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PSYCHOLOGICAL CONTRACT AND THE ORGANISATION: AN EMPIRICAL

ANALYSIS
Meenakshi M, Divyank Dhanjal & Vivek Kuchhal
ABSTRACT
This study empirically linked the relationship between Psychological Contract and Organization Commitments (which
includes value commitment and employee's intent to stay). The study focused on the topic that the formation of a healthy
psychological contract can ensure a stable employment relationship and help enhance commitment among employees
towards it's organization. Correlation was used to understand the relationship between psychological contract and
employee's intent or wish to stay with the organization. The results showed that 'intent to stay' and 'value commitment'
are directly and positively correlated with psychological contract. The study highlights the importance of psychological
contract and its deteriorating effects on human capital.
Keywords: -Psychological contract, intent to stay, value commitment, employee-employer relationship

Introduction
A psychological contract, as the name suggest is something related to human psychology, it is a concept developed by
organizational scholar Denise Rousseau, and it represents the mutual beliefs, trusts, perceptions and informal obligations
between an employer and an employee. It sets the dynamics of the relationship and defines the full detailed practicality of
the work to be done. It differs from the formal written contracts and is to be followed however. Psychological contract is
defined by the relationship between an employer and an employee wherein there are unwritten rules of mutual
understanding. A psychological contract counts as a Philosophy and not any devised plan or formula, also it can be
characterized by qualities like respect, compassion, objectivity, trust and many more. Psychological contracts are formed
by credence on exchange agreements and may arise in a large number of situations which may not be employer-
employee related. It's most significant function is of defining the relationship between employer and the employee at the
workplace. So, the psychological contract is an essential, yet implicit agreement that defines employer-employee
relationships in an organization. These contracts can cause virtuous and vicious circles in some circumstances. The study
empirically links the relationship between Psychological Contract and Organization Commitments (which includes value
commitment and employee's intent to stay). This paper focuses on the topic that the formation of a healthy psychological
contract can ensure a stable employment relationship and help enhance commitment among employees towards it's
organization. The correlation design is used here in understanding the relationship between psychological contract and
employee’s intent or wishes to stay with the organization. The results showed that 'intent to stay' and 'value commitment'
are directly and positively correlated with psychological contract. This paper highlights the importance of psychological
contract and its deteriorating effects on human capital.
Breach of a contract
Employee engagement is probably one of the most important factor in the workplace. It’s hard to describe, but we all
know it or have seen it. People go from totally involved and engaged to not interested and disengaged because of a
breach of the psychological contract in an organization.
A psychological contract is a person’s trust or belief about the mutual duties that exist between an employer and an
employee—some which are stated and tangible (like you (employer) give me (employee) pay and benefits and I’ll give
you work output, time and hours) and some which are unstated and intangible (like you will provide me with a positive
work culture and opportunity and I’ll give you commitment, loyalty and effort). This contract obviously evolves, both
ways, as expectations develop as we start becoming a part of the culture.
Disengagement or non-involvement often happens when there is a breach of contract. And these breaches, as we are sure
some of us might have experienced, arise because of a variety of reasons like violations of trust, actions that show a lack
of honesty and integrity, behaviors which violate ethics or the law, promises made that are broken, assignments that
invade personal time, no balance between work-life and personal life, job descriptions and expectations that are not well-
defined, environments that are non-friendly and depressing, and leaders who don’t act like one.
Many breaches lead to disengagement and become very critical because research has shown that disengagement of
employees can lead to a decline in productivity, performance, retention, workplace safety, loyalty and organizational
citizenship behaviors. Some research also shows that contractual breaches influence different people in different manner.
Different age groups face different problems like the youth might lose their sense of trust and commitment, the older
ones may lose their sense of job satisfaction and etc. It has also been proved that employee disengagement negatively
impacts the organization its growth.
The reason for the occurrence of a breach is a phenomenon named Emotion Contagion, which is an easy concept: which
is, if you are happy and are positive around someone, they will feel good and most likely carry that positivity to others,
which can create a ripple effect. It’s amazing when we realize how powerful a small positive gesture can be! This same
ripple effect occurs in the case of negativity or sadness. For example, do you feel good or bad around a positive person
and/or negative person? Thinking in this doesn't need a brain surgeon for sure.
Literature Review
(Turnley and Feldman, 2000), in their study examined the relationship between psychological contract and three types of
employee behavior namely, intention to quit, neglect of in-role job duties and organizational citizenship behavior.
Hierarchical regression analysis was used to examine the relationship. The analysis revealed that the psychological
contract violations were positively related to employees’ willingness to quit and to neglecting the in-role duties but
negatively related to employees' willingness to perform organizational citizenship behaviors. In conclusion their study
showed that psychological contract violations operate through a sense of unmet expectations and job dissatisfaction.
(Coyle Conway and Jacqueline, 2005), Emotion theory suggests that due to breach of his/her expectations, people
became angry and that anger is associated with an action tendency and this hypothesis can be supported by Social
interactions theory. Psychological contract breach encourages negative emotions about the unmet expectations associated
with particular promises. Perceived breach can & does occur in the absence of actual breach and perceptions of whether
or not obligations are fulfilled are not always shared by employer and employee, arising from lack of mutuality in the
contract, that is the extent to which the parties to the contract, share perceptions of its content.
(Srilatha and Joshy, 2010), have studied how psychological contract and its breach impacts bank’s employees intention to
quit. 7 items of measurement by Rouseau, Robinson, Kratz (1994) were taken as measures of psychological contract. The
results reveal that an employer’s failure to fulfil its commitments is significantly associated with bank employee’s
intention to quit the organization. They concluded by saying that Bank’s HR Managers must properly assess the state of
psychological contract of employees so that they will be able to formulate retention strategies for those employees whose
psychological contracts are being violated so that employees’ intention to quit is lowered.
(Weiss and Cropanzano, 1996), there study shows that there is a negative relation between Psychological contract and
job satisfaction. Affective events theory is used to explain that breach has effective relation with affective reactions
which in turn low the work attitude at job place and person will place dysfunctional behavior. Refers to the social
interactions between employees and organization potentially generating high quality long term relationships between
employee and organization. Social behavior is a result of an exchange process in order to maximize benefits & minimize
costs of social interaction. Social Exchange theory states that people weigh the potential benefits & risks of social
relationships before engaging into one themselves. When the risks are greater than the rewards people will either
terminate or abandon that relationship.
(Nishanth and Mahaleamge, 2016), studies the impact of psychological contract on employee outcomes of job
satisfaction and organizational commitment in an apparel company. Using regression analysis they identified that there is
a strong positive relationship between psychological contract on employee outcomes of job satisfaction and
organizational commitment. Correlation analysis also revealed a strong positive relationship between the two.
(Guest Sturges and Conway, 2005), establishes a relationship between various career management activities,
psychological contract, and the outcomes of psychological contract fulfillment. They tested a series of linked hypothesis,
based on social exchange theory (Blau, 1964). The findings revealed that both individual and organizational career
management behaviors are linked to psychological contract fulfillment; organizational career management help is
associated with affective commitment and job performance; psychological contract fulfillment plays a vital role in
mediating the relationship between career management and such attitudes and behaviors and that organizational
commitment may mediate between psychological contract fulfillment and individual career management activities aimed
at fostering their career outside the organization.
(Robinson and Morrison, 2000), studies the employees' perceptions of their psychological contract breach by their
organization, and what factors affect this perception that will cause employees to experience feelings of contract
violation. The study reveals that employees perceive a contract breach when organizational performance and self-
reported employee performance were low, the employee had not experienced a formal socialization process, minimal
interaction between the employee and the organization prior to the appointment, the employee had a history of
psychological contract breach with former employers, and the employee had many employment alternatives at the time of
appointment.
All the author’s studies concur that a breach in psychological contract causes a negative impact on employees’
productivity as they feel neglected and they intent to quit the organization. So the organizations especially mangers and
top level management needs to focus on the employees need and satisfaction so that they feel wanted by the organization
and their productivity is not hampered.
Methodology
The objective of the study is to determine the importance of employee-employer relationship at work place by studying
the psychological contract between them and if a breach how it impacts the growth and profitability of the organization.
The data for the study was collected using convenience sampling method. A survey was designed to observe the
perception of the psychological contract among employees of various organizations. 55 responses were collected for the
study, the employees were differentiated by time period of their working in the organizations i.e. employees working for
less than a month, working less than a year, working for 1-3 years, 3-5 years and employees working for more than 5
years. All these employees will have a different perception regarding their psychological contract with the organizations
depending on their experience level. Questions were asked regarding their intent to stay in the organization due to
fulfilment or breach of the psychological contract and their commitment to the organization for the same.
Analysis and Findings
A diverse group of people responded to the survey. People of different work experience gave their views on their
employee-employer relationship and inherit psychological contract between them. 61% of the respondents have worked
at their organization for less than 2 years and only 16% are working for a period of more than 3 years. This demographic
shows a young sample who are well informed about their needs and what is expected from their employers.

Respondents were asked to rate the importance of personal relationship between superior and subordinates, the result are
following;

50% of the respondents feel that personal relationship between superior and subordinate is important for growth if both
the organization and the individual. 30% of the respondents didn’t feel that the personal is important for the growth and
believes only work productivity will bring about a growth for the organization and the individual.
The following chart shows how much the employer value the commitments made the employees’ and how much efforts
the employer is willing to make the towards fulfilment of employees desires.
60% of the respondents agree that their employer is taking care of his/her well-being and makes extra efforts to hear the
personal problems and help them by performing favors to the employee, 67% of the respondents employers take the
opinions of the employee in decision making process and 71% respondents feel that their employer cares about the job
satisfaction of his/her employee. Overall 66% of the respondents feel that his/her employer is valuing his commitment
towards the work and helping the employee in their personal matters and professional matters so that employees have
maximum job satisfaction and they can achieve their goals.
When the employee feels that his/her employer is not taking his opinions in the decision making process, when he feels
that his work is not being appreciated, the employee generates a tendency to leave the organization. So the employer
must take necessary steps to ensure that the employee is wanted and appreciated so that he stays in the organization and
contribute towards achievement of goals and objective. The following chart shows how the respondents felt about their
professional relationship with their employers and how it affects their intent to stay in the organization;

40% of the respondents felt that their employer does not trust them and as a result withholds key information from them
and brings changes without taking opinions from the employee which hinders the working capabilities of the employee
and he feels alienated from the decision making process. 44% of the respondents felt that there is an imbalance in work-
reward system. The employers are seeking extra efforts which are prescribed to the employee and for that work the
employees are not receiving extra benefits, they are working extra for the same benefits without any appreciation which
leads them to their commitments towards the employer and the organization. As a result they want to leave the
organization i.e. their intention to stay gets depleted when the employer does not appreciate the work and the
commitment of its employees.
The employees feel that there is a breach in the psychological contract when the employers fail to deliver the promises
and are unable to provide job satisfaction to them. One question arises that when there is a breach who is responsible for
the breach? The employee? the employer? or both parties are responsible for the breach. We asked the respondents their
opinion on this, 61% of the respondents feel that the both the employer and the employee are responsible for the breach
of contract. They both fail at their ends to complete their respective tasks which leads to poor performance and brings
about a breach in the contract. 49% of the respondents feel that a breach in contract negatively affects the organization as
it leads to low productivity and high turnover which adversely affects the organization.
54% of the respondents feel that a psychological satisfaction positively affects the organization, it increases the profit
levels and brings about growth to the organization. When the employees are satisfied with their work performance, they
are being included in the decision making process and superiors appreciate their value and commitments they have made
towards the objective of the organization as a result their productivity increases, they come up with innovative ideas to
increase overall productivity and increase the profits of the organization.
The correlation between intent to stay and value commitment with employer-employee relationship is given as:

Correlation Employer-employee relationship

Intent To Stay 0.033137

Value Commitment 0.075475

Values of .33 and .75 show that there is low positive correlation between intent to stay and Employer-employee
relationship a strong positive correlation between value commitment and Employer-employee relationship. This means
that employee’s value their relationship as an important aspect in their work and want their employers to respect the
psychological contract between them. When the contract is strictly followed and respected the profit of the organization
increase as the employees’ are satisfied and happy with their work, their personal and professional desires are being
satisfied by both the organization and their employers.
Conclusion
This paper tells us about the importance of psychological contract in an organization. How the contract though not
written is of most importance to the organization and its members. From this study we got to know that the satisfaction of
the employees varies with their say in the organizational decisions and the behavior of employers towards them. The
survey shows the response of various people working in different organizations, their view about psychological contract
and its importance in the organizational growth and productivity.
The need for a psychological contract is much more than any written contract because if the members working in an
organization are not mentally and physically satisfied they might not contribute as much as they can towards the
organizations growth. The intent to stay, grow of the employees and the value commitment play a vital role here as they
help us to classify the dependent and independent variable and show the relationship between them. By this paper we like
to focus our readers’ attention to the need for a healthy relationship in an organization and how we can make the bonds
stronger by adopting small gestures like - appreciation, appraisals, motivation, team work and many more.
Our recommendation to the organization who lack in psychological contract or who wish to enhance it, would be to have
a friendly atmosphere in the organization. Respect the co-workers and also the subordinates and superiors. Actively
involve all the groups of employees into big decision making and never demotivate or demean them from doing
something good for the organization. In this way the relationship between employee and employer would be healthy and
will help in organizations growth and productivity.

References
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Guest Sturges and Conway, J. S. (2005). Managing the career deal: The psychological contract as a framework. Journal
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Nishanth and Mahaleamge. (2016). Impact of Psychological contract on Employee outcomes of Job satisfaction and
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