B+P Insights: The psychological contract

Changed market dynamics such as increased competition and changed customer demands, slower economic growth or even recession, globalisation, and demand for product innovation have placed pressure on organisations to be faster, more dynamic and more flexible. Another challenge facing modern organizations who can not succeed unless the people they employ commit to the strategy, mission, and existences is a change in values such as growing individualism, flexibility, and increased work-life balance. As a result trends in organizational designs are moving towards more flat structures with lower power distance, and more self-management delegated to the employees, but how do you manage your employees expectations and keep high engagement?


The psychological contract

In times where competition for the best employees increases, managers, human resource directors, and recruiters, are all looking for the right combination of inducements to attract and retain these individuals. The flat organizational structure and employee autonomy can not stand alone. Managing relations and expectations between the employees and the organization is crucial. One mechanism for managing these relationships and retaining key employees is the fulfilment of psychological contract obligations. Understanding and effectively managing the psychological contract can help organisations succeed.

“The psychological contracts, in general, are the set of beliefs held by an individual employee about the terms of the exchange agreement between the employee and his/her organisations” (Rousseau, 1989).

As indicated in the citation of Rousseau a psychological contract involves those beliefs about the conditions and terms regarding the job and organization a new employee brings. This could be expectations towards the organizational culture, the leadership style, success criterias in the job, the job content, etc. The belifs are formed during the recruitment process, where the employer and potential new employee often discuss what they each can offer and expect in the prospective relationship. If an agreement is reached, most employers will impose a standard form contract, leaving the details of the employee’s duties to be clarified “on the job”. But some of the initial statements, no matter how informal and imprecise, may later be remembered as promises and give rise to expectations, which make up the psychological contract.

In other words: the psychological contract is a concept you should have in mind to make  the matching process between, what your organisation need and offer and what a new employee offers and needs more efficient. Thus, by being more explicit and clear about your organization, what you can offer, and what you can not offer, what you need and what you do not need can increase your succesrate in matching the right talent with your strategic challenges.

A psychological contract exist in two types. The first one is the transactional type of contract – a short term focus, which focuses on an economic and extrinsic approach. The second type is the relational contract, a long term focus on intrinsic factors, which involves an open-ended socio emotional agreement to establish and maintain a relationship involving economic and non-economic exchanges.

A survey conducted in a Nordic context found that approximately 85% of employees was of the clear perception that they had a psychological contract. And 93% indicated that, on the basis of an explanation of the two different types of contract, they had a psychological contract with relational elements. The importance of the psychological contract and the attractiveness of the concept with human resource professionals, are furhter strengthened by a UK CIPD survey that found that 36% of HR Managers used the concept „to manage the employment relationship‟, and that 90% agreed that it was „a useful concept‟.


Generel recommendations

By not focusing on the psychological contract and the explicits and implicit expectations you risk disappointed employees who lose motivation becomes less committed to your organization, resulting in loss of engagement which is the very backbone of high performance.

Therefore, it is recommendable that employers, managers, executives, chairman’s etc. get introduced to the concept and trained in the concept and hopefully gain understanding for the value the concept contributes with, to manage the employment relationship. Furthermore these should be trained in using the concept actively, which includes maintaining and exploring the “state” of the contracts. This can be done in formal 1:1 meeting between manager and employee, in the daily dialogue where the leader can observe the non-said actions and contribute with a more focused and aimed communication. To fulfill these social and emotional exchanges, companies need to focus on incentives that deal with personal reputation and development and challenging assignments.

However, this requires that companies create cultures based on openness, honesty and sharing of information and make commitments through the creation of meanings and values as created by individuals and groups. Consequently managers and leaders can benefit from focussing on trust building, being transparent, exercising feedback and recognition, and aligning work with employees’ stregngths. Furthermore, the content of the psychological contract is continually evolving due to the ongoing communication and ideas about how the organization and the job role develops, which further increases the importance of a clear communication and alingment of expectations.


For further study following can be read:

Rousseau, D M (1995) Psychological Contracts in Organizations: Understanding Written and Unwritten Agreements. Sage Publications

Schein, E (1978) Career Dynamics: Matching Individual and Organizational Needs. Addison Wesley

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