitudinalandbehaviouralframeworksforsecuringemployee
inputstomanagementthinkingaspartofthedecisionmakingprocess.Thiscanbedonefacetoface,for
examplethrough'soapbox'sessions,whichencourageemployeestospeaktheirminds.Employeeattitude
surveyscanalsobeaneffectivetoolforexploringhowemployeesthinkandfeelonarangeofissuesaffecting
theworkplace.Intimesofrapidchange,managersandemployeesfrequentlyholdcontrastingopinionsabout
whatisgoingon.Twowaycommunication,bothformalandinformal,isessentialasaformofrealitycheck
andabasisforbuildingmutualtrust.
Strategicimplicationsofthepsychologicalcontract
Basicallythepsychologicalcontractoffersametaphor,orrepresentation,ofwhatgoesonintheworkplace,
thathighlightsimportantbutoftenneglectedfeatures.Itoffersaframeworkforaddressing'soft'issuesabout
managingperformance;itfocusesonpeople,ratherthantechnology;anditdrawsattentiontosome
importantshiftsintherelationshipbetweenpeopleandorganisations.

Mostorganisationscouldbenefitfromthinkingaboutthepsychologicalcontract.Thefirstpriorityistobuild
thepeopledimensionintothinkingaboutorganisationalstrategy.Ifpeoplearebottomlinebusinessdrivers,
theircapabilitiesandneedsshouldbefullyintegratedintobusinessprocessandplanning.Thepurposeof
businessstrategybecomeshowtogetthebestreturnfromemployees'energies,knowledgeandcreativity.

Employees'contributioncannolongerbeextractedbyshame,guiltandfear:ithastobeoffered.Issuesabout
motivationandcommitmentarecritical.Yetmanyoftheleverswhichmanagershavereliedontomotivate
employeesareincreasinglyunreliable.


Thepsychologicalcontractmayhaveimplicationsfororganisationalstrategyinanumberofareas,for
example:

Processfairness:Peoplewanttoknowthattheirinterestswillbetakenintoaccountwhenimportant
decisionsaretaken;theywouldliketobetreatedwithrespect;theyaremorelikelytobesatisfied
withtheirjobiftheyareconsultedaboutchange.Managerscannotguaranteethatemployeeswill
acceptthatoutcomeson,forexample,payandpromotionarefair,buttheycanputinplace
proceduresthatwillmakeacceptanceoftheresultsmorelikely.
Communications:Althoughcollectivebargainingisstillwidelypractisedinthepublicsector,inlarge
areasoftheprivatesectortradeunionsnowhavenovisiblepresence.Itisnolongerpossiblefor
managersintheseareastorelyon'jointregulation'inordertocommunicatewithemployeesor
securetheircooperation.Aneffectivetwowaydialoguebetweenemployerandemployeesisa
necessarymeansofgivingexpressiontoemployee'voice'.
Managementstyle:Inmanyorganisations,managerscannolongercontrolthebusiness'topdown'
theyhavetoadoptamore'bottomup'style.Crucialfeedbackaboutbusinessperformanceflowsin
fromcustomersandsuppliersandfrontlineemployeeswilloftenbebestabletointerpretit.
Managershavetodrawonthestrategicknowledgeinemployees'heads.
Managingexpectations:Employersneedtomakecleartonewrecruitswhattheycanexpectfromthe
job.Managersmayhaveatendencytoemphasisepositivemessagesandplaydownmorenegative
ones.Butemployeescanusuallydistinguishrhetoricfromrealityandmanagementfailuretodoso
willundermineemployees'trust.Managingexpectations,particularlywhenbadnewsisanticipated,
willincreasethechancesofestablishingarealisticpsychologicalcontract.
Measuringemployeeattitudes:Employersshouldmonitoremployeeattitudesonaregularbasisasa
meansofidentifyingwhereactionmaybeneededtoimproveperformance.Someemployersuse
indicatorsofemployeesatisfactionwithmanagementaspartoftheprocessfordeterminingthepay
oflinemanagers.Otheremployers,particularlyintheservicesector,recognisestronglinksbetween
employeeandcustomersatisfaction.Butemployersshouldonlyundertakesurveysofemployee
attitudesiftheyarereadytoactontheresults.

Managingchangeisamajorchallengefororganisations.HRprofessionalshaveakeyroletoplayin
contributingtotopleveldecisionsaboutthedirectionandpaceofchangeandinsupportinglinemanagers
acrosstheorganisationinimplementingthem.ThepsychologicalcontractcanhelpHRmanagerstomakethe
businesscaseforincorporatingeffectivepeoplemanagementpoliciesandpracticesintothechange
managementprocessatanearlystage,andtosuccessfullymanagetheirimplementation.

Ourresearchevidenceshowsthat:

Amajorityofworkersinbothpublicandprivatesectorsreportmajororganisationalchangestaking
place.
Employeesarenotnecessarilyhostiletochangebutmajorchangesparticularlyleadingto
redundanciestendtocausenegativeattitudes.
Mostpeoplesaychangeintheirorganisationisbadlymanaged.
Employeetrustinorganisationshasdeclinedandthiscanmaketheprocessofmanagingchangemore
difficult.

SeeourChangeAgendaManagingchange:theroleofthepsychologicalcontractandourfactsheetonchange
managementformoreinformation.
Breachofthepsychologicalcontractcanseriouslydamagetheemploymentrelationship.Itwontalwaysbe
possibletoavoidbreachofthepsychologicalcontractbutemployeesaremorelikelytobeforgivingwhere
managersexplainwhathasgonewrongandhowtheyintendtodealwithit.Thecontractmayneedtobe
renegotiated.

CIPDviewpoint
Publicinterestinthepsychologicalcontracthasbeenstimulatedbyfearsaboutjobinsecurity.Surveyevidence
suggeststhat,althoughsuchfearshavebeenexaggerated,employersshouldneverthelessbepayingmore
attentiontorestoringemployees'trustintheirorganisations.Thismeansclarifyingwhatisonoffer,meeting
commitmentsorifnecessaryexplainingwhathasgonewrong,andmonitoringemployeeattitudesonaregular
basis.Employeeengagementstrategiescanprovideausefulframeworkforthispurpose.

Thepsychologicalcontractdoesnotsupplyadetailedmodelofemployeerelationsbutitoffersimportant
cluesabouthowtomaintainemployeecommitment.Withthedeclineincollectivebargaining,attentionis
moreclearlyfocusedonrelationsbetweentheorganisationandindividualemployees.Thepsychological
contractreinforcestheneedformanagerstobecomemoreeffectiveatthecommunicationsprocess.
Consultationaboutanticipatedchangeswillhelpinadjustingexpectationsandifnecessaryrenegotiatingthe
deal.

Thepsychologicalcontractprovidesaconvincingrationalefor'softHRM',orbehavingasagoodemployer.It
offersaperspectivebasedoninsightsfrompsychologyandorganisationalbehaviourratherthaneconomics.It
emphasisesthatemploymentisarelationshipinwhichthemutualobligationsofemployerandemployees
maybeimprecisebuthaveneverthelesstoberespected.Thepriceoffailingtofulfilexpectationsmaybe
seriousdamagetotherelationshipandtotheorganisation.
References
1.
2.

GUEST,D.E.andCONWAY,N.(2002)Pressureatworkandthepsychologicalcontract.London:CIPD.
MARCHINGTON,M.,WILKINSON,A.andACKERS,P.(2001)Managementchoiceandemployeevoice.
Researchreport.London:CIPD.

Furtherreading
CIPDmemberscanuseourAdvancedSearchtofindadditionallibraryresourcesonthistopic.Theycanalso
useouronlinejournalscollectiontoviewselectedjournalarticlesonline.PeopleManagementarticlesare
availabletosubscribersandCIPDmembersonthePeopleManagementwebsite.CIPDbooksinprintcanbe
orderedfromouronlineBookstore.
Booksandreports
CONWAY,N.andBRINER,R.(2005)Understandingpsychologicalcontractsatwork:acriticalevaluationof
theoryandresearch.Oxford:OxfordUniversityPress.

TRUSS,C.,SOANE,E.andEDWARDS,C.(2006)Workinglife:employeeattitudesandengagement2006.
Researchreport.London:CharteredInstituteofPersonnelandDevelopment.
WELLIN,M.(2007)Managingthepsychologicalcontract:usingthepersonaldealtoincreasebusiness
performance.Aldershot:Gower.
Journalarticles
COYLESHAPIRO,J.andSHORE,L.M.(2007)Theemployeeorganizationrelationship:wheredowegofrom
here?HumanResourceManagementReview.Vol17,No2,June.pp166179.
CULLINANE,N.andDUNDON,T.(2006)Thepsychologicalcontract:acriticalreview.InternationalJournalof
ManagementReviews.Vol8,No2,June.pp113129.

ThisfactsheetwaswrittenandupdatedbyCIPDstaff.
www.cipd.co.uk