Since the earliest days of work, the psychological contract has existed. While it may not have always been given a name, employees and employers have always had specific ideas about what working with one another actually means. Dependent upon the perspective being used, of course, the focus could be on anything from money, to benefits or simply the status guaranteed by working at a specific company.

Regardless, the psychological contract can be of enormous benefit or massive detriment to the company. Before getting into the pros and cons of the topic, it is important to know what a psychological contract actually is in reality.

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Psychological Contracts

The Definition

As editor, I have written about this form of ‘contract’ on occasion. Below is an excerpt from The Importance of the Psychological Contract.

The concept of the psychological contract was originally developed by Denise Rousseau.  Rousseau is an H. J. Heinz II University Professor of Organizational Behavior and Public Policy at Carnegie Mellon University.

Unlike a formal, codified employee contract, a psychological contract is an unwritten set of expectations between the employee and the employer.  It includes informal arrangements, mutual beliefs, common ground and perceptions between the two parties.

Vera Hillman, a former HR Exchange Network contributor, has also written about the concept.  In her piece, The Psychological Contract:  Relevance for Our Everyday Business Operations, Hillmann outlined what she called the “essential aspects” of this form of contract.

• It is covert, imprecise and implicit: often expectations are not directly communicated and verbalized.

• It is unstable: the PC is always potentially unstable because it is based on hidden expectations and assumptions feeding into how situations are perceived.

• It is unwritten: there is no written agreement, such as a legally binding employment contract.

• It is dynamic: expectations shift over time and change constantly, such as when new colleagues join the team. This also shapes the PC as new situations might require reconsidering the employee-employer relationship.

The Pros

Having defined the psychological contract in greater detail, let us turn the focus now to the pros and cons.

Agility

HR professionals consistently hear the terms agile or agility.  The psychological contract is the epitome of agility.  As the worker changes, so too does the psychological contract shared between the employee and his or her employer.  Additionally, it provides a real-time look at the relationship between the two entities.

It could be argued that, while this attribute serves as a pro, it can also double as a con.  Why?  The fact the psychological contract is so easily changed means it is difficult to “enforce” and equally difficult on which to rely for guidance when it comes to the relationship between the employee and employer.

Loyalty

Loyalty is a massive asset for employers.  When an employee offers loyalty to the company, it hinges a great deal on the psychological contract that exists between the two.  As long as the contract is honored by both, loyalty will remain.

Empathy

Empathy, loosely defined, is the ability between the two parties to understand one another.  Pressing it forward under context of the psychological contract, when the employee and the employer can understand one another it creates a positive work environment; one in which employees and employers feel free to bring them full-selves to work.

Communication

That inevitably leads to positive communication.  That means the environment in which both parties function is one of openness and honestly.

INFOGRAPHIC:  The Psychology of Employer Branding

The Cons

Not-On-Paper

As previously mentioned, the psychological contract is not a physical contract; it’s not documented in any way.  This makes it very difficult to execute.  In fact, some say it is for this reason alone a PC cannot actually be defined as a contract.

Inconsistent

The psychological contract is inconsistent.  Every single employee develops their own PC with the company.  While these contracts may be similar across the board, they are still just as unique as each member of the company workforce.

Redundant

There are some that believe the concept of the psychological contract is redundant, even obsolete. Why? There are other ways to measure the employee-employer relationship. This includes employee engagement and pulse surveys.

The Impact on the Bottom Line

Like it or not, the psychological contract is real and in force for every employee. Ignoring this fact can be a detriment to the company.  Why?  These contracts, while the responsibility of both parties, are not created by the employer, but the employee.  Additionally, they can change those contracts on a whim and there is no notice required to the employer.  If, however, the employer breaches the contract, there is a high likelihood the employee will leave the company.  That causes a hardship on the company financially.  An unfilled position is costly.

And if the employee does not leave the company and continues to work post contract breach – that employee will most likely not be engaged with the organization much if at all.  Productivity will suffer.  Team or workforce morale will take a hit.  Translation other employees could be negatively impacted and it could spread like wildfire.

While some can argue, as mentioned before, that the psychological contract is not real the fact is it is real enough to do damage to the company if breached.  While PCs may not be binding in a court of law, they are very binding in the court of employee opinion.  Companies would do well to keep that in mind.

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Want to know how to lead when psychological contracts are in effect?  Read Psychological Contracts and Leadership.

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