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The changing nature of the psychological contract will have serious implications for Human Resource Management. Discuss

I. Defining the Psychological Contract

The working world is fraught with risk, lawsuit and numerous varieties of malcontents. One way to attempt to reduce a certain variety of potentially costly risk and performance variance in business relationships is by the use of contracts. Generally, a “contract” refers to an explicit, written and legally binding agreement between two or more parties. In the same way, though in many cases unknowingly, contracts can also consist of implicit and unwritten agreements. Such contracts are much like a “promise”. While some promises are literally “idle”, that is, it is apparent to any “reasonable” person there is no genuine intent or ability, other promises are viewed, through the eye of the beholder, as being credible. The perception of credible promises, even if not explicitly stated, forms the basis for psychological contracts in the eyes of employees with regards to an organization.

The psychological contract is defined as beliefs based upon are expressed or implied promises regarding mutual obligations of an agreement between an individual and the organization or its agents (Rousseau 2004, p. 120). The degree to which an employee perceives credibility and authority of the organization’s or it’s agents promises constitute the distinction that is made between “failed expectations”, “disappointment” and a “breach of contract”, again from the perspective of the employee. When credible promises are made, believed and acted upon, and subsequent harm, loss or opportunity cost by foregoing another course of action results, it is labeled as a “violation” of the psychological contract (Rousseau, 1995 pp. 16-17).
Though often considered from the perspective of the individual employee rather that the “legion” organization, it is important to note that the psychological contract, like other more familiar contracts, has mutual terms of performance.

II. Sheriffs vs. Jailers

In many firms, the human resource function could be likened to the function of a “jailer” rather than the job of a “sheriff”. The difference between the two is that the jailer remains stationary and waits for something to come into his very limited jurisdiction while the sheriff is out on patrol, looking for violators and, more importantly, working to prevent trespasses and violations. Similarly, a good human resource function should not merely “administrate” but to “optimize”. One key means by which HR can do this is through the effective recruiting, selecting, hiring, training and socialization of new employees (Rousseau, 2001, p. 512). One of the best ways to attract the “right” applicants is by proactively managing the psychological contracts in the workplace.
As indicated earlier, some HR departments administratively perpetuate the status quo while other firms utilize “high performance” work systems. Research indicates that achieving high productivity is not due to the implementation of a few “best in class” practices, rather, it is the net effect of having a cohesive, aligned system. This system can have as few as seven key components:

1. Employment security
2. Selective hiring
3. Self-managed teams or decentralized decision-making
4. Comparatively high compensation based on performance
5. Extensive training
6. Egalitarian work environment
7. Extensive information sharing (Pfeffer, 1998 p.64).

When people are really the “most important asset” and recognized as being responsible for generating results, a company either refuses to layoff or fire its employees or chooses practices to avoid creating an unstable and unpredictable environment (Pfeffer, 1998 pp. 66-67). In the absence of this prevention, there is a sense of betrayed trust which central to the idea of a violated psychological contract. When this trust is undermined, it is not likely employees will desire to put forth their “best” efforts or be motivated to do so in light of an organization that, at the front end of the agreement, offers less in exchange.
Burroughs in “Psychological Sense of Community at Work: A Measurement System and Explanatory Framework”, goes on to propose that the sense of community that people seek stems from them seeing themselves as part of a larger and more stable entity and consists of four elements. The first of these is “membership”, followed by “influence”, “integration and fulfillment of needs” and a “shared emotional connection”. Membership is simply a feeling of “belonging” and fits nicely with other theories such as social comparison and reciprocity as a process by which people can seek to achieve membership. Influence relates to the idea that one’s presence matters or that an individual feels as though they add some value to the group. Thus, a key element of proactively managing the psychological contract is to create a good person – job and person – organization fit. By doing so, a sense of community and a corporate culture in which mutual goals are aligned can, to a significant extent be achieve simply by attracting and retaining the right employees.

III. You are Wrong… Satisfaction Guaranteed and Change Management

Clearly, for an organization to fail to recognize and manage the psychological contract is a virtually unforgivable oversight, if not by the employees, then by the marketplace that will bear witness to the company’s underperformance. Such an omission is to ignore the glue that holds organizations together. Such a shortcoming on the part of management is at no time so obvious as during a time of organizational change. Times of organizational change present a dilemma in that former “promises” may no longer be reinforced and may actually be punished. In addition, because of the fact that psychological contracts are, by definition and in reality, enduring mental models, periods of organizational change or instability can be fraught with problems. The impact upon individual employees is where the “rubber meets the road”. As organizations change, change imposed on employees. Organizations can take decisive steps to help employees modify existing psychological contracts in order to accept the “new deal” brought on by organization change.

Though seemingly straightforward, managing the psychological contract can be difficult. Consider the phrase, “the customer is always right”. This example clearly illustrates that fulfillment rests upon the consumer’s idea of the “mutually agreed upon terms” yet who but the customer can determine the extent to which they are or should be “satisfied” (Rousseau 1995, p.6-7)? Psychological contracts are often similarly vague and difficult to discern when a violation has been made, much less that one is intentional. Despite this, as Rousseau correctly points out, “Arguing over whose version of the contract if correct can only cost the organization”. Unfortunately, such an argument involving the HR department and employment issues, the loss is often likely to be disproportionate on the employee’s side. Certainly, measuring the individual cost from a perspective of turnover, productivity and absenteeism, as well as morale and other “intangibles” is easier, one cannot overlook the costs to the organization and the unintended (or intended) messages that are sent.
In the same way as there are elements of a ‘legal’ contract, there exist components relevant to psychological contracts. The four parts of such a contract best captured from a paraphrased excerpt from Rousseau’s Psychological Contract (1995, p. 7):

  • Voluntariness – “…Contracts must be freely made. Voluntariness promotes contract fulfillment.”
  • Incompleteness – “…it is impossible to spell out all details at the time a contract in created. People fill in the blanks along the way and sometimes do so inconsistently”
  • Reliance Losses – “…Contract-related activities focus largely on reducing losses.”
  • Automatic Processes – “Once contracts are created, they create enduring mental models that resist change. Mental models can actually keep people from noticing changes that do occur.”

The foundations of the psychological contract are based upon and can be viewed as extensions of the even more fundamental theories: expectancy theory and equity theory. Expectancy theory rests upon the premise that employees’ motivation to achieve a given objective is based upon their belief of the extent to which a goal is even possible if effort were to be expended, the belief about the degree to which a specified outcome will result in the perceived ‘promised’ response, and the extent to which the specified outcome is desirable (Dreher, 2002 pp. 35-36). The Equity Model is similarly based on the idea that “…people often view themselves in an exchange relationships with other parties…” and that people have a “….tendency to compare themselves to others in terms of their exchanges and their treatment” (Dreher, 2002 p. 41).
As Rousseau points out, “…psychological contracts have the power of self-fulfilling prophecies: They can create the future” (Rousseau, 1995 p. 6). Though promises and psychological contracts in general are viewed from the “eye of beholder”, quoting Rousseau (1995, p34), they arise out of two groups of factors:
1. External messages and social cues from the organization or social setting and,
2. The individual’s internal interpretations, predispositions and constructions.
External messages can be sent or received in a number of manners from overt “public” statements such as those that might be found in an annual report, handbooks, policies and other organizational ‘propaganda’. Additionally, external messages are the observed behaviors of the organization to other individuals or groups such as when a “no tolerance” policy is implemented and someone is “publicly hung” to send a message to discourage repeat offenders. Another source is the organizational history and its character and social processes (Rousseau, 1995 p.36).
These factors help an employee to make a decision as to whether or not a statement (written, oral, social or otherwise) constitutes a binding “promise” on the part of the organization. These types of communication often occur during times of transition or change, for the individual or organization. Another internal factor that conditions one’s view of the potentially promissory statements is that of their own motivation. An employee’s aspirations influence the impact of thought processes, decisions and ultimately on-the-job behavior.

IV. Winning Their Hearts & Minds… Results will Follow
The “organization” is remarkably like a living organism, a fluid, dynamic creature that is made of divergent individuals with divergent interests who, theoretically if not in reality are “pulling the rope in the same direction” to achieve some mutual corporate and individual goal. The first implication of the idea of the psychological contract simply underscores the real goal of the HR function that, in its essence, has the role of not just administrating employees but proactively managing people well and creating and enabling systems to do so. Doing this require the thoughtful and careful consideration of employment from the perspective of the employee. Furthermore, due to the consequences of the rapidly changing and now global workforce, organizations may consciously need to manage multiple contracts simultaneously, which inherently makes it more difficult to achieve the perception of equity across the various groups. This can become a particular problem when all the constituent groups, figuratively if not literally, eat lunch at the same location fostering social comparison and potential conflict (Rousseau, 1998 p. 110). Despite this, employees will sense both the intent and credibility of a truly competent HR function that is “at the table” to negotiate the mutual best interests of the company and the employees.

Works Consulted

Burroughs, Susan and Lillian Eby (1998), “Psychological Sense of Community at Work: A Measurement System and Explanatory Framework”, Journal of Community Psychology, volume 26, number 6, pp. 509-532.
Dreher, George and Thomas Dougherty (2002), Human Resource Strategy: A Behavioral Perspective for the General Manager, McGraw-Hill Irwin, Boston, Massachusetts.
Pfeffer, Jeffrey (1998), The Human Equation, Harvard Business School Press, Boston, Massachusetts.
Rousseau, Denise (2004), “Psychological Contracts in the Workplace: Understanding the Ties that Motivate”, Academy of Management Executive, February 2004, volume 18, issue 1, pp. 120-127.
Rousseau, Denise (2001), “Schema, promise and mutuality: The building blocks of the psychological contract”, Journal of Occupational and Organizational Psychology, volume 74, pp. 511-541.
Rousseau, Denise (1995), Psychological Contracts in Organizations: Understanding Written and Unwritten Agreements, Sage Publications, Thousand Oaks, California.