Psychological Contracts: why do they matter?

Richard HallAssociate Professor in Work and Organisational StudiesUniversity of Sydney

Theories of organisational behaviour suggest that a psychological contract between an employee and an organisation will emerge and develop in virtually every employment relationship. Given that these psychological contracts consist of the expectations that employees, in particular, will have of their employing organisation (and its managers), it is evidently important that managers are at least aware of the existence of these contracts and recognise that employees have legitimate expectations relating to how they are treated at work. Psychological contracts are normally thought to be important because their breach has been found to lead to serious consequences, which are discussed fully below. Thus, it is vital that managers understand, manage and work to fulfil and sustain psychological contracts if these adverse consequences are to be avoided.

Although most research attention has been paid to the effects of breaching psychological contracts rather than the effects of fulfilling those contracts, it is normally thought that highly committed, satisfied and engaged employees will have a relatively strong and generally fulfilled psychological contract with their organisation (Guest and Conway 2002). Therefore we can conclude that strong, positive and fulfilled psychological contracts, especially those of the relational variety, will tend to contribute positively to employee motivation and performance. This raises the question of how managers can manage these contracts.

Establishing and managing the psychological contract

Relatively little research has been undertaken into the implications of psychological contracts for management. However on the basis of research undertaken to date it is possible to identify some likely implications.

Making the terms of psychological contracts explicit

Given that psychological contracts are implicit, potentially complex and inherently subjective it has been suggested that organisations (and employees) should make the terms of these contracts more explicit so that there is less chance of breaches being caused by misunderstanding. This suggests the need for open and honest discussions between management and employees concerning their mutual expectations and perceptions of promises and obligations. It also suggests a role for ‘realistic job previews’, comprehensive induction programs, wide-ranging performance and development meetings and regular feedback.

While there are few downsides to improved communication at work between employers and employees, leaving some elements and aspects of the employment relationship unstated may be functional and advantageous for employers and employees. Seeking to render explicit all aspects of the mutual obligations between the parties might serve to restrict the room to manoeuvre, in which employees can

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exercise discretion and autonomy, and in which managers and supervisors can tolerate and accommodate the inevitable diversity of employee needs and preferences. The reality probably is that in instances where implicit rules are rendered explicit, the superior power and authority of management will typically result in the assertion of managerial prerogative over employee aspirations.

Managing changes to the psychological contract

Organisations (and their managers) need to recognise that organisational changes will often imply changes to the psychological contract even if they don’t involve changes to the formal employment contract and working conditions of employees. This underlines the importance of organisations, change agents and managers recognising the need for effective strategies for anticipating, recognising and managing employee resistance and accommodating the expectations that employees might have. Common strategies for managing employee resistance to change centre on the following (Brown and Harvey 2006):

- Education and communication concerning the need for change- Creating and reinforcing the vision of where the organisation is headed- Ensuring participation and involvement of those affected in the change process - Facilitating and supporting change through training and resources- Negotiating with resistors- Use of reward systems to encourage changed behaviours- Use of explicit or implicit coercion

Research into resistance to organisational change suggests that managers need to understand the reasons for resistance in order to manage it. The psychological contracts perspective highlights that the reason for resistance might be associated with a perceived breach to the psychological contract. Communication, participation, negotiation and reward strategies might therefore need to be geared to addressing those perceived breaches.

Breaching the psychological contract - implications for managers and organisations

While the place of psychological contracts in models of employee motivation and performance (which are the mainstay of the discipline of organisational behaviour) is controversial, the best conclusion is that they probably affect individual employee attitudes and behaviour (see Figure 1). Psychological contract breach is generally defined as a perceived discrepancy between the promise and performance (of the organisation) with respect to one or more terms of the contract. In other words, according to the employee, the organisation ‘fails to meet its side of the deal’.

The weight of research indicates that instances of psychological contract breach tends to affect both employee attitudes and behaviours, although the effect is significantly more pronounced on attitudes than behaviours. In particular, breaches in the psychological contract have been found to be associated with the following attitudes:

lower levels of job satisfaction;

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lower levels of organisational commitment; and

a greater intention to quit.

Breaches have also been associated with several dimensions of adverse employee behaviour:

higher quit rates;

less propensity to display organisational citizenship behaviour (‘going the extra mile’ at work); and

lower in-role job performance.

Figure 1: Simplified Model of the Role of the Psychological Contract and Attitudes and Behaviour

Evidently, breaches of the psychological contract can have serious consequences for employees and, to the extent that organisations might be concerned about retention, performance and productivity, for organisations as well.

Surveys of employee experiences suggest that breaches are not uncommon. One study of recent MBA graduates indicated that 55% reported at least one breach of the psychological contract in their first two years of employment (Robinson and Rousseau 1994 in Conway and Briner 2005: 65). Methodologies based on employees’ diaries of workplace experience report significantly higher levels of breach – one study reported that 69% of employees recorded at least one breach in the ten-day survey period (Conway and Briner 2002 in Conway and Briner 2005: 65). Of course, not all breaches result in adverse attitudinal or behavioural responses. The implication of any given breach is likely to be related to the importance of the unmet promise or obligation, the extent to which the breach is actually attributed to the organisation,

Individual Characteristics

Organisational Characteristics, Policies and Practices

Attitudes- Motivation- Satisfaction-Commitment-intention to quit/ stay

Behaviour- job performance- OCB- quitting

Results

Psychological Contract Breaches

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and the depth and strength of the existing psychological contract (especially the relational contract).

The causes of psychological contract breach are also largely a matter of informed speculation in the absence of a substantial body of systematic research. Conway and Briner (2005: 65-69) contend that breaches will be caused by:

Management reneging on deals. Here, organisations, acting through the agency of managers, might simply change the terms of the deal, unilaterally. Indeed, many instances of organisational change might involve a change to the psychological contract. For example, organisational restructuring has often been associated with downsizing which may have implications for promises regarding job security. This kind of change has been comprehended as a shift from a relational psychological contract to a transitional psychological contract (Shields 2007).

Inadequate human resource policies. This is likely to occur where HR policy and practice does not match HR rhetoric. The organisation’s espoused values and advertised HR policies might advocate human resource development, training opportunities, family-friendly work arrangements, career development and promotional opportunities, however actual work practices and the operation of performance management systems might result in escalating performance demands, resource constraints and work intensification.

Lack of perceived organisational or supervisor support for the employee. While employees are thought to have their psychological contract with the organisation, they will inevitably regard their supervisor or manager as responsible for upholding the deal on a regular basis. The failure of managers to provide adequate resources, feedback, support or opportunities for employees may be caused by inadequate resources at their disposal, managerial incompetence, role misperceptions, or a misunderstanding of the expectations of the employee.

Misunderstanding of the terms of the psychological contract. Research has repeatedly shown that employees and managers often have different perceptions as to the content of psychological contracts, particularly with respect to the obligations owed by the organisation. If the employee has over-estimated the promises made by the organisation, then a perceived breach is likely even where the organisation believes it is fulfilling its side of the deal.

Conway and Briner (2005) also argue that a specific action by an organisation or management will be more likely to be perceived as a breach of the psychological contract where the employee has previously experienced breaches, and where the employee has relatively good options in the labour market for alternative employment. Obviously, this last point suggests that breaches will have greater implications where labour market conditions are relatively tight and where the skills of focal employees are in short supply.

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Managing breaches to the psychological contract

If managers can recognise that the psychological contract has been breached, from the perspective of an employee, what can they do?

Organisations and managers should monitor for breaches. It is likely that many employees will be able to tolerate breaches up to some ‘tipping point’ at which a further breach will lead to adverse attitudes and behaviour. Managers therefore might be able to monitor for breaches so that preventative action might be taken to avert the adverse consequences of breaches. Conway and Briner (2005) argue that managers need to be alert to the displayed emotions and behaviours of their employees for signs of perceived psychological contract breach. They identify frustration, helplessness, anger and resentment as key displayed emotions that should send warning signals. Ultimately the capacity of managers to read and interpret these signals will probably related to their ‘emotional intelligence’ (Goleman 1998).

Organisations and managers can try to redress breaches. Once a breach has occurred managers can try to redress the situation by: a) explaining the reasons for the breach; b) compensating for the breach; and/or c) ensuring organisational justice (Conway and Briner 2005). Evidence for the effectiveness of these strategies is mixed: explanation appears to make little difference to employees’ ascription of responsibility to the organisation (Robinson and Morrison 2000); adequate compensation can apparently ameliorate the damage done by a breach (Conway and Briner 2005: 173) ; and, organisational justice strategies need to be tailored to the specifics of the breach to have any effect (Kickul et al 2002).

Are psychological contracts just a managerialist confidence trick?

The concept of the psychological contract directs attention to the individual level by focussing on the employee’s formation of a set of expectations of employer behaviour at work. It suggests a scenario where employees then evaluate organisational behaviour according to the fulfilment or breach of the terms of the implied contract and predicts that employees will take adverse action against an organisation where serious breaches occur. It also implies (however imperfectly) that there is something approximating an equivalence between the two contacting parties: the employee and the organisation coming together to reach an implicit agreement as to the terms under which each will fulfil their obligations. Much of the discussion about psychological contracts also suggests that breaches are often caused by employee’s misunderstanding the actual terms of the contract, hence the suggestion that management should clarify the terms of psychological contracts by making them more explicit.

Some critics (eg: Cullinane and Dundon 2006) have argued that this is a somewhat fanciful depiction of the contemporary workplace and that the concept of the psychological contract simply serves to disguise and obscure the true nature of management power and prerogative at work. Rather than an equivalence between employee and employer at work, these critics see a structural antagonism between employers and employees where the former use their superior power to dictate the explicit and implicit terms and conditions of employment, both formally and

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informally. They reject the notion that employees aggrieved by a perceived breach to the psychological contract can simply elect to quit, or otherwise discipline the organisation through reduced effort and performance. More often than not, they contend, employees are forced to accept the new terms of the psychological contract as dictated by management. Further they suggest that organisations routinely and deliberately breach psychological contracts because they are more committed to achieving the strategic goals of the business than honouring any implicit contract that employees might believe they have with them. The case studies noted by Cullinane and Dundon (2006), for example, certainly demonstrate that breaches are often caused by deliberate management strategies associated with downsizing, restructuring, re-engineering and cost-cutting rather than by employee misinterpretation of the terms of the psychological contract. It is also difficult to avoid the conclusion that, despite the rhetoric of ‘high-performance’ and ‘high-involvement’ work systems that should be associated with longer-term, relational or balanced psychological contracts, the predominant pattern in western business organisations over the past 20 years has been a shift in the direction of a greater emphasis on shorter-term, transactional and transitional psychological contracts.

Conclusion

Ultimately, the rhetoric surrounding the current interest in psychological contracts needs to be critically considered in light of the realities of workplace change in the recent past. When managers speak of the need to manage the psychological contract, as many apparently now do, we need to ask whether they actually mean managing down the expectations of employees and socialising them into accepting the ‘realities’ of deals that are rather more transactional, short-term and unilateral than relational, long-term and based on partnership. Nevertheless, if nothing else, the concept of the psychological contract does remind us that the perceived terms and conditions under which people work in organisations are considerably more extensive, complex and subtle than suggested by the formal contract of employment, and that their breach can have significant consequences for both individuals and organisations.

Websites and Resources

CIPD Factsheet: The psychological contract. (January 2008). This brief overview of psychological contracts provided by the UK Chartered Institute of Personnel and Development is useful and can be accessed at http://www.cipd.co.uk/subjects/empreltns/psycntrct

Grimmer, M. and Oddy, M. (2007) ‘Violation of the Psychological Contract: The Mediating Effect of Relational Versus Transactional Beliefs’, Australian Journal of Management, 32(1): 2007. This recent paper presents data based on a study of Australian MBA students from two Australian universities. It can be downloaded from: http://www.agsm.edu.au/eajm/0706/pdf/Paper8_Grimmer_Oddy_June2007.pdf

Baird, M. ‘Three Degrees of Contract’ looks at the legal contract, the psychological contract and the social contract and considers the relationships between them in understanding relations at work. It can be accessed at: http://www.econ.usyd.edu.au/wos/worksite/baird7.html

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For an example of the use of the psychological contract by a private management consultancy and development organisation see: Adelphi Associates (UK): http://www.adelphi-associates.co.uk/html/psychological_contract.html

References

Brown, D. and Harvey, D. (2006) An Experiential Approach to Organization Development. 7th Edition. New Jersey: Pearson Prentice Hall.

Conway, Neil & Briner, Rob B. (2005) Understanding Psychological Contracts at Work: A Critical Evaluation of Theory and Research. Oxford: Oxford University Press.

Cullinane, N. and Dundon, T. (2006) ‘The Psychological Contract: A critical review’ International Journal of Management Reviews 8 (2): 113-129.

Goleman, D. (1998) ‘What makes a leader?’ Harvard Business Review, Nov-Dec: 93-102.

Guest, D. and Conway, N. (2002) Pressure at work and the psychological contract. London: CIPD.

Kickul, J., Lester, S. and Finkl, J. (2002) ‘Promise Breacking during Radical Organizational Change: Do Justice Interventions Make a Difference?’ Journal of Organizational Behavior, 23: 469-88.

Robinson, R.L. and Morrison, E.W. (2000) ‘Psychological Contracts and OCB: The Effect of Unfulfilled Obligations on Civic Virtue Behavior’ Journal of Organizational Behavior, 16: 289-298.

Shields, J. (2007) Managing Employee Performance and Reward. Cambridge: Cambridge University Press

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