Outline and Critically Evaluate the Concept of the ‘Psychological Contract’

This essay will outline and critically evaluate the theory of the “psychological contract” and its role between the employee and employer. Through looking at the positive and negative aspects of this contract by using relevant information, figures and evaluating case studies, it shall explain why the understanding of this “psychological contract” is considered to be so vital to the management the contemporary employment relationship. The “psychological contract” of employment can briefly be defined as ‘a set of unwritten reciprocal expectations between an individual employee and the organisation’ (Schein, 1976). Such as the employee being promised certain policies or benefits and the employer expecting the employee to perform at a certain level or be of a specific age etc. Guest and Conway (2002) defined it as “the perceptions of the two parties, employee and employer, of what their mutual obligations are towards each other”. Therefore, an agreement that is beyond what is written or implied in the contract or other explicit manifestations of the employment relationship. The concept of the psychological contract is commonly traced back to the early work of Argyris (1960) and to social exchange theory (Blau, 1964).

However, the crucial developments leading to its current use as an analytic framework were provided mainly by Rousseau (1995). The psychological contract therefore provides an opportunity to explore the processes and content of the employment relationship through a focus on more or less explicit deals. These deals are likely to be re-negotiated or modified over time, to be influenced by a range of contextual factors, and to have a variety of consequences. Thus the primary focus of the psychological contract is the employment relationship at the individual level between the employer and employee. The role of HRM is the management of expectations; ensuring that employees are aware of the expectations upon them ensuring that what employees can expect of the organisation is clearly transmitted. The psychological contract begins to take shape even before the explicit employment contract is established; e.g. recruitment claims in job advertising; the selection process, individuals form associations which lead to assumptions about working for the firm and what they expect from such a relationship.

The importance of the psychological contract is very diverse. CIPD (2008) suggests that as employees are increasingly recognised as a key organisational asset, management of the psychological contract becomes important in monitoring and managing employee attitudes and expectations. In particular, the significance of the psychological contract is as the mediating factor which translates HRM policies and practices into individual performance. It is the state of the psychological contract that informs the actions of the employee on a day-to-day basis, particularly whether to work to their potential or withhold effort.

For example, if the state of the contract is poor, then the employee wouldn’t work to their optimum capacity. Therefore, it’s important for the psychological contract to be well understood by both the employer and employee as it can have a positive outcome for the company due to happy employees working harder, which in turn brings better results for the employer. However, if the psychological contract is not understood properly it can lead to a very negative effect on the company, due to unsatisfied employees not working to their best, being unmotivated and wanting to quit. Thus, a positive psychological contract is generally strongly associated with behavioural and performance outcomes such as job satisfaction, employee commitment, motivation and lowered intention to quit.

In developing an analytic framework that considers not just the psychological contract but its context, we can look at the systems framework of traditional industrial relations to see the causes, nature, and consequences of the psychological contract. Context is recognised in the limited research on the employer’s perspective. Tsui et al (2003) highlighted the need to consider business strategy, ownership, and employment relations policy. Guest and Conway (2002) point to the need to consider human resource practices. Rousseau and Schalk (2000) and Tsui et al (2003) both point to the need to consider national culture, and it seems important also to consider organisational culture. At the individual level there are also likely to be differences in response related to personal circumstances but also to differing work values or career anchors (Schein, 1996). The range of variables that help to shape the context at both the organisational and individual level, as well as some of the key aspects of policy and practice, are on the left hand side of Figure 1.

These variables and aspects then inform the three key elements of the psychological contract on which the contract is based; employee’s sense of fairness in the way they are treated by their employer, the degree of trust they have in their employer and their belief that their employer will/has delivered on the implicit ‘deal’ between them (Guest and Conway 1997). The status of fairness and trust is somewhat uncertain in the context of existing psychological contract research. Fairness, often defined in terms of dimensions of justice, can be seen as an input, a dimension, and a consequence of the psychological contract. Similarly for trust, although it is typically treated as an outcome. However, this may become problematic, more particularly in the context of “idiosyncratic deals” where the social comparisons relating to fairness and trust associated with whether the deals made are perceived as unauthorised or favouritism (Rousseau, 2004) are likely to affect the attitudes and behaviour of others. Equally, from an organisational perspective, subsequent responses are likely to be a function of trust in employees to continue to deliver their side of the deal.

In support of this, there is some evidence that fairness and more particularly trust serve as mediators between contract fulfilment or breach and outcomes such as commitment and intention to quit (Clinton & Guest, 2004). It therefore appears that, more particularly in the context of employment relations, both fairness and trust are closely implicated with the psychological contract. For this reason, it can be argued that there is value in developing and incorporating into the model of the employment relationship the concept of the “state” of the psychological contract. If the psychological contract addresses perceptions of the shared promises and obligations between organisation and individual, the “state” of the psychological contract is concerned with “whether the promises and obligations have been met, whether they are fair and their implications for trust” (Guest & Conway, 2002). The way in which the concepts that form the state of the psychological contract might be related is shown in the centre of Figure 1.

The psychological contract is central to “employee engagement”. Defined as “a combination of commitment to the organisation and its values plus a willingness to help out colleagues. It goes beyond job satisfaction and is not simply motivation. Engagement is something the employee has to offer: it cannot be ‘required’ as part of the employment contract”. (CIPD, 2008). Therefore, in developing a positive psychological contract through particular configurations of HR policies and practices, organisations can produce greater effort though increased employee engagement. The final part of the model addresses outcomes. Given the dominant focus on breach of contract, this has been the most widely explored element within the model and the issues addressed have been similar whether an employer or employee perspective has been adopted. The outcomes typically explored are listed on the right hand side of Figure 1 where a broad distinction is drawn between attitudinal and behavioural outcomes.

The aim in the extended model of the psychological contract is to provide a broad analytic framework within to explore employment relations in the 21st century. Using the psychological contract as the main concept helps to maintain a focus on employment relations and the concerns of employees in a context which is increasingly non-union and where employee “voice” may be restricted, and therefore where there is a risk that employee concerns and issues might be neglected. However, at the same time, by building on the systems framework and taking account of context and the processes associated with the “state” of the psychological contract, it can be applied in organisations/companies where traditional industrial relations still thrive. There have been many interesting and in-depth studies and research on the psychological contract. The backing of the psychological contract in the analysis of the contemporary employment relationship has come from a variety of sources. Kalleberg and Rogues (2000), from a more institutional, sociological perspective, accorded it a central role in their study of employment relations in Norway.

They note that “The notion of psychological contracts has proved useful for understanding employment relations, since many of their important aspects are based on perceptions: most employment relations are implicit or at least not written, and thus parties may have different understandings about them”. They explored five dimensions covering communication, compensation, time frame, investment in the relationship, and degree of change each of which they believed could be considered on a relational–transactional dimension. In a large Norwegian sample, they found a positive association between more relational as opposed to transactional contracts and higher levels of commitment to the organisation, job satisfaction, and intention to stay. This is a major point to show why the management of the psychological contract is so important for an organisation, if the “state” of the contract is good then it will bring with it benefits. There is a potential problem for the psychological contract in that it has typically been studied from the individual worker’s perspective.

Research on employee perceptions of breach or violation of promises by the organisation and their consequences, including behavioural consequences such as absence, labour turnover, and withdrawal of cooperation and extra-role behaviour, comes close to addressing some of the outcomes in more traditional employment relations. In contrast, there is little research within a psychological contract framework on the perceptions of employers and their agents of how they react when they believe that employees have failed to keep their promises or to meet their obligations. There have been debates about the validity, feasibility, and utility of an employer’s perspective on the psychological contract. However, its value in any attempt to apply the psychological contract to analysis of the employment relationship is increasingly recognised (Shore & Coyle-Shapiro, 2003). Research from an employer’s perspective has been presented by Tsui et al (1997). They contain four types of exchange relationship that employers might follow, which they label under-investment (in employees), over investment, mutual investment, and quasi-spot contracts.

Tsui et al (1997) found that over-investment and mutual benefits led to better employee attitudes and behaviour than the other two approaches. Tsui et al. (1997) clearly claim their study is not about the psychological contract because it only addresses the perceptions of one side. The study shows how research might be developed that addresses employment relations from the perspectives of employers and employees. Guest and Conway (2002) report evidence of the utility of the psychological contract for employment relations. Among a sample of 1,306 UK employment relations managers, 36 per cent said they used the concept of the psychological contract to help them manage the employment relationship and many more considered it potentially very useful. Interestingly, a number of managers acknowledged that the exchange was not always fair and tended to favour the employer.

The study explored the application of high-commitment human resource practices as part of the context of the psychological contract and found an association between their greater application and management reports of more positive employee attitudes and behaviour. Since the use of these practices implies either over-investment or mutual investment, the findings appear to support those of Tsui et al (1997). A main research need is to explore perceptions of both sides of the employment relationship to determine the level of support of perceptions of promises/obligations and their fulfilment, and the extent to which there is a shared view of the attitudinal and behavioural consequences. Researchers are beginning to explore the extent to which employees and the employer have a shared understanding of the promises and obligations and the extent to which they have been met or breached. In summary, there are a variety of sources that can be drawn upon to argue the case for using the psychological contract as a framework to explore the employment relationship, incorporating the perspectives of both employer and employee.

Many show how important it is for a mutual understanding of the contract from both parties, otherwise it can lead one or the other being unfairly treated. Furthermore, there is evidence that a lot of the time there actually is a bias in the relationship, with one half being unfairly treated by the other. So can the psychological contract ever be completely fair? Through research into the concept of the psychological contract, it’s clear that it can have a positive effect on a company if managed well. However, it seems to be delicate in the sense of that if the “state” of the contract ever weakens or favours the employer for example, then the employee’s production will decrease and may think about quitting. Therefore, if it isn’t properly maintained, with promises and obligations not kept by both parties then it can have a very negative effect on an organisation too. The framework provides a basic analytical look into what the concept of the psychological contract is made up from and the key aspects of it. However, research needs to explore how psychological contracts in the workplace develop and to what extent they are shared/standardised or idiosyncratic.

In this context, which elements, for example the more relational or transactional, are most highly valued and most susceptible to breach and violation? For example, does any shift from standard and positional deals to idiosyncratic deals increase the likelihood of perceptions of breach and create further employment relations problems? Much of the psychological contract research has focused on promises, what about obligations? Are these shared and are they more strongly felt? Do these, more than promises, reflect societal values? And if so, what are the consequences if either employer or employee violates them? In all this, there are important questions about the role of collective agreements. Research also needs to address the state of the psychological contract and the delivery of the deal, including the relationship between fairness, trust, and delivery of the deal. Can we conceive of a virtuous or vicious circle combining them and therefore substantially affecting the attitudes and behaviour of all parties to the relationship?

By implication, there is a need to explore the circumstances under which there is positive fulfilment of the psychological contract and mutuality, reflected in a shared understanding by both employer and employee about the nature of the promises and obligations and the extent to which the “deal” has been delivered. In conclusion, it’s clear that the maintenance and understanding of the concept of the psychological contract can bring positives to an organisation. However, there are many cloudy parts of the contract being unsure and not definite. Each organisation could have different expectations and similarly employees could have different expectations so it’s hard to determine what is exactly agreed upon.

If any party breaks the contract, then it’s not clear what will happen either. Therefore, it’s important that the management of this relationship is maintained well, with the basic key aspects respected by both parties. More individual research pieces needs to be done in order to discover specific parts of the contract and how it develops over time, in order to get a better idea of the whole relationship. Saying this, it is clear why the understanding of this contract is so important for modern day management of employment relations. The psychological contract is a good framework to base employment relations and needs to be maintained in order to bring benefits to both parties. We need a conceptual framework that enables us to analyse and research employment relations, and the psychological contract appears to be able to meet this challenge and maintain a focus on the attitudes, the concerns, and the behaviour of workers in such organisations.

References

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