Defining and analysing a psychological contract

The psychological contract is certainly an important aspect of the employment relationship as it invisibly binds the employer and the employee through a set of expectations. For the individual in an organisation, the psychological contract is mostly relevant as it directly affects the level of motivation, commitment and morale of that person. Moreover, a positive psychological contract helps to boost the productivity and performance of an employee.

Thus, to gain the commitment and loyalty of individual employees, it becomes essential that organisations put in place appropriate systems to foster the identification of employee expectations and ways to fulfill them. However, expectations are not easily identified, both on the employers` and employees` side. These often give rise to breaches on behalf of either one or both parties.

The maintaining of a positive psychological contract with all members of an organisation thus becomes a primary focus of the HR practitioner and HR practices play an important part in that if those are carefully linked to the psychological contract.

2.0 Literature Review

2.1 Definition of psychological contract

A psychological contract, in its broad sense, consists of a set of unwritten expectations that exist between each individual employee and their employer (Armstrong, 2009). As per Guest (2007), the psychological contract consists of what he refers to as the “perceptions of both parties” to issues such as the employment relationship, the organisation and the individual, of mutual promises and obligations implied in that relationship between those two parties, that is, the employer and the employee.

Moreover, as per Schein (1965), the essence of the psychological contract pertains to the fact that there constantly exists a plethora of unwritten expectations that forms part of the interaction between each member of an organisation and their employer. Thus, the psychological contract constitutes of a system made up of beliefs and which regroups all those actions that are expected from the employee and of the outcome that those employees expect from their employer in return.

As per Armstrong (2009), the concept of the psychological contract stems from the early works of Argyris (1957) and from the social exchange theory (Blau,1964), which contends that social change and stability forms part of the process of negociated exchanges between parties. However, the use of the psychological contract as an analytical framework in its current form was mostly developed by Schein (1965).

The psychological contract often works in parallel with a written employment contract. It is however, different from the legal employment contract in the sense that the contract of employment outlines the terms and conditions of employment, remuneration arrangements and the basic rules governing the employment relationship. The psychological contract on the other hand, pertains to broad expectations regarding what each party is seeking from the relationship. It is not a written document but exists wholly within the parties` heads (Torrington, Hall and Taylor, 1987).

Moreover, as per Rousseau and Greller (1994), the ideal employment contract should be providing details with regards to the expectations of both the employer and the employee. However, this is not the case as the organisational environment is constantly changing which makes it almost impossible to be specific about all the working conditions right from the start of employment. It is therefore, left to the employee and the employer to form their own psychological contract. As pointed out by Guest et al (1996), the psychological is implicit and dynamic as it develops as time goes by and experience is accumulated and as the employment conditions are altered or as employees start reconsidering their expectations.

2.2 Formulation of the expectations

There are two main questions in the psychological contract which individuals must ask about the employment relationship and these are as follows: (Guest et al., 1996)

1) What can I reasonably expect from the organisation?’

2) What should I reasonably be expected to contribute in return’

Therefore the employment relationship should be understood by either party and the aspects of the employment relationship covered by the psychological contact will include, amongst others, some of those aspects of the expectations from the employee’s point of view (Armstrong, 2009):

How they are treated in terms of fairness, equity and consistency.

Security of employment.

Scope to demonstrate competence.

Career expectation and the opportunity to develop skills.

Involvement and influence.

Trust in the management of the organisation to keep their promises.

From the employer’s point of view, the psychological contract covers such attitudinal and behavioural aspects of the employment relationship as competence, effort, compliance, commitment and loyalty (Armstrong, 2009).

2.3 Changes to the psychological contract

According to Hiltrop (1995), the nature of the psychological contract is changing due to changes in the internal and external environment of businesses. Those changes can also be explained by a shift in paradigm from personnel management to human resource management. The previous or “old” psychological contract focuses more on imposed relationship using compliance, command and control while the new psychological contract`s core is mutual relationship which lays more emphasis on commitment, participation and involvement.

Moreover, the old psychological contract also focused on permanent employment relationships, on promotion, finite duties, the ability to meet job requirements, job security and the employee`s loyalty to the company and training provided by the organisation. The permanent employment relationship has evolved to focus more on variable employment relationship. Therefore, the talent of people are obtained and retained only when that is required (Armstrong, 2009).

With the evolution of the psychological contract the expectation for promotion has shifted to lateral career development, finite duties has been replaced by multiple roles, employees are also expected to add value rather than only meeting their job requirements. Employees moreover, expect to remain employable and they prefer to remain loyal to their own career rather than to the company. Employees also seek opportunities for self-learning rather than being sent for training by the organisation (Armstrong, 2009).

According to Hiltrop (1995), the emerging psychological contract is one which is short-term and situational. The parties involved do not depend as much as each other for growth and survival as it was the case before.

2.4 Development of Psychological contract

The development of the psychological contract is linked to individual and organisational factors. The individual aspect includes experience and expectations about the employment relations, which might have been created before hiring, during the recruitment process, during the stage where the employees are socialising or from the experiences during employment. (Rousseau, 2001) Other factors affecting the individual determinants are age, gender, level of education, union membership, the level of commitment to the job (Guest & Conway, 1998), job insecurity and need for greater employability (Martin et al., 1998), personality traits (Raja et al., 2004), the individual’s ability to cope with changes (Bellou, 2007) orideology (Bunderson,2001)

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The organisational factors affecting the development of the psychological contract include human resource policies and practices which can contribute to making certain promises or obligations on the part of the employer and expectations of employees (Guest & Conway, 1998).

As Guest et al (1996) point out:

A positive psychological contract is worth taking seriously because it is strongly linked to higher commitment to the organization, higher employee satisfaction and better employment relations. Again this reinforces the benefi ts of pursuing a set of progressive HRM practices.

They also emphasize the importance of a high-involvement climate and suggest in particular

that HRM practices such as the provision of opportunities for learning, training and development,focus on job security, promotion and careers, minimizing status differentials, fair reward systems and comprehensive communication and involvement processes will all contribute to a positive psychological contract. The steps required to develop a positive psychological contract

are shown below:

Define expectations during recruitment and induction programmes.

Communicate and agree expectations as part of the continuing dialogue that is implicit in good performance management practices.

Adopt a policy of transparency on company policies and procedures and on management’s proposals and decisions as they affect people.

Generally treat people as stakeholders, relying on consensus and cooperation rather than control and coercion.

On the basis of their research, Guest and Conway (2002) emphasize the importance of communication in shaping the psychological contract, especially at the recruitment and induction stage when promises and commitments can be made by employers on such matters as interesting work, learning and development opportunities, not to make unreasonable demands on employees, feedback on performance, fair treatment, work/life balance, a reasonable degree of security and a safe working environment. They concluded that following the recruitment and induction stage, communication is most effective if it is personal and job-related. Top-down communication is less important. They also stressed that a positive psychological contract can only be achieved if management keeps its word – if it does not breach the contract.

2.5 Violations of Psychological Contracts

According to Rousseau (1995), breaches can take three forms: inadvertently, disruptive, or reneging. Whether the victims identify the source of the breach to be unwillingness or inability to comply, impacts on how breach is experienced and what victims do in response.

Inadvertent: able and willing to comply, occurs due to divergent interpretations

Disruption: Willing but unable – inability to fulfill contract

Breach of contract: Able but unwilling – break a promise

2.5.1 Breaches of contracts

Psychological contracts are tacit – that is, they are understood or implied without being spoken or written. It is thus likely that they contain vague beliefs and unverified assumptions. Violation of psychological contract, which is when an employee feels that the organisation has failed to deliver on its promises, has major consequences (Rousseau, 1995).

Psychological contract breach is a subjective occurrence as it is one’s perception that another has failed to fulfill satisfactorily the promised obligations of the psychological contract (Rousseau, 1989). The employee has the belief that a breach has occurred and that affects his or her behaviour and attitudes, regardless of whether that belief is valid or not.

“Self-serving biases” occurs when employees evaluate themselves and their own contributions positively and the contributions of the employer less positively (Taylor & Brown, 1988). With such preconceived notions, whenever the psychological contract is fulfilled, the employee who generated the contract will take the credit for its fulfillment.

And when breaches of the contract occur, according to the “fundamental attribution error” of Ross (1977), these employees lay their own non-fulfilment of a contract onto external conditions, such as other people in the organisation, the global economy, or the organisation. (Ross, 1977)

2.5.2 Effects of breaches

Psychological contract violation may result in a number of attitudinal responses. (Guest 1996) Attitudinal responses consist of reduced organisational commitment, job satisfaction and increased cynicism (Robinson and Morrison, 1995). Dunahee and Wangler (1974) suggest five stages of employee response to employer contract breach: complaining, lowered job involvement, retaliation, appeals to union and legal assistance, and resignation. They suggest that these are all attempts at evening out the contract.

Employee cynicism has been described as a negative attitude and involves a belief that their organisation lacks integrity, negative emotions towards the organisation and a tendency for employees towards critical behaviour of their organisation. (Dean et al., 1998)The aims of employee cynicism are usually senior executives, the organisation in general and organizational policies. Breach of psychological contract may also create behavioural changes, in reduced effort and commitment and thus leading to significant implications for employee and organisational performance. This can lead to feelings of injustice, deception or betrayal among employees (Morrison & Robinson, 1997).

Rousseau (2001) also mentions that employees with different understandings of their psychological contracts respond differently to contract violation and to planned organisational change.

2.6 Link between HR Practices and Psychological contract

Competition has compelled organisations to find new ways to bring about various changes to maintain financial control (Coyle-Shapiro and Kessler, 2000). Organisations concluded that to maintain such type of control, they need to remove typical benefits usually involved in the “exchange relationship” between employer and employee (Singh, 1998). Singh (1998) believed that such traditional benefits as “lifelong security, guaranteed pay increases and assured career opportunities” should no more be provided to employees.

Nowadays, the new tendency is that employees no more have security in their respective jobs even though they show commitment to the organisation (Aggarwal and Bhargava, 2009). Aggarwal and Bhargava (2009) noticed that the employee “exchange flexibility and hard work for simply having a job”. According to Herriot et al. (1997), this can eventually have a systematic effect on the employee-employer relationship resulting in the transformation of the established “trust, loyalty commitment and long-term relationship”.

Previous studies demonstrated that for employers to obtain what they really expect from their employees, they should give them “appropriate inducements” (Schein, 1965). Employees who are satisfied and feel part of the organisation will be more willing to make effort to do their job to achieve organisational objectives and will be more apt to sort out problems arising in the organisation (Argyris, 1964). Yet, employers have had to face many difficulties to assess the expectations of employees and which “kind of inducements will influence employees to make desired contributions” (Aggarwal & Bhargava, 2009). And as said by the authors: “Management of expectations is critical for survival of any relationship” (Aggarwal & Bhargava, 2009).

Psychological contract has been early defined as an “unconscious assumption” as regards to the employee/employer relationship (Argyris, 1960; Levinson et al. 1962). Nowadays, psychological is said to be the type of agreement that is formed based on the exchanged promises between the employee and the employer (Aggarwal & Bhargava, 2009). However, it is to be noted that each employee’s psychological contract is unique in nature (Aggarwal & Bhargava, 2009). It is here suggested that each employee’s perception of the relationship differs from each other (Aggarwal & Bhargava, 2009).

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Coyle-Shapiro and Neuman (2004) on their side suggested that the psychological contract of employees is developed through the “interaction of various macro and micro variables”. According to Aggarwal and Bhargava (2009), human resource practices are considered as macro-level variable in contrast to the psychological contract which is defined as a micro-level one. Psychological contract has been recognised as being “perceptual and idiosyncratic” (Aggarwal and Bhargava, 2009). The authors have also noted that even though the organisation provides employees with identical advantages, the employees’ responses will be different (Aggarwal and Bhargava, 2009).

Moreover, various investigations have demonstrated that human resource practices form part of the variable that inspired the perception of employees towards the psychological contract and organisational outcomes (Kotter, 1973; Rousseau, 1990). Rousseau and Wade-Benzoni (1994) also believe that HR practices and psychological contract are both linked to the organisation strategy. According to Arthur (1994), HR practices firstly affect “employee’s skills, attitudes and behaviours” that consecutively have an effect on organisational performance. Rousseau (1995) suggested that HR practices drive “strong messages to individuals regarding what the organisation expects of them and what they can expect in return”. HR practices is also said to convey promises and future aims on behalf of the organisation through recruitment, reward and development practices and these are viewed as a specific form of contract (Rousseau, 1995).

Furthermore, it has also been stated that “HR practices impact firm performance by creating structural and operational efficiencies” (Arthur, 1994). Berg (1999) on his side believes that having a “strong HR system” tends to improve employee’s satisfaction towards their job. It is also assumed that having such a system in an organisation reduces exhaustion in employees (Godard, 2001). In simple terms, it can be stated that the business strategy and employment strategy have an impact the way we design our HR practices and this eventually shape the psychological contract of our employees (Aggarwal and Bhargava, 2009).


2.7.1 David Guest

A core model of the psychological contract:

A model of the psychological contract as formulated by Guest et al (1996) suggests that the core of the contract can be measured in terms of fairness of treatment, trust, and the extent to

which the explicit deal or contract is perceived to be delivered.

Table 1: Guest`s (1996) model of psychological contract

2.7.2 Levinson’s Model of a Psychological Contract and Reciprocity

The model focuses on the influences on mental health in the relationship between employers and employees in organisations, which is contractual in nature. The frequency of the expectations of the employees seemed to have an almost obligatory quality. Either when people express their expectations, or when expectations were tacit, it was as if the company or other people were compelled to fulfill them. (Levinson et al. 1962)

Adaptation of Levinson’s Model of a Psychological Contract and Reciprocity (Levinson et al., 1962)

Table 2: A diagrammatic adaptation of Levinson’s model of psychological contract (1962)

The central part of the model is the content of the psychological contract. This model of psychological contracts indicates that psychological contracts are created within three areas of employee concerns: (1) employee dependence on a company, (2) the boundaries of interpersonal relationships within a company, and (3) the impact of change (Levinson et al., 1962).

Areas of concern in which psychological contracts develop

1) Dependency

Individual – organisational relationships involving divergence, exploitation and legitimacy

Dependency involves an employee’s relationship with the company. This develops when employees turn to upper management for support in terms of resources, training, equipment and project planning. Such dependency concerns are not the result of psychological immaturity of workers, but are a legitimate aspect of employee-organisation interaction.

For example, work efforts should be supported through recognition of needs for proper resources. Failure to address these concerns can be considered to be a form of exploitation. So, to avoid unnecessary stress at work, the upper management must recognize their responsibilities to provide the conditions that allow an employee to complete the tasks required. (Levinson et al., 1962)

2) Distance

Interpersonal relationships involving affection, autonomy and control

The second set of concerns in the model involves interpersonal relationships, particularly about the appropriateness of interpersonal behavior. The managers need to know with which degree of intimacy or detachment to deal with the employees in order to be impartial. A balanced level of autonomy and control of the employees is required to avoid undermining their confidence and also avoid confusions but at the same time, ensuring that the work is done. (Levinson et al., 1962)

3) Change

Change in both personal and work life involving adaptation

The third area of concern relates to the adaptation to three aspects of change: personal, social and technological. Various changes occur while an individual evolves in an organisation namely personal, social and technological changes. The social and technological changes are forced upon him/her while the personal changes are inflicted on the organisation. Levinson et al. (1962) found that both employees and managers recognized their responsibility in relation to social, personal and technical change.


The psychological contract is a series of mutual expectations. The parties involved in the relationship may not be aware of these expectations but however these control their relationship with each other. In this model, reciprocation is a judgment of how well obligations were perceived to be met. The level of perceived reciprocity in the psychological contract is proposed as the link with mental health at work. And thus a low level of reciprocity is thought to lead to disrespectful behaviour, inflexibility, a narrowing of sources of gratification, inability to accept limitations and a fall in activity and productivity. (Levinson et al., 1962)

Characteristics of Mental Health at Work

The mental health outcomes were the ability of people to:

• treat others as individuals rather than instrumentally (Respectful)

• be flexible under stress (Flexible)

• have many sources of fulfillment (Resourceful)

• accept their own limitations and capacities (Realistic) and

• be active and productive (Active and Productive) (Levinson et al., 1962)

In summary, Levinson et al.’s (1962) model of psychological contract shows that employees make up psychological contracts based on their expectations of work conditions. Employees develop a set of contractual schemes related to:

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• the mutual dependence of employers and employees

• boundaries on interpersonal relationships within the company, and

• adaptation of the company and the individual to change

2.7.3 Zone of indifference

The zone of indifference and obedience theory, developed by Barnard (1938) stems from the assumption that people always seek a balance between what they contribute to the organisation and what they expect from the organisation. When bound by the psychological contract, employees would therefore agree to do certain things just because they think they should. On the other hand, an employee may refuse to do certain tasks because those tasks fall outside the zone of indifference (Schermerhorn et al, 2002).

The link between the zone of indifference and the psychological contract is illustrated below using the example of an office clerk.

Table 3: A hypothetical psychological contract of an office clerk

As seen in the diagram above, for those tasks that the employee is mentally prepared to do and which are explicitly formulated in his/her employment contract, the employee is willing. For instance, working forty hours a week is formulated in the employment contract as well as occasional overtimes. For those tasks, the employer would require only normal inducements. However, for additional tasks such as working on Sundays, which are not formulated in the employment contract, the employee would not be prepared to fulfill them. The fulfilling of such tasks would require extraordinary inducements on the part of the employer (Schermerhorn et al, 2002).

2.7.4 The Social Exchange Theory

The employee-employer relationship has constantly been considered as a social exchange process “based on the norms of reciprocity” (Gouldner, 1990) and shared support (Blau, 1964). Shore and Barksdale (1998) described social exchange theory as one where the employment bond is valuable if “degree of balance” in the employee-employer responsibilities is present. Moreover, according to Meyer and Allen (1997), if there is such a balance in the relationship that is maintained between the employer and the employee, employees will aspire to get monetary and socio-emotional rewards from the organisation in exchange for their skills, effort and commitment. This tends to say that social exchange theory involves psychological processes which shaped attitudes and behaviours of employees which will consequently affect organisational performance (Shore and Barksdale, 1998; Rousseau, 1995).

Social exchange exists to an extent in most employee-employer agreements (Shore and Barksdale, 1998). Several research papers have recognised the raisons d’etre of the social and economic exchange (Blau, 1964). According to Haas and Deseran (1981), economic exchange is the overt exchange of the resources in contrast to the social exchange which involves continuously providing efforts and support to each other through unspoken contributions. Blau (1964) also affirmed that these resources are “exchanged voluntarily” and “general expectation of reciprocity”. Moreover, this social exchange tends to create a positive result (Gouldner, 1960).

Besides, it is to be noted that social exchange is relevant to the relational rather than the transactional aspect of the psychological contract (Turnley et al. 2003; Robinson and Morisson, 1995). Thus, the relational is said to anticipate “affective, attitudinal and behavioural” employee’s reactions (Turnley et al. 2003; Robinson and Morisson, 1995). Besides, social exchange has been said to be linked to perceived organisational support (POS) and trust (Dirks and Ferrin, 2002)

However, various authors suggested that trust and commitment together are essential psychological intermediaries between “perceived employer contributions and employee reciprocity through organisational citizenship behaviour (OCB)” (Hornung and Glaser, 2010). Hornung and Glaser (2010) also suggested that trust should be the main concern before commitment for employee’s mental models of social exchange. As maintained by Konovsky and Organ (1996), trust can shape positive employee attitudes going beyond the explicit aspect of the economic exchange. Molm et al. (2000) believe that having trust in the other party induce him/her to behave in a specific way which consequently create positive feelings in him/her and compel the latter to reciprocate. This means that each party is compelled to “help those who have helped them” (Gouldner, 1960). Suazo and Turnley (2010) stated that a party will voluntarily engage into exchange relationships if he/she believes that the other individual involved in the process will provide its promised resources in the future.

Perceived organisational support (POS) involves the aspects of various social exchange theory (Blau, 1964). The POS concept illustrated the employee’s insight in terms of the organisation’s obligations to the employee (Eisenberg et al., 1986). According to the authors, the POS involves the experiences of the employee and this eventually creates attributions such as “the benevolent or malevolent intent of the organisation’s policies, norms, procedures, and actions as they affect employees” (Eisenberger et al., 2001)

According to Suazo and Turnley (2010), “employees high on POS believe that the organisation cares about them and values their contributions”. High POS employees are liable to increase the “affective commitment” and commitment to the organisation in contrast to low POS employees (Suazo and Turnley, 2010). Furthermore, it has been found that high POS employees possess high convictions that more efforts provided will result to increased rewards compared to low POS employees (Suazo and Turnley, 2010).

2.7.5 Rousseau’s model of Psychological Contracts

Rousseau proposed a model of contemporary psychological contracts which includes the transactional and relational contracts. The two factors of the model are time frame and performance requirements:

Time frame refers to the duration of the employment relationship

Performance requirements are the prerequisites of performance as a condition of employment.

The model creates a framework of four possible types of contract:

a) Transactional: short term, specified performance

Since employment arrangements are of a limited duration, and are mainly centered on economic exchange; this creates specific and narrow duties, limited employee involvement, distrust, uncertainty, and instability in the workforce along with the possibility of high turnover.

b) Relational: long-term, non-specified performance

Long term employment founded on mutual trust and loyalty where rewards are based more on membership and participation in the organisation than merely on performance.

c) Transitional: short-term, non specified performance

It is not a psychological contract form itself but a condition where ideas are drawn from the consequences of organizational change and transitions that are in conflict with previously established employment conditions.(Rousseau, 1995)

d) Balanced: long-term, specified performance

Dynamic and open-ended employment arrangements formed on economic success of organisation and employees’ opportunities to develop career advantages. Both employees and organisation contribute to each other’s learning and development. Rewards based on performance and contribution to organisation’s comparative advantages, example changing demands.

A balanced contract is the hybrid of the relational and transactional contracts where shared values and commitments are present together with the need to attain specific business goals. (Rousseau, 1995)

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