University of London International Programmes

Human Resource Management

MN3075
Developed by Praba Nair
Associate Lecturer, SIM GE
Version 2

Copyright © 2019 by Singapore Institute of Management Pte Ltd. All rights reserved.
Topic 3

Chapter 5: Psychological Contracts

Chapter 5: Psychological Contracts
Aims
The aim of this lesson is to introduce the important concept
of the psychological contract.
Learning Outcomes
• To define the concept of psychological contract
• To understand the changing employment relationships
• To explain how psychological contracts are created
• To explain the consequences of breach of contract
• Evaluate the relationship between HRM practices and
psychological contracts
Recommended Reading
• Pages 79 – 101 of the Subject Guide
• Cullinane, N. and T. Dundon ‘The psychological contract: a critical
review’, International Journal of Management Reviews 8(2) 2006,
pp.113–29.
• Coyle-Shapiro, J.A–M. and L. Shore ‘The employee-organization
relationship: where do we go from here?’, Human Resource
Management Review (17) 2007, pp.166–79.
• Conway and Briner (2005) Understanding psychological contracts at
work: a critical evaluation of theory and research. (Oxford: Oxford
University Press, 2005) [ISBN 9780199280643].
– Chapter 3 ‘What is the psychological contract? Defining the concept’
– Chapter 5 ‘How does the psychological contract affect behaviour, attitudes and
emotion? The importance of psychological contract breach’
Social Exchange Theory
• The roots of the psychological contract can be traced to the work of
Blau (1964) and Gouldner (1960).
• Blau (1964) differentiates social exchange from economic exchange.
• Economic exchange features precise specifications of transactions
and prevalence of extrinsic rewards. It is generally short term. It is a
formal contract and ensures obligations are fulfilled.
• Social exchange theory is based on unspecified future obligations
and the distribution of unequal power resources. There is an element of
trust. Obligation to reciprocate continues over the long term.
• Underlying social exchange is the norm of reciprocity (Gouldner
1960). When one party benefits another an obligation is generated on
the recipient to reciprocate.
• Employment relationships are shaped as much by social as well as
an economic exchange.

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What is a Psychological Contract
• It is based on Social Exchange Theory (Blau, 1964). It is closely related
to the norm of reciprocity (Gouldner 1960)
• Most employment contracts can be characterised as incomplete as the
employer cannot specify in advance all the details of the contract.
Employees faced with uncertainty fill in the blanks in their written
contract with their own interpretations. The psychological contract is the
basis of these.
• According to Schein it is ‘A set of unwritten reciprocal expectations
between an individual employee and the organisation.’ (Schein, 1980)
• Kotter (1973) defines it as ‘An implicit contract between an individual
and his organisation which specifies what each expect to give and
receive from each other in their relationship.’
• According to Rousseau, (1989) it 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.’
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What is a Psychological Contract
• In essence, psychological contracts are an individual’s belief
regarding reciprocal obligations: what obligations the employee
owes the employer and employer’s obligations to the employee.
• Although there is general consensus that the psychological contract
deals with implicit reciprocal promises and obligations, there has
been differences in the definitions.
• Schein’s definition focused on the expectations of both parties and
the level of mutuality and reciprocity needed to be considered jointly
in order to explain the sources of agreement and disparity.
• The emphasis has shifted from expectations to obligations.
Obligations are based on perceived promises. According to
Rousseau (1989), the psychological contract ‘is an individual’s
beliefs regarding the reciprocal exchange between them and the
organisation’.

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Expectations and Obligations
• Obligations are based on perceived promises whereas
expectations can occur for a variety of sources such as past
experience.
• Importance of distinguishing between the two concepts lies in
their consequences. Unmet obligations would naturally result
in a more damaging response than unmet expectations.
• According to Robinson (1996), expectations come from a
variety of sources and that only expectations that result from
explicit or implicit promises by the employer are part of the
psychological contract.
• Robinson (1996) argues that unmet expectations alone do not
reflect contract violation. A violation of obligations would
produce a more intense and organisationally detrimental
response than unmet expectations.
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Transactional & Relational Contracts (Rousseau 1995)
• Transactional contracts
– Characterised by hard work in exchange for high economic returns
– ‘Fair day’s work for a fair day’s pay’ (Taylorism)
– It is generally a short term exchange with a specified time frame.
– There is limited personal involvement in the job
– There is limited flexibility
– Commitments are generally unambiguous and limited to well-specified conditions

• Relational contracts
– Employee loyalty in exchange for job security
– Based on personal relationships, trust and mutual obligations
– It is generally open-ended relationship and time frame
– Considerable investment by employees and the employer
– There is high degree of mutual interdependence and high barriers to exit
– Emotional involvement as well as economic exchange
– It is dynamic and subject to change
– It is generally subjective and implicitly understood

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Transactional & Relational Contracts (Rousseau 1995)
• Both types of contracts can operate concurrently.
• They are opposite ends of a continuum (Rousseau1995)
– Can change over time if employment contract changes e.g. temporary
position to permanent position
– Can exist together in same firm with different employees
– Can exist in same employee – high commitment HR gives performance
pay but also training and development
• As contracts become less relational, employees perceive their
contracts to become more transactional and vice-versa.
• If relational and transactional contracts are on extreme ends, there
would be a negative relationship between the two types of contracts.

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Distinguishing Dimensions of Transactional
and Relational Contracts
• Focus
– To what extent are the incentives for the employment relationship
primarily economic

• Time frame
– Is the relationship time-limited or open-ended
• Formalisation
– How formal is the specification of the performance requirements
• Inclusion
– To what extent is the job perceived to be of limited versus extensive
personal involvement
• Stability
– To what extent is the relationship perceived to be static versus
dynamic
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Key Features of Psychological Contracts
• Psychological contract is unwritten
• It is based on perception and therefore subjective.
• It is reciprocal.
• It is concerned with perceived obligations as distinct from
expectations.
• Creation of psychological contract may result from implicit
means relying on an individuals expectation of actions and
events within the organisation.
• It is personal. The exchange relation is between the
individual and the organisation.
• There is a distinction between psychological contracts that are
transactional in nature and those that are largely relational
(Rousseau 1995).
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What are the benefits of psychological contracts
for employers and employees? (5marks)
As employees form their own psychological contract, based on
their own interpretation, then the way that an organisation treats
the workforce will be interpreted differently by each worker.
Employers
• Not legally binding
• Provides flexibility for the employers to change job scope
Employees
• Ability to deal with uncertainty
• Enables employees to demand more benefits/working
conditions

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Parties in the Psychological Contract
• The general understanding is that the contract is
between the individual employee and the organisation.
• Since the organisation is made up of multiple exchange
partners, it is not clear who the employee considers
entering into an agreement. What is meant by the
organisation?
• Levinson (1965) argues that employees tend to view
actions by agents of the organisation itself as actions of
the organisation:
a. Organisation has a legal, moral and financial responsibility for
the actions of agents
b. Organisational precedents, traditions and norms provide
continuity and prescribe role behaviours
c. Organisation, through its agents, exert power over employees.

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Parties in the Psychological Contract cont’d

• The notion of personification.

• Employees differ in their extent of personification based
on the actions of the organisational agents.
• While personification may apply to some employees,
there maybe others who see their relationship with the
organisation as comprising a number of separate
relationships with multiple organisational agents.

Ref: Coyle-Shapiro, J. A-M. and L. Shore, ‘The employee-organization

relationship: Where do we go from here?’, Human Resource
Management Review(17) 2007

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Organisational Agents
• Differing views on who represents the organisation
– Immediate supervisor
– Middle/senior manager
• Employees immediate supervisor play an important role
in shaping an individual’s psychological contract. They
facilitate the fulfilment or the breaking of the contract.
• Managers need to perceive themselves as representing
the organisation in order to be considered as “legitimate’
organisational representatives (Guest and Conway,
2000).
• Should employees’ views of who represents the
organisation be given precedence or do managers need
to see themselves as acting as organisational agents ?

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Manager’s Interests
• Managers play an important role in conveying the parameters
of the exchange relationship with employees.
• They have a responsibility to monitor and manage the
exchange relationship.
• Managers self-interests may predominate organisational
interests. Their self-interest may influence how they manage
the employment relationship with employees.
• Managers may not consciously choose to pursue self-interest,
but may assume alignment of interests between themselves
and the organisation.
• Greater the individual identifies with the organisation, the
greater the likelihood of acting in the interests of the
organisation

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Employer’s Perspective
• Employer’s perspective is important as they dictate the
terms of the employment relationship.
• Allows the investigation of the actions of both parties in
the exchange relationship. Able to assess the degree of
mutuality that exists in the relationship.
• It allows the assessment of the extent to which there is
agreement on the obligations of both parties as well as
the potential breach of contract.
• Contract breach is a subjective and perceptions matter.

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Types of Employer / Employee Relationship
Employer-employee
Exchanges

Balanced Unbalanced
Exchanges Exchanges

Economic Mutual
Under-exchanges Over-exchanges
Exchanges Exchanges

Tsui et al 1997

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Categories of Employer-employee
relationships

• Balanced Exchanges
– Economic exchange – based on economic contributions, pay for
work, no long-term relationship
– Mutual investment – based on social relationship, involves long-
term investment, high commitment

• Unbalanced exchange
– Underinvestment - employee sees from social exchange and
employer views from economic exchange (e.g. lay offs when
required)
– Overinvestment – employees take an economic view and
employer views from social exchange (job security, training etc…)

Tsui et al (1997)
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Types of Psychological Contracts
Performance Terms
Specified Unspecified

Short-term Transactional Transitional

- Low ambiguity - Ambiguity/uncertainty
- Easy exit/high turnover - High turnover/termination
- Low member commitment -Instability
- Little learning -e.g. during downsizing and merger
-e.g. retail assistants at peak times exercise
Duration
Balanced: Relational:
- Open ended with performance - High member commitment
terms (subject to change) - High affective commitment
- High member commitment - Professional development (training &
- High Integration development)
- On-going development - Equitability
Long-term - Mutual support -e.g. family business members
- Dynamic
-e.g. High involvement team

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Measurement of Psychological Contracts
Content approaches
1. Qualitative measures
• Herriot et al. (1997) adopted a qualitative research method using critical incidents to measure
on employee and employer obligations in the UK.
• Employees were asked to think of situations where an employee or the organisation went
beyond or fell short of what might be expected of them in their treatment of the other party.
• Employees were asked to respond as employees of the organisation and managers to respond
as representatives of the organisation.
• Employee obligations e.g. working hours; quality and quantity of work, honesty, loyalty,
treatment of company property etc…
• Employer obligations e.g. training, fairness, recognition, work environment, justice etc…

2. Quantitative measures
• Employees were asked to indicate the extent to which they believe that their employer is
obligated to provide the following the obligations on a 1–5 point scale from ‘not at all’ to ‘highly
obligated’: rapid advancement, high pay, pay based on current levels of performance
training, long-term job security, career development support with personal problems.

• Employees were also asked to indicate the extent to which they felt obligated to provide
the following to their employer using the same scale: work extra hours, volunteer to do
non-required tasks on the job, protect proprietary information, give advance notice of
taking a job elsewhere.

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Creation of Psychological Contracts
• Generally made during the recruitment process through oral
discussions and written documentation including any
advertisement.
– Messages and social cues from the organisation (written and oral
statements; observation of treatment of others; organisational
policies and culture; and social cues from colleagues)
• Rousseau (1995) outlines individual’s interpretation of those
signals in two areas:
1. Cognitive biases – how individuals process information
(unrealistic positive view of self, optimism and exaggerated
perceptions of personal control)
2. Motives – motives for taking a job also influence interpretation
of psychological contract (stepping stone or long-term career)

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Changing Psychological Contracts
• Rousseau (1995) presents several ways in which
contracts can change.
• Factors that affect change can be internal or external.
Internal change can occur without any formal effort to
change the contract (e.g. employee’s interpretation of
the psychological contract may change over time).
• External change can lead to:
– Accommodation
• Making adjustments within the framework of existing contracts

– Transformation
• Fundamental shift in the nature of the contract

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Successful Change through Accommodation
• Change occurs in the context of existing contract
• There is a positive relationship between the two parties
• Changes affect the non-core elements of the contract
(the extras leaving the core terms of the contract
unchanged)
• There is participation in the change by the two parties
• Few changes are made
In essence the old contract remains largely intact despite
minor changes to the contract (e.g. change in working
hours etc…)

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Transformation – radical change to contracts
• Radical change may include loss of earnings, career
prospects, job status etc…
• Rousseau (1995) outlines a process of transformation
that involves:
– Challenging the old contract
– Creating credible signs of change
– Contract negotiation

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Development of Contract Breach
Robinson and Morrison (2000) present a theoretical model of how
contract violation develops.
• Reneging
– It occurs when the organisation knowingly breaks a promise. This could
be due to two reasons:
1. Inability – not able to deliver promises
2. Unwillingness - organisation decides not to fulfil obligations.
There are three factors:
a. Value of the employee - organisation is less willing to renege if the employee
has critical skills compared to someone who is easily replaced
b. How well the employee has fulfilled the contract
c. Type of contract - costs of reneging are higher if it is a relational contract
• Incongruence
– Different schemata – cognitive frameworks that influence the
interpretation of employment relationship
– Complexity and ambiguity of obligations – the greater the complexity the
more likely the difference in perception
– Communication – importance of communication
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Does the discrepancy matter?
It depends!
1. The larger the discrepancy the more important it is.
2. Is the employee vigilant in monitoring the contract? i.e.
the extent to which the employee monitors how well
the organisation is fulfilling the terms of the contract
This is most likely when there is uncertainty e.g.
downturn and layoffs. They will also be more vigilant
when the relationship is transactional.

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Factors affecting likelihood of Breach
1. Perception by the employee of higher maintenance of
their contract than the organisation.
2. Employees with low self esteem generally have lower
perception of breach by the organisation.
3. Individuals differ in their sensitiveness to equity.
Individuals with higher equity sensitivity may perceive
breach at the slightest discrepancy.

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Factors leading perceived breach to perceived violation
1. Outcome assessment - The greater the perceived
imbalance between the two parties contributions the
greater the possibility of violation. The greater the value
of the outcomes, the more likely violation will occur.
2. Attribution - If the employee believes the organisation
reneged on their promise, the greater the violation
experienced by the employee.
3. Process - If the individuals are fairly treated and
respected with explanation given, the less likelihood of
negative reactions.
4. The context in which perceived breach occurs
especially when the specific breach is not common in
the organisation / industry.
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Managing perceptions of Breach

• Careful in making promises to prevent breach in the

future.
• Increase communication to minimise incongruence.
• Realistic job previews will help employees have a good
understanding of the job.
• Fair procedures in the process of contract breach (this
includes procedural justice and interactional justice).
• Train line managers to treat people fairly.

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Consequences of Contract Breach
• Employee obligations and fulfilment
– Norm of reciprocity - Robinson, Kraatz and Rousseau (1994) found in
their study of US MBA students that when employer failed to deliver on
its obligations, employees reciprocated by lowering their obligations to
the employer. Similar evidence were found in the UK public sector
(Coyle-Shapiro and Kessler, 2000)
• Attitudes
– Reduction of employee trust in employer (Robinson, 1996). This leads to
reduction in contributions.
– Reduction in commitment (Coyle-Shapiro and Kessler, 2000)
• Behaviours
– Leave organisation, neglect in-role job performance and unfavorable
representation to outsiders (Turnley Feldman, 1999).
– Employees leave organisation when they have available alternative
employment , justification for breach is low and procedural justice is low.
– Distrust in future employers (Pugh, Skarlicki and Passell, 2000)
– Correlation between contract fulfilment and OCB (Robinson and
Morrison, 1995)
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Difficulties and Dilemmas of Managing
Psychological Contracts

• Managing implicit psychological contracts

– Implicit promises are generally inferred and complex

• Costs and benefits of making implicit promises explicit

– Organisations going through change
– Wide scope of psychological contracts

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Changing Nature of Psychological Contracts
• Although the concept of the psychological contract has been
around since the early 1960s, it was not until the late 1980s
that the conceptual and empirical work advanced.
• Implications of globalisation, organisational restructuring and
downsizing make it unclear what employees and
organisations owe each other in the exchange relationship.
• Nature of the psychological contract is changing together with
a view that organisational changes have violated particular
aspects of the psychological contract especially in the US.
• As organisations go through changes, they are faced with the
challenge of renegotiating and managing the transition in the
employment contracts.
• Fundamental aspects of the psychological contract has
changed in response to organisational changes.
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Changes in Psychological Contracts
• There is a blurring of obligations and expectations in the
employment relationship.
• Changes in psychological contract
– Lack of job security – the employee will be employed as long as he/she
adds value to the organisation.
– Employee has the right to demand interesting and work, freedom and
resources to perform it, rewarded for the contribution.
• The extent of changes vary across industries and jobs e.g.
manufacturing and healthcare.
• Studies of leading companies (Stiles et al., 1997) conclude:
– All jobs are less secure.
– Little prospect of employment for older managers.
– Fewer opportunities for promotion. Career would consist of longer
periods in a specific position combined with some lateral moves.
– Career planning is the responsibility of the individual employee. E.g. ‘no
one at Citibank is guaranteed a career. What you are offered is a chance
to pursue one.’Chapter 5: Psychological Contract Page 40 / 44
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New Employment Relationship
According to Roehling et al. (2000) new employment relationship has conflicting
characteristics:
• Loyalty
– Untapped reserve of employee commitment and loyalty (Hackett, 1996)
– Organisational loyalty is ‘dead’ (Cole, 1997)
• Job security
– Guarantees of job security (Schalk and Freese, 1997)
– Security is a thing of the past (Herriot and Pemberton, 1995)
• Shared commitment to business objectives
– No commitment for mutual goals (Laabs, 1996)
– Employees provide commitment to business objectives (Csoka, 1995)
• According to Roehling et al. (2000) new employment relationship characterised by:
– Training and education
– Skill development opportunities
– Empowerment of employees
• Debate over extent of changes occuring. However, it is important to bear in
mind the extent of changes may vary across sector, occupation and country.
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Discussion 1
What are the benefits of psychological contracts
for employers and employees?

?
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Discussion 2
Consider how the nature of the psychological
contract has changed in the last 50 years.

?
Chapter 5: Psychological Contract Page 43 / 44
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Summary
• Psychological contract is an individual’s belief concerning reciprocal
obligations that exist between the individual and another party.
Psychological contracts are subjective.
• There is a distinction between psychological contracts that are
transactional in nature and relational in nature.
• Psychological contract is concerned with perceived obligations as
distinct from expectations. Perception plays an important part in
psychological contract.
• Contract breach may arise due to reneging and incongruence.
• Contract breach has significant consequences for the organisation:
affect employee obligations and fulfilment, attitudes and behaviours.
• The concept of psychological contracts have changed over time.