Should employers take

psychological contract
seriously when looking at
the employment
relationship?

INDIVIDUAL ESSAY
Strategic Human Resource Management
 INDIVIDUAL ESSAY

Contents
Introduction...........................................................................................................................2

Types of Psychological Contract............................................................................................3

Contents of the Psychological Contract................................................................................5

Trust and the Psychological Contract....................................................................................7

Employee Motivation and the Psychological Contract.........................................................8

Conclusion...........................................................................................................................10

DECLARATION......................................................................................................................11

Bibliography.........................................................................................................................12
 INDIVIDUAL ESSAY

Introduction
Chosen Topic: Should employers take the psychological contract seriously when
looking at the employment relationship?

I chose this topic because I have a genuine interest in this area of the module, and I
wanted to gain even more knowledge on the topic than what I had previously learned.

In order to answer this question, I wish to first explain what the psychological contract
actually is and the different forms it can take as well as the content contained in a
psychological contract. There are two types of contract in an organization, a formal
(written) contract and the psychological (unwritten) contract. The term ‘psychological
contract’ was first used in the early 1960’s but it became more popular following the
economic downturn in the early 1990’s. There isn’t one universal definition, but the most
widely accepted definition is; “The psychological contract is individual beliefs, shaped by
the organization, regarding terms of an exchange arrangement between the individual
and their organization.” [CITATION Rou19 \l 2057 ] Professor guest also later defined the
psychological contract as “The perceptions of both parties to the employment
relationship, organisation and individual, of the reciprocal promises and obligations
implied in the relationship” [ CITATION DGu00 \l 2057 ] in other words, the psychological
contract is what both the organisation and employer see as the promises and obligations
they have to each other.

Modern times have seen a shift from industrial relations to human relations, the
human aspect has become a crucial aspect in business and management. This natural
shift means that the psychological contract should be taken seriously by employers. As
the business world is ever changing, expectations or ‘promises’ surrounding the
psychological contract are changing also. These expectations from each party (employee
and employer) are unwritten and unspoken terms that each expect to be fulfilled.
[CITATION Sch95 \l 2057 ] stated “Though it remains unwritten, the psychological
contract is a powerful determiner of behaviour in organisations”. Following on from
Schein’s opinion I believe it is worth employer’s considering this concept, although there
 INDIVIDUAL ESSAY

is no legal obligation on the employer, regarding the psychological contract. I feel it is

worthwhile for employers to seek a better understanding of what employees expect to
provide to the organization and what they expect to gain in return. This may give the
employer the chance to satisfy their employees so that they have a loyal and hard-
working workforce.

There are some key features of the psychological contract to consider, including;

The psychological contract is based on beliefs or perceptions. This means every individual
may have different outlooks on what is actually contained in the psychological contract;
The psychological contract is implicit rather than explicit. Each party may draw their own
conclusions as to the existence or substance of promises and obligations based on
observed behaviours on the other party; The psychological contract is based on a
perceived agreement rather than an actual one. This means employees and managers
may have conflicting opinions as to the content of the psychological contract; The
psychological contract is based on an exchange. It is founded on the concept of
reciprocity, for example, the employer may behave a certain way as long as the employer
is providing something in return to warrant this behaviour; The psychological contract is
ongoing and continually evolving. A written legal contract will likely be set for a specific
period where as the psychological contract terms are constantly being re-written. These
changes occur because of the interaction between both parties, expectations and
obligations will change, as one is fulfilled a new one will soon be made.

Types of Psychological Contract

When looking at the psychological contract it is important to note that it comes in four
different forms;

1. Relational
2. Balanced
3. Transitional
4. Transactional
 INDIVIDUAL ESSAY

The most common psychological contracts are transactional and relational contracts.
Transactional contracts are based on very specific obligations (e.g. Financial) usually over
a short period of time, common in harsh economic climates. The focus is very much on
the individual’s performance. The employee will be rewarded financially if they fulfil very
specific employee task behaviours. In Shields matrix (2007) it states that “If you perform
at a high level for as long as we need you, we will provide you with exciting work and
opportunities to develop your human capital and employability.”

Relational contracts are based on organizations seeking a deeper and more extensive
commitment to the job over a longer period of time, they rely heavily on trust. The
organization provides a broader range of benefits and opportunities based on an
individual’s membership, length of service or seniority and loyalty to the organization.
These types of contracts are common during stable economical periods. Performance
requirements are much more unspecified in a relational contract than a transactional
one. Shields matrix (2007) states that “If you are loyal and work hard as directed, we will
provide you with a secure job, steady pay increases and internal training & promotion
opportunities.”

Balanced contracts are based on a mixture of transactional and relational promises

and obligations over a short and long term, can occur during more stable economic
change. The individual and the collective group performance are equally considered
when offering both intrinsic and extrinsic rewards. At first glance, transactional and
relational contracts appear to be opposites. Despite this, the idea of balanced contracts
and other empirical evidence [ CITATION Coy00 \l 2057 ], suggests that employees often
have both transactional and relational contracts at work. Shields matrix (2007) states that
“If you contribute consistently as a team player and organizational citizen, we will offer
you a reward mix that balances your needs and ours.”

Transitional contracts are unspecified, a specific performance level is not required for
reward. This contract usually occurs when there is change happening, such as
organization restructuring or downsizing. Organizations may change the terms of the
contract if they are in crisis or it is a short-term contingency. Rewards are in decline and
work intensifies, you may be encouraged to quit, or the organization may make you
redundant. The employee – employer relationship erodes during this period and there is
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a clear shift moving away from the relational contract. In Shields matrix (2007), it states
that “If you work harder than before, we may be able to keep you on, but you may have
to be prepared to take a pay freeze or pay cut.”

Contents of the Psychological Contract

It is impossible to be definitive about the content of the psychological contract as it is
impossible to avoid that the perceptions of the organization and the individual will differ.
There are, however, studies that have been carried out that can offer a guideline or an
inclination as to what these perceptions might be.

From reading [ CITATION Wan11 \l 2057 ] report I found that the psychological
contract contains the organization’s obligations and the individual’s obligations. The
organization’s obligations include; To provide continued employment, safe working
environment and fair compensation; To provide training, career development, promotion
opportunities and long-term job opportunities; To demonstrate credible commitment to
a valued social cause. The individual’s obligations include; Fulfil formally specific role
requirements; Fulfil generalized role obligations, organizational commitment and
involvement, organizational citizenship behaviour; Participate in the organizations
mission, organizational and societal citizenship behaviour.

The report also goes on to say that the psychological contract includes a salient
beneficiary; In economic currency the salient beneficiary will be perceived as oneself; In
socioemotional currency the salient beneficiary is perceived as self and organisation; In
ideological currency the salient beneficiary is society, an intangible principle. The
psychological contract also contains the concept of affiliation logic; The company gives
me affair day’s pay for a fair day’s work; The organization nurtures my professional
development and sense of community; The organization shares my passion, cause and
mission.

A study carried out by Herriot, Manning and Kidd obtained both the organization and
the employees’ expectation. They surveyed UK employees and managers and asked each
group what employees can expect from their organization, and what the organization can
 INDIVIDUAL ESSAY

expect from their employees. [ CITATION Pet97 \l 2057 ] found what employees can
expect from their organization (according to employees); 1. Safe and Congenial
environment; 2. Fair and equitable pay with respect to market and across the company;
3. Fairness in selection, appraisal, promotion and redundancy; 4. Providing adequate
training; 5. Providing job security as much as is possible. They also found what
organizations can expect from their employees (according to employees); 1. To work
contracted hours; 2. To do a good job in terms of quantity and quality; 3. To be honest; 4.
Self-presentation – dressing and behaving correctly; 5. Flexibility – willing to go beyond
job description when required.

Their survey also found what employees can expect from their organization (according
to managers); 1. Fairness and consistency of benefits; 2. Humanity, acting in a
responsible and supportive manner; 3. Fairness in selection, appraisal, promotion and
redundancy; 4. Recognition for special contributions; 5. Safe and congenial environment.
What organizations can expect from their employees (according to managers); 1. To work
contracted hours; 2. To do a good job in terms of quantity and quality; 3. To be honest; 4.
Loyalty – staying with the organization and putting its interests first; 5. Flexibility – willing
to go beyond job description when required.

In this study the organization and employees have similar views as to the content of
the contract and what their expectation are of each other. There are however some small
discrepancies between the views of both parties. When talking about what organizations
can expect from employees, the employees mention self-presentation (dressing and
behaving correctly), where as the organization are more concerned about loyalty. When
discussing what employees can expect from organization, the employees are very
concerned about job security and fair and equitable pay. The organization doesn’t
mention job security and doesn’t directly mention pay but they do however mention
recognition for special contributions and fair benefits. The employees seem to want their
organization to ensure their job is secure for the long term and that they offer fair wages
where as the employers talk more about fair benefits and recognition. It is important for
the organization that each party’s expectations are similar as if they were a million miles
apart then their employees are likely to be unhappy, unproductive and both parties are
likely to have a bad relationship with each other which may force the employee to quit.
 INDIVIDUAL ESSAY

Trust and the Psychological Contract

Trust is a very important part of the psychological contract, it is a fundamental
component of all human social interactions. If there is no trust in the employment
relationship it is highly unlikely the terms of the psychological contract will be fulfilled,
this will have a put a strain on the employment relationship. Trust is a thing that develops
over time, it involves a certain level of risk, depending on the situation, and it usually
requires a strong relationship between two parties to exist. Trust as a psychological state
can be defined as “The willingness of a party to be vulnerable to the actions of another
party based on the expectation that the other will perform a particular action important
to the trustor, irrespective of the ability to monitor or control that other party.”
[ CITATION May95 \l 2057 ] Trust is a two-way system, it requires reciprocity, you must
be willing to give as well as take for it to function.

Mayer’s definition of trust has a strong link to the psychological contract. A

psychological is based upon an exchange, or at least the belief an exchange will take
place. The psychological contract is founded on the concept of reciprocity, the employer
must make themselves ‘vulnerable’ by behaving a certain way in return for some sort of a
worthy reward offered by the employer. The employer is also making themselves
vulnerable by making the offer, there is no guarantee either party will fulfil the contract,
they just have to ‘trust’ each other. Trust is a key component of the psychological
contract and indeed the employment relationship, because they are so strongly linked,
employers should seek to fulfil the terms of the psychological contract in order to ensure
trust exists between them and that a positive employment relationship maintained. Trust
or the fulfilment of the psychological contract can encourage constructive workplace
behaviours and attitudes. Employees will be more likely to reach specific targets or goals
in the future if the employer can be trusted to keep their end of the bargain. It can also
encourage higher co-operation and collaboration, as well as raised performance levels.

A breach or violation of the contract can undermine trust, this is when on party
perceives the other as failing to fulfil a promised obligation. Some examples of typical
violations include; failing to provide adequate training; failure to provide compensation;
lack of promotion opportunities; lack of job security. When contracts are violated, they
tend to shift from relational contracts to transactional contracts, because trust has been
 INDIVIDUAL ESSAY

violated the obligations of the contract will be made much more specified. Violations of
the contract can be inadvertent, it may have been unintentional and could have been a
genuine mistake, in which case the violator should seek to rectify their mistake. The
violation could have occurred because of a disruption, it was impossible to fulfil the
contract despite the willingness to do so. It may also have been a breach of contract, in
which case on party is knowingly refusing to fulfil the terms of the contract. When a
contract is broken it can lead to anger and conflict between the involved parties, which
will reduce trust and good faith. This will cause low job satisfaction levels and reduced
productivity. Attendance and commitment to the job may also fall which will eventually
lead to the employer quitting or being fired due to poor performance or misconduct in
work. a high staff turnover is not good for any organization so employers should look to
avoid breaching or violating contracts.

In order to fulfil the psychological contract, employers should; provide realistic job
expectation; have frequent discussions with the employee about expectation; check the
employees understanding of what is expected; give feedback where necessary; be aware
and sensitive to individual differences among employees; and check if the employee has
changed any of their expectations.

Employee Motivation and the Psychological

Contract
Motivation is an area that has been widely researched and this will continue into the
future. Organizations are focusing a lot of there attentions on what motivates their staff
and why. Organizations want to know how to motivate their staff as motivated
employees usually have high job satisfaction and high-performance levels which in turn
leads to profits. It can also encourage employee loyalty to the company. Knowing how to
motivate your staff can be very tricky as one individual may be motivated by entirely
different things to another individual within the same organization. Not only that but an
individual may change their own views over time, what motivates them now (e.g.
money), may not motivate them in the future (e.g. may be motivated by extra time off
and holidays). The psychological contract can be used as a tool to gain a better insight
 INDIVIDUAL ESSAY

as to what exactly motivates employees to behave in a certain way and why do they feel
motivated.

For example, looking at Maslow’s hierarchy of Needs (1943) it explains that employees
have certain needs that have to be fulfilled in order to be motivated. Once one need is
fulfilled, they will keep moving onto the next until happy. The first step in the hierarchy is
physiological needs, such as food and water, which are basic needs, will be provided
through wages. The second on the list is safety needs, which can include job security and
a safe workplace, these are also basic needs. In [ CITATION Pet97 \l 2057 ] study, they
found that employees expect to be working in a safe and congenial environment, as well
as seek job security as much as is possible. The fourth need is self-esteem, this is the
need for prestige and feeling of accomplishment, employees want to feel like they have
done a good job. The final need is self-actualisation, this is when one has reached their
full potential. They have been given a challenging task and prevailed using their own
initiative and creativity. Usually when an individual reaches this stage it is a continual
process, they are always striving for more, they want to keep improving. These needs can
also be linked to Herriot’s study (1997) as it found that employees seek appraisal/
recognition (sense of accomplishment) and also want the opportunity for promotion. The
similarity between Maslow’s hierarchy of Needs and the psychological contract proves
that it could be a very useful tool for organizations to use going forward, when
attempting to motivate staff.
 INDIVIDUAL ESSAY

Conclusion
Despite the uncertainties surrounding the psychological contract, I believe it to be an
important concept for organizations to consider and employers should take them
seriously when looking at the employment relationship.

My reasons for this are that the business world is ever changing, over the years there
has been a shift from industrial relations to the human aspect. Psychological contract has
seen a massive growth in interest in the last ten years and I don’t see this changing any
time soon so I believe this will be a key area to focus on.

The psychological contract is closely associated with trust. It is very important for an
employer to maintain trust with its employees as it can have a major positive impact on
the organization. When trust exists in the employment relationship or the psychological
contract is being fulfilled this can encourage constructive workplace behaviours and
attitudes. Employees will be more likely to reach specific targets or goals in the future if
the employer can be trusted. It also tends to increase co-operation and collaboration, as
well as raised performance levels. All this is good news for the employer as it should
allow the profits to come pouring in. However, if there is a breach or violation to the
contract it will have the opposite effect. It will cause conflict between the two, the
employment relationship will deteriorate it may cause attendance and commitment to
fall and the employee may eventually be forced to quit. Therefore, it is important that
employers maintain a level of trust with employees and continue to fulfil the obligations
of the contract in order for the success of the business and the happiness of employees.

The final reason is that the psychological contract may be very useful in understanding
what exactly motivates employees and why. This is a problem companies continually face
as one individual may be motivated entirely differently to the next. This knowledge could
prove to be very useful when trying to recruit and retain employees. Employers simply
should not ignore the psychological contract as it would be foolish to dismiss its
importance.
 INDIVIDUAL ESSAY

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