Psychological Contract in HRM HR Management

  • Defining the psychological contract

As with many aspects of human resource management – such as motivation and performance – the psychological contract is somewhat elusive and challenging to define (for a discussion of this, see Guest, 1998a). However, it is generally accepted that it is concerned with an individual’s subjective beliefs, shaped by the organisation, regarding the terms of an exchange relationship between the individual employee and the organization (Rousseau, 1995).

As it is subjective, unwritten and often not discussed or negotiated, it goes beyond any formal contract of employment. The psychological contract is promise based, and over time assumes the form of a mental schema or model, which like most schema is relatively stable and durable. (For a more detailed analysis on how the psychological contract is formed see Rousseau, 2001). A major feature of psychological contracts is the concept of mutuality – that there is a common and agreed understanding of promises and obligations the respective parties have made to each other about work, pay, loyalty, commitment, flexibility, security and career advancement.

Research undertaken by Herriot et al., (1997) sought to explore the content of the psychological contract in the UK. They researched the perceived obligations of two parties to the psychological contract by identifying the critical incidents of 184 employees and 184 managers representing the organisation. From the results they inferred seven categories of employee obligation and twelve categories of organisation obligation. In relation to employee obligations they make reference to both concrete and abstract inputs the organisation hopes/expects the employee will bring to the organisation.

At the first level these involve an expectation that the employee will work the hours contracted and consistently do a good job in terms of quality and quantity. The organisation will desire that their employees deal honestly with clients and with the organisation and remain loyal by staying with the organisation, guarding its reputation and putting its interests first, including treating the property which belongs to the organisation in a careful way.

Employees will be expected to dress and behave correctly with customers and colleagues and show commitment to the organisation by being willing to go beyond their own job description, especially in emergency. It is possible to suggest that many of these expectations reflect the common law terms implied in the contract of employment and as such it is the ‘manifestation’ of the required behaviours more than the existence of a psychological contract which is used to manage ‘norms’ within the organisation.

On the other side of the contract we can note the obligations placed on the organization in terms of the expectations each employee has of the deal. Most employees would want the organisation to provide adequate induction and training and then ensure fairness of selection, appraisal, promotion and redundancy procedures. While recent legislation has centred on the notion of work–life balance, it is argued that an element of this agreement is an employee expectation that the organisation will allow time off to meet personal and family needs irrespective of legal requirements.

It has long been held that workers ought to have the right to participate in the making of the decisions which affect their working lives (see Adams, 1986; Bean, 1994; Freeman and Rogers, 1999); the debate relating to the psychological contract suggests that employees further expect organisations to consult and communicate on the matters which affect them. With the increasingly high levels of ‘knowledge’ workers it is accepted that organisations ought to engage in a policy of minimum interference with employees in terms of how they do their job and to recognise or reward for special contribution or long service.

Organisations are generally depended upon to act in a personally and socially responsible and supportive way towards employees, which includes the provision of a safe and congenial work environment. We have already noted that in relation to reward and performance management systems there is a need to act with fairness and consistency; the expectation goes further in that the application of rules and disciplinary procedures must be seen to be equitable.

This perceived justice should extend to market values and be consistently awarded across the organisation, indicating the link therefore to a consistency in the administration of the benefit systems. The final element that many workers expect their employer to provide is security in terms of the organisation trying hard to provide what job security is feasible within the current economic climate.

Previous decades have seen many organisations forced, by increased competition and the globalisation of business, to seek to remain competitive by cutting costs and increasing efficiency. This has, in part, given rise to the restructuring endemic in UK and US organizations under the various guises of business process re-engineering, downsizing and rightsizing, all of which apply performance-related pay systems aimed at increasing productivity.

The restructuring has also given rise to redundancies, has had the significant impact of reducing job security of those who remained, has removed many of the middle-level management grades and consequently reduced possible promotion opportunities for all employees. While long-term job security, promotion and career progression were perceived by many employees, whose psychological contract was possibly formed many years earlier, to be the ‘key’ obligations which were owed by the organisation in return for their loyalty and commitment, modern organisations (and in some respects the ‘modern’ employee) are learning to live without such elements in the psychological agreement.

The consequences have been predictable; employees feel angry at the apparent unilateral breaking of the psychological contract and at the same time insecure, having lost trust in the organisation. Commitment is reduced, with motivation, morale and performance being adversely affected. This is potentially dangerous for the organisation, as lean organisations need effort and commitment in order to get work done and at the same time a willingness to take risks in the pursuit of innovation. It is suggested (Rousseau, 2001; Guest and Conway, 2002) that negative change in the employment relationship may adversely affect the state of the psychological contract.

Sparrow (1996) claims that the psychological contract underpins the work relationship and provides a basis for capturing complex organisational phenomena by acting in a similar manner to that of Herzberg’s hygiene factors. Good psychological contracts may not always result in superior performance, or indeed in satisfied employees; but poor psychological contracts tend to act as demotivators, which can be reflected in lower levels of employee commitment, higher levels of absenteeism and turnover, and reduced performance.

Herriott and Pemberton (1995: 58) suggest that the captains of industry have set in motion a revolution in the nature of the employment relationship, the like of which they never imagined. For they have shattered the old psychological contract and failed to negotiate a new one. It has long been accepted that two forms of psychological contract, termed relational and transactional, operate in the employment relationship. The former refers to ‘a long term relationship based on trust and mutual respect.

The employee offers loyalty, conformity to requirements, commitment to their employer’s goals and trust in their employer not to abuse their goodwill’ (Arnold et al., 1998: 388). In return, the organisation supposedly offered security of employment, promotion prospects, training and development and some flexibility about the demands made on the employees if they were in difficulty.

However, as a result of the changes outlined above, it is suggested that some employers have had difficulty in maintaining their side of the bargain. As a result, the old relational contracts have been violated and have been replaced by new, more transactional contracts, which are imposed rather than negotiated and based on a short-term economic exchange. As Arnold et al. suggest, ‘the employee offers longer hours, broader skills, tolerance of change and ambiguity. . . .In return the employer offers (to some) high pay, rewards for high performance and simply a job’ (1998: 388).

Guzzo and Noonan (1994) take the perspective that psychological contracts can have both transactional and relational elements. Employers may have to demonstrate to employees that they can keep to a sound and fair transactional deal before attempting to develop a relational contract based on trust and commitment. Furthermore, as Herriot et al. suggest: ‘Organisations may be in danger of underestimating the fundamentally transactional nature of the employment relationship for many of their employees’ (1997: 161).

The essential point is to recognise that all psychological contracts are different. It is important for the organisation to appreciate the complexities of transactional and relational contracts and to recognise that psychological contracts will have elements of all dimensions and that contracts are individual, subjective and dynamic. The significance of the psychological contract in relation to performance management is that it highlights how easy it is for organisations to assume that employees seek primarily monetary rewards; this is not necessarily the case. The evidence suggests that effective

Transactional Relational

Primary focus Concerned about economic factors Concerned about people Time frame Closed ended and short term Open ended and indefinite Stability of the relationship Static, rarely changing Dynamic and frequently changing Scope of relationship Narrow Broad and pervasive Tangibility of terms Well defined Highly subjective performance management and reward structures in organisations must attend to the quality of the relationships employees experience while at work which are an integral aspect of the psychological contract. The message appears simple: improved performance is affected by more than money.

Relational and transactional contracts

Relational and transactional contracts


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