Relevance for Our Everyday Business Operations

Updated 8/3/2021

The Psychological Contract of ever increasing importance for HR departments as it can be used to measure factors impacting behavior in the workplace. This contract is a a powerful instrument for driving behavior and business performance. 

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What is the Psychological Contract?

The Psychological Contract, a concept that describes the perception of the business relationship between two parties, has long been a point of interest in the HR community.

The contract, usually thought of between employees and their employer, refers to the mutual expectations people have of one another, and how these implicit expectations impact and change our behavior. For HR professionals, an understanding of the psychological contract can help to measure the factors that impact behavior in the workplace.

These are the essential aspects of the Psychological Contract:

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

• It is 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.

Why is it Important for the Work Relationship?

The problem with the psychological contract is that employees think that their expectations are generally accepted and agreed upon. The so-called violation of the contract simply means that these expectations are not fulfilled.

Often what we say is not what we think, specifically in the context of work. This leads to hidden assumptions on both sides—for the employee and the employer –and results in violating the contract.

The true scope of the psychological contract only becomes apparent to both parties when a specific behavior reveals the assumptions. When employees feel that the it has been violated, they lose trust in the organization and adjust the contract according to their experiences. In this case, if employees feel they do not get much out of the business relationship, they will lower their efforts correspondingly.

Possible consequences of a violation of the psychological contract include employee dissatisfaction, demotivation, withdrawal, and underperformance, which might lead the employee to think about leaving the organization.

On the other hand, when employees feel that the contract has been fulfilled and that the employer is ‘sticking to their part of the deal,’ the results are increased performance, job satisfaction, and loyalty towards the organization.

For example, if one employee puts in extra hours each day and ‘goes the extra mile’ to provide excellent customer service, he or she might feel that they should be first in line for a promotion. If another colleague gets promoted before him or her, the contract is violated as the expectation remains unfulfilled.

It’s likely that the manager wasn’t aware of this expectation and could expect someone who wants to be promoted to mention this during performance appraisals. This demonstrates an expectations gap between employee and employer, and could result in the employee showing lower effort in the workplace because he or she assumes that their top performance has not been rewarded.

Impact of an International Workplace on the Psychological Contract

Cultural aspects bring a whole new dimension to the psychological contract—and it does not make things easier! It is already difficult to guess what your staff or your employer might think when you are from the same culture. Cultural differences add an additional layer to the vagueness and implicitness of the contract, which can lead to misunderstandings and misjudgement.

People from different cultures can have very different expectations when it comes to management style, reward systems, and work ethic. Also, different cultures have diverse opinions when it comes to leadership preferences.

These nuances are often not discussed when hiring international staff—as everyone assumes that they have a ‘common ground’ of understanding. However, reality proves that the opposite is true. International teams can demonstrate high dissatisfaction and underperformance without being able to identify the underlying reasons for this. That is why it is essential to consider the implications of the psyhcological contract even more when working with different cultures. As it is unwritten, there is no such ‘common ground’ which was officially agreed upon.

For more information on the importance of the psychological contract, click here.

Managing the Psychological Contract

In many cases, issues in the workplace reflect a violation of this silent agreement, as opposed to a violation of the employment contract recorded in writing. Because of this, the psychological contract offers one of the most insightful approaches of understanding and influencing behavior at work.

It is important to understand the nature of this contract in order to maintain a positive relationship between employers and employees. The solution for avoiding and resolving violations is communicating the mutual expectations of both parties involved.

One practical solution is putting mutual expectations in writing at the beginning of employment or performance reviews and openly discussing the ‘terms of the business relationship’. This could entail sections such as ‘What we expect from the employee’ and ‘what employees can expect from us as a company in return’.

Similarly, employees could articulate their thoughts in sections like ‘What I expect from my employer’ and ‘what I am willing to put in’. Be as specific as possible and give specific examples and incentives (monetary and also non-monetary), as this increases the likelihood of fulfilment of the contract on both sides. The psychological contract should also be in line with the organization’s values and philosophy as this demonstrates cohesiveness, integrity, and carries out a positive organizational culture.

This ‘written agreement’ could become part of your internal talent management strategy. Performance reviews offer the appropriate time and format to discuss the psychological contract. It also enables new employees to achieve desired performance standards much faster as everyone knows what do to, in order to be rewarded. But keep in mind, this contract changes constantly, is unstable, and needs to be redefined on a regular basis.

When the psychological contract is applied in an appropriate manner, organizations are more likely to increase their overall performance and reduce turnover rate of their staff. This makes the contract an effective tool for the management of your organization. Try it out and keep in mind: What you put in is what you get out!