Last updated: August 13, 2019
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Discuss The Meaning of the term Psychological Contract and Consider Whether the Concept is Important for Organisations Today

1.0 Introduction

This paper examines the psychological contract and the interchanging relationship between the employee and the organisation. The researcher will discuss the “old” and the “new” psychological contract, along with the importance of the contract itself using the literature of experts in this field. Finally we will look at the changes that have taken place before concluding with violations of the contract itself.

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The term psychological contract has been around since the 1960s and ever since then there has been many definitions. Roehling (1997) credits Argyris with introducing the term psychological contract. He referred to the relationship between the employee and the foreman suggesting that this relationship had a stronger influence on attitudes and performance of employees than that of their actual written contract. This theory was further developed by respected authors such as Sparrow and Schein. Armstrong (2006) quotes Scheins definition as “the notion of a psychological contract implies that there is an unwritten set of expectations operating at all times between every member of an organisation and the various managers and others in that organisation”.

Similarly Sparrow (1999) suggests that it is an open ended agreement about what the individual and the organisation expect to give and receive in return from the employment relationship. Whether we are looking at definitions by Schein, Sparrow or Argyris it is all based around the idea of what is expected to be given and received from an employment relationship. We can clearly see that there is a mutual understanding between both the employer and the employee.

However in recent studies this has been challenged Rousseau (1990 pp391) defines the term as “the employee’s perception of the mutual obligations existing with their employer”. She is solely looking at the psychological contract from the employee’s point of view. Otham et al (2005) believes that Rousseau is referring to the fact that the individual’s belief is more of a perceived promise and this promise could cover variables such as expectations of future return and obligation.

2.0 Importance of The Psychological Contract

In every organisation a psychological contract has been established. Every employee expects some form of benefit from their employer, and every employer expects some type of commitment from their employee. Guest and Conway (2002) suggest that the psychological contract is concerned with assumptions, expectations, promises and mutual obligations. It creates attitudes and emotions that form and govern behaviour. Imagine the damaging effect on an employee/employer relationship if these promises or obligations are broken.

Rousseau (1994) identified two tasks of the psychological contract:

  1. To predict the outputs that employers will receive from employees
  2. Employees can predict what kind of rewards they will get from investing their time and effort in the organisation.

With reference to the first task Armstrong (2006) acknowledged five points of what he believes the employer receives from this contract.

  • Competence – an individual who will have the functional and technical knowledge and skills to perform their role
  • Commitment – an individual who fully supports and implements the organisations decisions
  • Compliance – an individual who will ensure full compliance with the organisations governing bodies
  • Effort – an individual who pushes self and others for results while staying in bounds of ethical and legal standards
  • Loyalty – an individual who will show loyalty to the organisations beliefs and values.

In reference to the second task Armstrong identifies how employees look for fairness and equity, security of employment, scope to demonstrate competence, career expectations and involvement. Security of employment is an attribute which is quoted in many books and research articles on the psychological contract. Rousseau (1994), Kolb (2005), Levinson (1983) and Schein (1988) all imply that job security is one of the key benefits that employers can offer in the psychological contract, but this is associated with the old psychological contract.

Due to the economic, social and technological changes at macro level a new psychological contract exists which reflects the needs of the present business environment. Hiltrop (1996) characterises attributes of the old and new psychological contract. Security is replaced with flexibility, certainty with high risk and tradition with constant change to name but a few. Even though the psychological contract has changed, the underlying fact remains that it is still present with both organisations and employees adapting it to the current climate that they operate in.

3.0 Changes

Rousseau (1995) associates the psychological contract with a schema, which is something that develops through experience. An individual’s own personnel experience within an organisation may cause the psychological contract to change. Rousseau also suggests that the contract can change without any formal effort to alter their terms. We mentioned previously the economic, social and technological changes; these have caused both the organisation and employees to change their perception of what they believe the psychological contract to be. Hilltrop (1996) suggests that the most important change has been the inability of the organisation to offer job security. Gone is the knowledge of knowing you have stability in your job and it has been replaced with uncertainty. One factor of this as mentioned by Herriott (1992) is that organisations are so concerned with increasing productivity and reducing costs that they can no longer offer this job for life. Guests (2000) implies that the greater the number of changes the more negative the impact on the psychological contract. Changes may include mergers, redundancies, leadership or culture.

Redundancies for example may cause an employee to change from a relational psychological contract where there is loyalty to that of transactional where there is a feeling of no loyalty within the organisation. Organisations that can no longer offer the traditional rewards are still putting demands on employees. They are now expected to be more flexible in their work. The RBS have put an end to the job for life culture and have instilled the achievement culture where staffs are now expected to be more proactive within their roles. This can be seen as the new psychological contract. Holman et al (2007) views the new contract as embracing flexibility and mobility, where employees should be flexible in their work practices and be prepared to take responsibility for their own training and career development.

Sparrow and Hiltrop (1994) looks at organisations that are forced to cause changes to the psychological contract whether it be through downsizing or lack of promotions. They must look to entice loyalty and commitment by other means. How can organisations achieve this? Kahn (1978) suggests that organisations need to integrate the needs and the values of the organisation with that of the individual. The idea is that if the organisation is successful so will the employees. Hilltrop (1994) poses that “nowadays employees will care more about their own development and that their skills are transferable between companies and industries”. Therefore this shows us how employees have changed their expectations of the psychological contract.

4.0 Commitment

We have focused a lot on the expectations of the employee but what of the organisation. One of the main motives of an organisation to enter in to a psychological contract is commitment. That is for the employee to commit for the conceivable future to the goals and objectives of the organisation. Mowday et al (1982) delineate organisational commitment as “the relative strength of an individual’s identification with and involvement in an organisation”.

Meyer and Allen (1997) advocate that there are three types of organisational commitment.

Affective Commitment – narrates to the employees emotional attachment to the organisation, fundamentally Meyer and Allen are saying that the employee commits to the organisation because they want to. This type of commitment is dependent on matching the individual’s needs and expectations with the actual experience they have with the organisation.

Continuance Commitment – refers to employees who need to stay working with the organisation. It has been suggested by Meyer and Allen that the employee will be apprehensive that they are making a mistake if they were to leave their post.

Normative Commitment – refers to employees who remain with their organisation because they feel they have to. Employees who receive benefits such as pension or health insurance feel they have to stay with their employer to repay them.

We discussed earlier Rouseau transactional psychological contract which has no loyalty and the relational psychological contract which is associated with loyalty. MacDonald and Makin (1999) claim that there is a link between Rouseau psychological contract and Meyer and Allen’s organisational commitment. They believe that affective commitment is associated with relational in that there is a sign of loyalty and that normative commitment is linked to transactional, they feel they have to stay there not that they want to.

5.0 Violations

As mentioned earlier by Roehling (1997) the psychological contract is a set of beliefs or perceptions of what one party expects to receive from the other party. It can be said that this is based on assumptions of good faith. What if this good faith is broken, this is called a violation. A violation or a breach as described by Morrison and Robinson (1997 pp230) “is that one’s organisation has failed to meet one or more obligations within ones psychological contract”. Rousseau (1989) suggests that violations are serious and may signal a change in the relationship. A suggestion that is backed by Isaksson (2006) when violations occurs employee attitudes, behaviour and health are affected. Otham et al (2005) delves further into this hypothesis of violation by saying that it will only occur when the breach leads to an emotional response. The emotional response as Otham suggests needs to be a negative emotional response such as employment termination.

A study by Botha and Moalusi (2009) to identify the most prominent breaches of the psychological contract established some interesting points. From the qualitative research that they conducted they discovered that a lack of promotions was highlighted by all members of the population sampled with 90% perceiving it as the most important. The majority of the perceived breaches seemed to reflect employee dissatisfaction with the relational aspects of their psychological contract in areas such as bad treatment by seniors and favouritism.

What types of violations are there? Rousseau suggests there are three types of violations, inadvertent violation, disruption violation and reneging. George (2009) further supports this by saying that inadvertent violation occurs when the parties are willing to keep their bargain but divergent interpretations lead one party to inadvertently break that promise. Disruption is when circumstances make it impossible for one or both parties to fulfil their end of the contract and reneging is when one side refuses to honour the contract.

We can see from this that not all violations are intentional but they do occur and play a major part in the psychological contract.

6.0 Conclusion

The psychological contract was first mentioned by Argyris back in 1960 and is still ever present in today’s society. The rapport between organisations and their personnel has unquestionably suffered dramatic change in recent decades. The co-dependency between employee and organisation that provided the major foundation of the psychological contract has deteriorated significantly. Attributes originally associated with the contract such as loyalty are being phased out and replaced with items such as flexibility and career development. Organizations may be reluctant to invest in training and development programs for employees because of a professed lack of continuance commitment among employees.

Taken to the extreme, this could produce a highly skilled workforce in which employees are simply using the organization before moving to new challenges. In this situation, the psychological contract may take on far less importance than traditionally. The aim for both the workforce and the organization is to develop a positive psychological contract. Guest (1996) points out that a positive psychological contract is worth taking seriously, it is strongly linked to higher commitment to the organisation, higher employee satisfaction and better employment relations. All of these elements are deemed essential in establishing a successful partnership between employees and the organisation.