Sustainable Psychological Contract and Organisational Life

As organisations aim to understand and improve the dynamics of the employment relationship, the concept of psychological contract plays a crucial role. The psychological contract is based on the mutual expectations and obligations between employees and the organisation, shaping their working relationship.

In this article, we will explore the effect of the psychological contract on organisational life, including the consequences of breach or violation, the different types of psychological contracts, and the relationship between psychological contracts and human resource management.

What is a Psychological Contract?

A psychological contract is an unwritten, informal contract between employees and their employer that outlines each party’s expectations, obligations, and values for the relationship. It’s essentially the “human side” of the employment relationship, going beyond the legalities of a formal contract.

Key Points About Psychological Contracts

• Unwritten and informal: Unlike a formal contract, no written document outlines the psychological contract. It’s formed through implicit and explicit communication, actions, and behaviours between the employer and employee.
• Mutual expectations: Both the employer and employee have expectations of each other. These expectations can cover job duties, compensation, benefits, work-life balance, career development, and the overall work environment.
• Obligations and values: Besides expectations, the psychological contract includes perceived commitments and values. These can influence how employees and employers behave and make decisions.
• Dynamic: The psychological contract is not static. It can change as the relationship between the employer and employee evolves or as external factors such as company policies or the economy change.

Why is the Psychological Contract Important?

The psychological contract is important because it can significantly impact the employee experience and the organisation’s overall success. Employees who feel that their psychological contract is being met are more likely to be engaged, productive, and satisfied with their jobs. Conversely, when the psychological contract is breached, employees may become disengaged, demotivated, and even leave the organisation.

Here are some additional benefits of a strong psychological contract:

• Increased employee engagement and satisfaction
• Improved productivity and performance
• Reduced turnover
• Stronger employer-employee relationships
• Positive organisational culture

How Can Employers Manage the Psychological Contract?

Employers can do several things to manage the psychological contract and ensure that it is positive for both the employee and the organisation. These include:

• Clearly communicating expectations
• Being fair and consistent in their treatment of employees
• Keeping promises and commitments
• Providing opportunities for growth and development
• Recognising and rewarding employees for their contributions
• Creating a positive and supportive work environment

By understanding and managing the psychological contract, employers can create a healthy and productive work environment for everyone.

Types of Psychological Contracts

Several different frameworks categorise psychological contracts, but one of the most prominent is Rousseau’s (1989) model, which identifies four main types:

Transactional

A short-term, task-oriented exchange characterises this type. Employees fulfil specific duties in return for agreed-upon compensation and benefits. Think of hourly workers or contractors focusing primarily on completing assigned tasks without expecting long-term career development.

Relational

This contract emphasises a longer-term commitment and loyalty between employee and employer. The employer offers job security, training, and development opportunities, while the employee reciprocates with dedication and effort beyond minimum requirements. This is common in established companies with strong employer branding and commitment to employee well-being.

Balanced

This combines elements of both transactional and relational contracts. Both parties invest in the long-term relationship, focusing on mutual benefits and growth. The employer provides fair compensation, development opportunities, and work-life balance while the employee contributes skills, effort, and loyalty. This fosters a collaborative and mutually beneficial dynamic.

Transitional

This type arises during periods of organisational change or uncertainty. Expectations are less clear, with both parties adapting to new circumstances. Employees seek security and support, while employers provide reassurance and assistance during the transition. Think of mergers, acquisitions, or restructurings where roles and expectations evolve.

Role of Psychological Contracts in Organisational Culture

The role of psychological contracts in organisational culture and climate is crucial, and they interact in a complex and mutually influential way. Here’s how:

Shared Expectations and Values

Psychological contracts shape the organisation’s culture by reflecting shared expectations and values between employees and the employer. When these contracts are met, employees feel a sense of trust, fairness, and commitment, fostering a positive and collaborative culture. Conversely, unfulfilled expectations and broken agreements can lead to cynicism, distrust, and a negative culture.

Defining Norms and Behaviors

The type of psychological contract prevalent in an organisation can influence the established norms and behaviours. For example, a relational contract emphasising loyalty and long-term commitment might encourage collaborative behaviour and knowledge sharing, while a transactional contract might prioritise individual performance and competition.

Attracting and Retaining Talent

The terms and conditions outlined in the psychological contract, both explicit and implicit, play a significant role in attracting and retaining talent. A culture that offers fair treatment, growth opportunities, and valuing employee contributions will be more attractive and retain employees better.

Impact of Culture on Psychological Contracts

Personal and national culture plays a significant role in shaping and influencing psychological contracts. Here’s how:

Culture Shapes Expectations

The existing organisational culture sets the context for employee expectations within the psychological contract. A culture of open communication fosters open and transparent expectations, while a culture of ambiguity might lead to confusion and potential breaches.

Leadership Influences Perception 

Leadership behaviours and actions significantly influence how employees perceive their psychological contracts. Consistent, fair, supportive leadership builds trust and reinforces positive contract fulfilment.

Cultural Events Shape Perception

Significant events in the organisation’s life, such as mergers, restructuring, or layoffs, can dramatically impact employee perceptions of their psychological contracts. Effective communication and support during these transitions are crucial to minimise negative impacts.

Link to Human Resource Management (HRM)

The link between psychological contracts and Human Resource Management (HRM) practices is deep and impactful. HRM practices shape the formation, fulfilment, and potential breach of psychological contracts, significantly influencing employee experience and organisational outcomes. Let’s delve deeper:

How HRM Practices Shape Psychological Contracts

• Recruitment and Onboarding: Clear communication about job duties, compensation, and recruitment expectations sets the psychological contract’s foundation. A well-structured onboarding process reinforces these expectations and fosters trust.
• Performance Management: Regular feedback, career development opportunities, and fair performance evaluations demonstrate the employer’s commitment to the employee’s growth, fulfilling relational contract expectations.
• Compensation and Benefits: Competitive salaries, benefits packages tailored to employee needs, and recognition programs contribute to fulfilling transactional and balanced contract elements.
• Communication and Transparency: Open and honest communication about organisational changes, challenges, and successes builds trust and strengthens the perception of fairness, which is crucial for all contract types.
• Work-Life Balance: Flexible work arrangements, mental health support, and policies promoting personal well-being demonstrate the employer’s value for the employee’s life outside of work, upholding balanced and relational contracts.

Impact of HRM Practices on Psychological Contract Fulfillment

• Fulfilled Contracts: When HRM practices align with employees’ expectations within the psychological contract, they experience increased satisfaction, motivation, and commitment, leading to higher productivity and reduced turnover.
• Breached Contracts: When HRM practices don’t support the psychological contract, employees might feel betrayed, leading to disengagement, decreased performance, and potentially, turnover.

Key Considerations for Organisations

• Align Practices with Contract Type: Understand the dominant psychological contract type within the organisation and tailor HRM practices accordingly.
• Regularly Review and Communicate: Conduct surveys and focus groups to understand employee perceptions and adjust practices as needed. Ensure clear and consistent communication about changes and rationale.
• Focus on Transparency and Trust: Promote open communication, actively listen to employee concerns, and demonstrate consistent and fair treatment to build trust and strengthen the psychological contract.

Effects of Breaching the Psychological Contract

Breaching the psychological contract between an employer and employee can significantly affect both individuals and the organisation. Here’s a breakdown of the potential consequences:

Individual Employee Effects

• Decreased job satisfaction and engagement: Employees feel less valued and appreciated when expectations are unmet, leading to lower satisfaction and motivation.
• Reduced performance and productivity: Disengaged employees become less invested in their work, resulting in decreased output and quality.
• Emotional distress and stress: Feelings of betrayal, anger, and disappointment can lead to increased stress and negative emotions, impacting mental and physical health.
• Decreased trust and loyalty: Broken promises erode trust, weakening the employer-employee relationship and making the employee less likely to go the extra mile.
• Increased intention to leave: Unfulfilled contracts can push employees to seek opportunities elsewhere where they feel their expectations will be met, leading to higher turnover rates.

Organisational Effects

• Decreased morale and engagement: Negative experiences spread, impacting other employees’ overall mood and motivation.
• Reduced productivity and performance: Lower individual performance decreases overall organisational output and efficiency.
• Increased costs: Higher turnover leads to recruitment and training costs and lost knowledge and expertise.
• Damaged employer reputation: Negative employee experiences can be shared online and impact the organisation’s ability to attract and retain talent.
• Decreased innovation and creativity: Disengaged employees are less likely to contribute innovative ideas, hindering organisational growth and development.

Specific Examples of Breaches

• Broken promises: Not delivering on promised promotions, compensation increases, or training opportunities.
• Unfair treatment: Showing favouritism, biased decisions, or lack of support to specific employees.
• Workload overload: Excessive work demands without additional resources or compensation, leading to burnout.
• Lack of transparency: Keeping employees in the dark about important decisions or organisational changes.
• Shifting expectations: Significantly changing job duties or responsibilities without clear communication or agreement.

Mitigating the Effects

• Open communication: Honestly address the breach, explain its reasons, and actively listen to employees’ concerns.
• Seek solutions: Work collaboratively with employees to find solutions that address their unmet expectations and restore trust.
• Offer apologies and reparations: Acknowledge the wrongdoing and offer genuine apologies and actions to compensate for the breach.
• Prevent future breaches: Review HRM practices and communication strategies to avoid facing similar situations again.

Work Place Trauma

The trauma caused by workplace incidents can affect the psychological health and work-life balance of employees. Before we delve deep into this topic, let’s first define trauma.

What is Trauma?

According to Dr. Gabor Maté, the definition of trauma extends beyond just dramatic events or crises. He views it as an unhealed emotional and physical wound caused by any experience that overwhelms our ability to cope. This broader definition encompasses a more comprehensive range of situations that can leave lasting negative impacts on individuals.

Examples of Workplace Trauma

• Violence or threats of violence: This can include physical assault, verbal threats, or intimidation.
• Sexual harassment or assault: This can include unwanted sexual advances, groping, or rape
• Bullying and mobbing: This involves repeated, unreasonable behaviour an employee is subjected to, intended to intimidate, humiliate, or ostracise.
• Exposure to dangerous or unsafe conditions could include exposure to hazardous materials, chemicals, or machinery or working in dangerous environments such as construction sites or mines.
• Major organisational changes or downsizing: These can be stressful and disruptive, leading to job insecurity and uncertainty. Witnessing traumatic events: This could include accidents, fatalities, or other violent events.

The Effects of Workplace Trauma

• Post-traumatic stress disorder (PTSD): a mental health condition that is likely to develop after experiencing or witnessing a traumatic event. Symptoms can include flashbacks, nightmares, anxiety, and avoidance of reminders of the trauma.
• Depression: a common mental health condition that can cause feelings of sadness, hopelessness, and loss of interest in activities that were once enjoyed.
• Anxiety: a feeling of worry, nervousness, or unease that can be intense or persistent.
• Substance abuse: Some people may start using alcohol or drugs to cope with the emotional pain of workplace trauma.
• Physical health problems: Trauma can also have a negative impact on physical health, leading to problems such as sleep disturbances, headaches, and stomach problems.

Therefore, a strong psychological contract in the workplace can reduce the effect of any trauma the employee is subjected to. It should be seen as part of a comprehensive approach to preventing and addressing workplace trauma, alongside strong safety protocols, ethical leadership, and a culture of open communication and support.

To sum up, a psychological contract is an unwritten, dynamic agreement between employees and employers that outlines their mutual expectations, obligations, and values. Unlike formal contracts, it’s formed through implicit and explicit communication, actions, and behaviours. By understanding and actively managing its dynamics, employers and employees can create a more positive, productive, and resilient work environment.