Psychological Contract – Meaning and Importance

The psychological contract is certainly an important aspect of the employment

relationship as it invisibly binds the employer and the employee through a set of
expectations. For the individual in an organization, the psychological contract is mostly
relevant as it directly affects the level of motivation, commitment and morale of that
person. Moreover, a positive psychological contract helps to boost the
productivity and performance of an employee.
Thus, to gain the commitment and loyalty of individual employees, it becomes essential
that organizations put in place appropriate systems to foster the identification of
employee expectations and ways to fulfill them. However, expectations are not easily
identified, both on the employers and employee’s side. These often give rise to breaches
on behalf of either one or both parties.
The maintaining of a positive psychological contract with all members of an
organization thus becomes a primary focus of the HR practitioner and HR practices play
an important part in that if those are carefully linked to the psychological contract.

Definition of Psychological Contract

A psychological contract, in its broad sense, consists of a set of unwritten expectations
that exist between each individual employee and their employer. The psychological
contract consists of the “perceptions of both parties” to issues such as the employment
relationship, the organisation and the individual, of mutual promises and obligations
implied in that relationship between those two parties, that is, the employer and the
employee.
Moreover, the essence of the psychological contract pertains to the fact that there
constantly exists a plethora of unwritten expectations that forms part of the interaction
between each member of an organisation and their employer. Thus, the psychological
contract constitutes of a system made up of beliefs and which regroups all those
actions that are expected from the employee and of the outcome that those employees
expect from their employer in return.

Contents of Psychological Contract

Employees promise to: Organizations promise to:

1. Work hard Pay commensurate with performance

2. Uphold company reputation Opportunities with training and

development

3. Show loyalty to the organization Opportunities for promotion

4. Work extra hours when required Recognition for new ideas or innovations

5. Be flexible. For example, by Interesting tasks

taking on a Colleague’s work

6. Be courteous to clients and An attractive benefits package

colleagues
Respectful treatment
7. Come up with new ideas
Reasonable job security

Employment versus Psychological Contract

Employment Contract Psychological Contract

1. Written Unwritten

2. Explicit Implicit

3. Legal Binding No legal status

4. Does not tell us much about what Tell us most things about what people
people actually do at work actually do at work

5. May exert only a small influence Exerts a large influence on behavior,

on behavior feelings and attitudes

Types of psychological contracts

Psychological
contract type Description

Focuses on a transactional relationship between an employee and an organization,

Transactional emphasizing the exchange of specific tasks and rewards. The contract is usually short-term
psychological and task-oriented. Employees expect fair compensation for their efforts and compliance
contract with explicit job requirements.
Occurs during organizational changes or transitions, such as mergers, acquisitions, or
restructuring. It reflects the expectations and obligations that employees have during
Transitional periods of change. Employees may expect security, support, and assistance in adapting to
psychological new roles or environments. The contract is often temporary and subject to revision as the
contract transition progresses.
Emphasizes a fair and equitable exchange between employees and organizations. It
Balanced acknowledges both monetary and non-monetary aspects of the employment relationship,
psychological such as work-life balance, professional development, and job security. This contract type
contract aims to foster mutual commitment, trust, and a sense of well-being for both parties.

Focuses on building long-term relationships between employees and organizations. It

Relational involves implicit expectations, such as job satisfaction, organizational citizenship
psychological behaviors, and opportunities for growth and advancement. The contract emphasizes
contract mutual loyalty, trust, and the belief that the organization will fulfill employees’ career
aspirations and provide a supportive work environment.

How to create an effective psychological contract

There are many ways that HR, managers, and business leaders can work together to
create an effective, positive psychological contract between the employer and employee.
1. Ensure that there is open and honest communication
Creating a line of open and honest communication from the start is integral to creating
an effective psychological contract between employer and employee. Set clear
expectations in job descriptions, and be transparent about pay, benefits, and career
progression.
Ensure that feedback is regularly provided to employees from managers, including what
they’re doing well and how they can improve, and give employees a chance to voice their
thoughts and concerns and what support they expect and need from their manager.
This two-way flow of information is really valuable.
2. Be clear about the expectations and obligations of both parties
Job descriptions should contain a clear set of skills required as well as key
responsibilities of the role you’re hiring for, and this should match up with the day-to-day
responsibilities the employee faces when they start work. These responsibilities should
also be listed in the employment contract and any information relating to contracted
hours, dress code, privacy and data ethics, and anything else relevant to the role and
your company.
Similarly, employers should be clear on what behaviors are encouraged or expected
given the organization’s culture and values. These are often not clearly expressed
leading to employees acting and behaving in a way that is inconsistent with the
expectations of the organization.
If you use certain performance metrics or targets to assess individual employee
performance, then make these clear from the start so that the employee knows how they
will be assessed and what they need to focus on.
3. Build trust by delivering on promises made in the psychological contract
Only promise something you can deliver to your employees. For example, if you state in
an interview or at some point during the period of employment that there will be training
opportunities available so the employee can develop their skills, then make sure these
are provided and that the employee is made aware.
If a candidate asks about the possibility of flexible working hours during an interview,
which you don’t offer employees, be clear about that and explain why you don’t. It’s
better to let a candidate down at this stage rather than over-promising and failing to
deliver once they join the organization.
4. Foster a positive workplace culture
A positive workplace culture supports the goals and values outlined in the psychological
contract. A study by LinkedIn found that 83% of companies agree that an employer’s
brand significantly impacts the talent a company can attract and recruit. Your employer
brand helps define your culture, values, and mission and share these with the world;
therefore, it has immense value.
Ensuring that your work environment matches your employer brand is essential. Focus
on creating a supportive and collaborative workplace where you focus on fairness and
inclusion, commit to the well-being of all employees, and recognize and reward good
performance.
5. Consult with employees to gain insights
Research has found that when employees are engaged, they are happier and more
satisfied at work, have lower levels of absenteeism, higher retention, and loyalty, and
give better customer service. Therefore, carrying out frequent employee engagement
surveys is essential, as it helps you understand how your employees truly feel and what
their evolving expectations are so that you can bridge the gap to meet their needs.
According to Forbes, employees who feel heard are 4.6 times more likely to feel
empowered to perform their best work. Surveys, informal group feedback sessions, and
one-to-ones can all help employees feel valued and gain insights into whether the
psychological contract is being upheld or breached.
Signs of a breakdown in the psychological contract
At the organizational level:
● Reduced levels of engagement, job satisfaction, productivity and satisfaction
have been linked to breaches in the psychological contract.
● Similarly, increased turnover and loss of performance could also occur.
At the individual level:
● A lack of commitment
● Employees becoming demotivated, unproductive and rising levels of
absenteeism. Similarly, we find more tension and even conflict between
employees, team members and managers leading toward further breakdown of
trust.

What HR can do to fix a broken psychological contract

1. Understand the expectations
A broken psychological contract can be detrimental to the employee and the company’s
overall success. As HR professionals, it’s crucial to understand the expectations of both
parties to make a positive impact and mend the broken psychological contract. By
taking this first step and gaining an understanding, HR can assess the situation and
develop a plan to move forward.
It’s essential to display empathy and understanding when approaching this issue, as it’s
a sensitive and personal matter. By acknowledging and addressing the expectations of
both parties, HR can take strides toward a more beneficial psychological contract for all
involved.
2. Conduct an analysis
Conduct a thorough analysis to determine the specific issues that have caused the
breakdown. This might involve collecting feedback through surveys, focus groups, or
confidential interviews to understand their primary concerns and perspective.
3. Find a solution that aligns with both parties
Once HR has determined the root cause of the issue, the next step is to work towards
brainstorming and implementing feasible solutions for both the employee and employer.
Communication is key in repairing a broken psychological contract, and HR should
facilitate open and honest discussions to ensure mutual understanding and agreement
on the way forward. Implementing a transparent and effective solution can help restore
employee trust and foster a positive work environment.
4. Involve employees and get feedback
Ask employees for their involvement and feedback as you work to repair the
psychological contract. Are they starting to regain trust? Do they feel they are treated
fairly? Are they engaged and committed to their work and the organization?
5. Monitor progress and make adjustments
HR should regularly monitor the progress of the efforts to repair the psychological
contract. This can be done through ongoing employee surveys, focus groups, or one-on-
one conversations. If necessary, adjustments can be made based on feedback to ensure
that the organization effectively addresses the concerns and rebuild trust.