A basic definition of the Psychological Contract appears in Michael Armstrongs excellent Handbook of Human Resource Management Practice the employment relationship consists of a unique combination of beliefs held by an individual and his employer about what they expect of one another..."
The psychological contract has expanded considerably over the past 10 years, primarily under the influence of Rousseau. (1989, 1995, and 2001)
Psychological contract research has been identified as a useful concept for understanding employees' relationships with their employers and subsequent consequences including work attitudes and performance (Robinson, Kraatz, & Rousseau, 1994; Shore & Tetrick, 1994; Turnley & Feldman, 2000).
In terms of organisational analysis, social exchange constructs are clearly evident in the work of Argyris (1960), Levinson et al. (1962), and Schein (1965; 1978). Argyris (1960) used the term 'psychological work contract' to describe an embeddedness of the power of perception and the values held by both parties' organisation and individual to the employment relationship.
This emphasises the point that employment relationships are shaped as much by a social as well as economic exchange (Fox, 1974).
For example, an employer may make a promise to its employee to provide job security and training, and an employee may promise to work hard and to be loyal. The contract is termed psychological because it reflects each party's perceptions of the relationship and promises involved.
The Psychological Contract represents, in a basic sense, the obligations, rights, rewards, etc., that an employee believes he/she is 'owed' by his/her employer, in return for the employee's work and loyalty.
Primarily, the Psychological Contract refers to the relationship between an employer and its employees, and specifically concerns mutual expectations of inputs and outcomes. The Psychological Contract is usually seen from the standpoint or feelings of employees, although a full appreciation requires it to be understood from both sides. In employment context, the psychological contract is the fairness or balance, that Is perceived by the employee between how the employee is treated by the employer and what the employee puts into the job. The concept of the Psychological Contract within business, work and employment is extremely flexible and very difficult (if not practically impossible) to measure in usual ways, as we might for example benchmark salaries and pay against market rates, or responsibilities with qualifications
Psychological contract is the beliefs of each of the parties involved in the employment relationship about what the individual offers employee might be willing to offer. For example, an individual employee might be willing to offer loyalty to the organisation and in return experts to get security of employment. Unlike the employment contract, the psychological contract is largely not written down and changes over time as new expectations emerge about what employees should offer and what they can expect to get back in return. Some commentators suggest that the psychological contract is undergoing a fundamental transformation because of the increasing need for flexibility and adaptability in conditions of intense competition. In particular, it is suggested that employee should be willing to offer commitment and high performance to the organisation and expect to receive individual development in return. (Heery E. and Noon M. 2001)
The singular 'Psychological Contract' also embodies very well the sense of collective or systemic feelings which apply strongly in workforces. While each individual almost certainly holds his or her own view of what the Psychological Contract means at a personal level, in organizational terms the collective view and actions of a whole workgroup or workforce are usually far more significant, and in practice the main focus of leadership is towards a collective or group situation. This is particularly necessary in large organizations where scale effectively prevents consideration of the full complexities and implications of the Psychological Contract on a person-by-person basis.
That said, it is usual for the Psychological Contract to refer to one employee's relationship with an employer, or to an entire workforce's relationship with the employer.
Main body
Within these referenced definitions you will see already that the concept is open to different interpretations, and has a number of complex dimensions, notably:
There are a series of mutual obligations on both sides (which include, crucially, intangible factors that can be impossible to measure conventionally).
It is a relationship between an employer on one side, and on the other side an employee and/or employees (which by implication distorts the notion of a formal contract between two fixed specified parties).
The obligations are partly or wholly subject to the perceptions of the two sides (which adds further complexities, because perceptions are very changeable, and as you will see, by their subjective 'feeling' and attitudinal nature perceptions create repeating cause/effect loops or vicious/virtuous circles, which are scientifically impossible to resolve).
Overall the Contract itself has a very changeable nature (being such a fluid thing itself, and being subject to so many potential influences, including social and emotional factors, which are not necessarily work-driven).
And an obvious point often overlooked, within any organization the Psychological Contract is almost never written or formalised, which makes it inherently difficult to manage, and especially difficult for employees and managers and executives and shareholders to relate to (the Psychological Contract is almost always a purely imaginary framework or understanding, which organizational leadership rarely prioritises as more real or manageable issues - or leadership regards the whole idea as some sort of fluffy HR nonsense, and anyway, "Let's not forget who's the boss... etc etc" - so that the whole thing remains unspoken, unwritten, and shrouded in mystery and uncertainty).
Much of the theory surrounding Psychological Contracts is intangible and difficult to represent in absolute measurable terms. Diagrams can be helpful in understanding and explaining intangible concepts. Here are a couple of diagram interpretations, offered here as useful models in understanding Psychological Contracts.
Here is a Venn diagram representing quite a complex view of the Psychological Contract, significantly including external influences, which are often overlooked in attempting to appreciate and apply Psychological Contracts theory. Venn diagrams (devised c.1880 by British logician and philosopher John Venn, 1834-1923) are useful in representing all sorts of situations where two or more related areas interact or interrelate. The Venn diagram below provides a simple interpretation of the factors and influences operating in Psychological Contracts.
psychological contracts model
In the Psychological Contract Venn diagram left -
vc = visible contract - the usual written employment contractual obligations on both sides to work safely and appropriately in return for a rate of pay or salary, usually holidays also, plus other employee rights of notice and duty of care.
pc = psychological contract - which is hidden, unspoken, unwritten, and takes account of the relationship references (r) between employee and market (which includes other external factors), also the employer's relationship with the market (also r), and the visible contract (vc). Note that only the visible contract (vc) element is written and transparent. All the other sections are subject to perceptions until/unless clarified.
In management and organizational theory many employee attitudes such as trust, faith, commitment, enthusiasm, and satisfaction depend heavily on a fair and balanced Psychological Contract. Where the Contract is regarded by employees to be broken or unfair, these vital yet largely intangible ingredients of good organizational performance can evaporate very quickly. Where the Psychological Contract is regarded by employees to be right and fair, these positive attitudes can thrive.
Intriguingly also, several factors within the Psychological Contract - for example employee satisfaction, tolerance, flexibility and well-being- are both causes and effects. Feelings and attitudes of employees are at the same time expectations (or outcomes or rewards), and also potential investments (or inputs or sacrifices).
This reflects the fact that employee's feelings and attitudes act on two levels:
Employee feelings and attitudes are strongly influenced by their treatment at work (an aspect of the Psychological Contract), while at the same time,
Employee feelings and attitudes strongly influence how they see themselves and their relationship with the employer, and their behaviour towards the employer (also an aspect of the Psychological Contract).
Concept explained
Concept argued in relation to each other
What do findings show?
Where will it possibly go?
However there are flaws with psychological contract. This is worthy of separate note and emphasis because it's a big factor in organizations of all sorts.
Lack of leadership transparency results from one or a number of reasons:
assumption by leadership that employees already know
assumption by leadership that employees aren't interested, or are incapable of understanding
thoughtless leadership - not even considering transparency to be a possible issue
belief by leadership that employees have no right to know
a policy of secrecy - to hide facts for one reason or another
First let's put to one side those situations where a leadership intentionally withholds facts and operates secretively because it has something to hide. Achieving a healthy Psychological Contract will neither be an aim or a possibility for such employers.
More commonly in other situations, lack of transparency exists due to leadership negligence, fear or insecurity, or simply a lazy old-fashioned 'X-Theory' culture, all of which can be resolved with a bit of thought and effort, and which can produce dramatically positive results, because:
Leadership transparency has a huge influence on two major factors within the Psychological Contract and its effective management:
employee trust and openness towards the employer
employee awareness of facts - enabling employee objectivity in judging the Psychological Contract
Where leadership is not transparent, employees have no reason to trust the employer, and according to human nature, will tend not to be open and trusting in return. As discussed elsewhere in this article, trust is crucial for a healthy Psychological Contract.
And where leadership fails to inform and explain itself openly and fully to employees, employees will form their own ideas instead, which tend not to be very accurate or comprehensive. Wrong perceptions, especially when we add misinformation, rumour, etc., thrive in an information vacuum. Faulty beliefs become hidden factors (among the blue arrows in the iceberg diagram) which influence the Psychological Contract very unhelpfully. Aside from this, ignorance and uncertainty make people feel threatened and vulnerable.
Lack of leadership transparency is a particularly daft failing where clear explanation of organizational position provides real objective justification for a particular organizational action or inflexibility.
Transparency helps to kick-start a 'virtuous circle' within the Psychological Contract, as well as giving employees reliable facts about their situation.
The 'virtuous circle' enables trust, openness and tolerance to develop. Reliable facts replace faulty assumptions and unhelpful perceptions.
Lack of transparency starts a 'vicious circle'. Distrust fosters distrust. Secrecy fosters secrecy. Employer/employee communications will tend to be closed, not open. Fear and suspicion on both sides increase, particularly in employees, whose perception of the Contract worsens as a result, in turn increasing animosity and fear.
'Virtuous and vicious circles' within the Psychological Contract are explained in more detail later in this article.
Note that this advocation of transparency does not give leaders the right to unburden themselves constantly of the worries and pressures that typically come with the responsibility of leadership. Followers expect leaders to be transparent where people are helped by knowing, so that they can prepare and react constructively.
Transparency here refers to the easy and helpful availability of information about the organization. It's similar to openness, discussed later, which is more concerned with honest two-way communications within an organization. These are not fixed definitions of transparency and openness; just an attempt here to explain two different aspects of organizational and management clarity.
Transparency tends to be a matter of leadership policy, style, by which clear facts about an organization's position, activities and decisions are made available to its employees and ideally also to its customers. Openness tends to refer to the flow of communications in all directions within the organization, here especially the feelings, ideas and needs of employees. Good general levels of openness in communications may have no influence at all on improving leadership/organizational transparency, especially if the organization chooses not to be very transparent. Transparent organizations find it much easier to foster open communications.
Criticisms of psychological contract theory
'The psychological contract is beset with conceptual problems and still has to establish itself as a useful and valid psychological construct' (p.633, Guest 1998)
'Much work remains to be done in clarifying our use of the term, both theoretically and empirically' (p.50, Millward and Brewerton 2000)
'The major problems with psychological contract theory are that there simply is not enough of it and what exists is underdeveloped and underspecified.' (p. 183 Conway and Briner 2005)
'Very little is known about the employees' role in influencing the psychological contract and its content in everyday work and about employees' perceptions of their psychological contract obligations' (p. 474 Seeck and Parzefall 2008).
Conclusion
The Psychological Contract is fascinating for many reasons because it offers so many different perspectives. It's not a tool or a process. The Psychological Contract is a model and a philosophy which can guide us in the way we structure and manage organizations, and deal with employees within them. At a basic level it helps us understand more about the 'give and take' that characterises working for an organization, and particularly leading an organization. It is very useful in understanding why employees are 'difficult to motivate', or 'difficult to manage' - especially when this is an ongoing or widespread challenge. The Psychological Contract helps leaders understand better how to align their people's needs with those of the organization, which is a very elusive notion.
The concept also offers a powerful way to expand thinking and possibilities for people and work, in some distinctly separate and important ways:
individual employee motivation and management
motivation and management of workgroups and departments
entire workforce motivation and management
review of grading, management hierarchy, succession
recruitment and selection and induction
training and development
assessment of leadership - vision, style, capability
assessment of traditional workplace terms and conditions, contracts, etc
organizational communications
organizational philosophy and culture
fundamental organizational purpose, constitutional rules and ownership
new business purpose and legal structure
markets and societies - types of organizations that will work best in the future
At a deeper level the Psychological Contract questions the significance of fairness in the way organizations are run and established. There is no single right way. There are ways which are bound to fail, because in essence they become uncompetitive. The world changes, and as it does, work and business changes too. From the tone of this article, and the website surrounding it, you may gather that I am not a great fan of old-style business and management. It seems to make an awful lot of money for a very few people, and provide a relatively unhappy and unfulfilled working life for a big proportion of everyone else.
Most people still live for the weekends and their annual holidays; many hate their work and are not truly connected to or aligned with their employer, which often is a bigger problem for the employer than it is to the staff. Meanwhile many big businesses are making a mess of the world in all sorts of ways, because profits come first. All the indications seem to be that there are better ways to do things. The Psychological Contract gives us a guide to the answers.
