Study And Definition Of Psychological Contract Management Essay

There are two types of contract in an organization, a formal contract and a psychological contract. To understand the psychological contract in an organization, the analysis will be carried out by the author to discuss the relevance in the business context.

The psychological contract is all about the expectation for both sides in a relationship. It is mainly used to describe the relationship between employees and organization about their expectations from each other. Over the time, a lot of researches have been done including journal, books. Lots of critical views of points have been mentioned since the past few years drew the attention.

How can we understand the relationship between employer and employee? What determines the give and take of such relationships and what happens when they go wrong? And what challenges are they facing in the changing environment? These are the questions to be addressed.

Definition of psychological contract:

The term ‘psychological contract’ was first used in the early 1960s, but became more popular following the economic downturn in the early 1990s. It has been defined as ‘…the perceptions of the two parties, employee and employer, of what their mutual obligations are towards each other’. These obligations will often be informal and imprecise: they may be inferred from actions or from what has happened in the past, as well as from statements made by the employer (

For example, some of these obligations may be seen as an expectation for employees from a recruitment process and on the other hand, they may be seen as a promise for employers. They are usually believed to be a part of the relationship between the employers and employees.

The most widely accepted definition is Rousseau’s (1995):

The psychological contract is individual beliefs, shaped by the organization, regarding terms of an exchange arrangement between the individual and their organization.

The psychological contract is the unwritten expectations of the employer and employees. Schein (1988) suggested that it actually included three different kinds of expectation from the employee:

the need to be treated fairly

the need for security and certainty in return for loyalty

the need for fulfillment, satisfaction and progression

Different authors define the psychological contract from different perspectives on what it is and what it is to do. There are some major thought of psychological contract. First, ‘obligations’ from both employers and employees have been emphasized by some authors. Second, ‘expectations’ have also been mentioned in others’ researches about what are the both parties expecting the other to deliver during the employment.

Table 1: The Content of the Psychological Contract

According to employees – what employees can expect from their organization

Safe and congenial environment (15.0%)

Fair and equitable pay with respect to market and across the company (11.9)

Fairness in selection, appraisal, promotion, redundancy (10.8)

Providing adequate training (9.6)

Providing job security as much as is possible (9.6)

According to employees – what organizations can expect from their employees

To work contracted hours (32.1)

To do a good job in terms of quantity and quality (19.4)

To be honest (15.2)

Self-presentation – dressing and behaving correctly (10.5)

Flexibility – willing to go beyond job description when required (10.1)

According to managers – what employees can expect from their organization

Fairness and consistency of benefits (16.4)

Humanity, acting in a responsible and supportive manner (14.3)

Fairness in selection, appraisal, promotion, redundancy (12.9)

Recognition for special contributions (10.8)

Safe and congenial environment (8.7)

According to managers – what organizations can expect from their employees

To work contracted hours (28.1)

To do a good job in terms of quantity and quality (22.3)

To be honest (16.9)

Loyalty – staying with the organization and putting its interests first

Flexibility – willing to go beyond job description when required (11.6)

Source: Adapted from Conway and Briner (2005): 41, drawing on survey by Herriot, Manning and Kidd (1997)

It is not easy to define the psychological contract and also not easy to describe the content. Follow this result of survey from Herriot, Manning and Kidd (1997) in UK’s employees and managers and asked each group what employees can expect from their organization, and what the organization can expect from their employees. It shows that psychological contract can be related to the Guest’s (2002) model.

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Table 2: Guest’s model on Psychological Contract




employee characteristics


employee behaviour

organisation characteristics



HR practices



The function of the psychological contract:

The function of the psychological contract has been stated in so many ways by different persons in different years. Such as:

‘Psychological contracts represent an essential feature of organisational life, serving to bind individuals and organisations together and to regulate their behaviour’ (Robinson, Kraatz, & Rousseau 1994).

‘The psychological contract acts to sustain the employment relationship over time’ (Rousseau & Wade-Benzoni 1994).

‘The psychological contract enables the human side of organisations to function smoothly and is particularly important in times of uncertainty and risk such as during corporate restructuring’ (Morrison 1994).

‘Psychological contracts act in a similar manner to hygiene factors. Good contracts may not always result in superior performance but poor contracts tend to act as demotivators and can be reflected in lower commitment and heightened absenteeism and turnover’ (Sparrow 1996a).

Psychological contracts help to accomplish two tasks – i.e. they help to predict the kinds of outputs employers will get from employees, and they help to predict what kind of reward the employee will get from investing time and effort in the organisation (Sparrow & Hiltrop 1997).

As described by Sparrow and Hiltrop, the psychological contract could be the major part of the organization in employment relationship. A step further, the “predict” as mentioned in the text could be a way to motivate. And it is also related to the job satisfaction for employees. The psychological contract gives both employees and employers expectation on their employment contract. Good results often carried out when the employees met their satisfaction, after experiencing the positive feedback from the employer, job satisfaction level would go up, the commitment from employees and morale both raise as well. Thus, it will lead to a higher loyalty to the employers.

There could be some commitment during the employment contract:

Table 3: commitment in employment

Employees promise to:

Employers promise to provide:

Work hard

Pay commensurate with performance

Uphold company reputation

Opportunities for training and development

Maintain high levels of attendance and punctuality

Opportunities for promotion

Show loyalty to the organisation

Recognition for innovation or new idea

Work extra hours when required

Feedback on performance

Develop new skills and update old ones

Interesting tasks

Be flexible, for example, by taking on a colleague’s work

An attractive benefits package

Be courteous to clients and colleagues

Respectful treatment

Be honest

Reasonable job security

Come up with new ideas

A pleasant and safe working environment


Here is an example of how Prêt à Manger manage their psychological contract:

Table 4: Prêt à Manger’s implied psychological contract

What Prêt à Manger expects from


What people can expect from Prêt à


Reasonably hard working

Get paid as much as we can afford (not as

little as we can get away with)

Good sense of humor

Cosmopolitan atmosphere as a result of

diverse employee backgrounds

Enjoy delicious food

Invest in people training and development

(in-store trainer)

Start early and leave early

Most managers are promoted from within


The table above shows the important content of Prêt à Manger’s psychological contract between the company and its staff.

The promise from the company shows the reasonable hard working to match with affordable pays. And also provides a chance for training and development for employees to get on their careers. Training helps the employees to fit in the company and a future development, as well as it gives a advantage on their performance to reach the standards.

As such a big organization, Prêt à Manger has its employees from all over the world with different cultures. The requirement of ‘a sense of humor’ makes an interesting environment to work as well as its customers. Equal-opportunity policy therefore is an important factor at the workplace. The company requires people to come at 6 am or 6.30 am to prepare freshly hand-made sandwiches and salads to sell during the whole day. At the end of shift, the products which left will go to a local charity store, sandwiches or salads will be sent to homeless or poor people to support their lives. This is also one of the company’s goals, carrying out social responsibility.

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Psychological contract breaches:

Psychological contract breach is a subjective experience, referring to one’s perception that another has failed to fulfill adequately the promised obligations of the psychological contract (Rousseau, 1989).

For example, the psychological contract breach happened when the employers failed to fulfill their promise such as high salary, promotion or long-term job security and so on.

Coyle-Shapiro and Kessler (2000) described the situation that occurs when the psychological contract is breached. The results of their research show that, when a breach occurs, employees experience an imbalance in the contract and hence react to address that imbalance. Their perception is that the employer has not adhered to its side of the contract, and hence employees reduce their adherence to the contract by reducing their commitment and their willingness to become engaged with the organization.

Morrison and Robinson (1997) pointed out, “Whereas equity is evaluated by considering ratios of inputs and outcomes, breach of contract is determined by comparing inputs and outcomes relative to what was promised.”

However, sometimes the promise could be partly broken. For example, a store general manager was recruited to make all the decision in store and when some new systems were introduced into this company and he was on his vacation, since he came back, was only asked to make part of the decision. This could still be the situation for him to accept but may result in a change of his working attitude as well as job satisfaction.

If the organization wants to be successfully maintaining their good psychological contract, then it is essential to understand how it is breached. The understanding will then give the benefit to management to attempt to improve the business.

Employees’ trust

As the research has been taken to the impact on organizations of psychological contract breach, Rousseau (1989) argued that the intensity of the reaction to these violations results not only from unmet expectations of entitlements but also from more general beliefs about respect of persons, codes of conduct and other patterns of behavior associated with relationships, involving trust.

Robinson (1996) defined the trust as:

One’s expectations, assumptions or beliefs about the likelihood that another’s future actions will be beneficial, favourable, or at least not detrimental to one’s interests.

Robinson (1996) suggests that trust plays a significant role in the subjective experience of psychological contract breach by one’s employer. Robinson claims that employees with low levels of trust are likely to be more vigilant in identifying breaches and more likely to perceive a breach even when there is none because such a finding would be consistent with low levels of trust. Lack of trust results in employees losing confidence that their contributions will be reciprocated as promised by the employer (Robinson 1996).

Psychological contract as motivation methods

As Maslow defined in 1954, the motivation in an organization is based on people’s needs. He defined as 5 stages of needs from basic needs to self-actualization.

Table 5: Maslow’s Hierarchy of needs:


Within the organization, employees are expecting the repay from the company as an exchange of their contribution. The psychological contract breaches happen when one party fails to deliver the promise. On the other hand, the psychological contract can be a major influence on employees’ loyalty. Employees get what they expected from the day they joined. Increasing level of job satisfaction helps them to improve their performance at work. And also senior employees feel more responsible for the job and the company as they know the quality of their work impact on their feedback from organization.

The development of psychological contract

Potential employees and employers enter into an employment relationship with some expectations. These expectations will influence the development of the psychological contract. Shore & Tetrick (1994) suggested that the dynamic nature of the interaction between the parties to the contract, together with organizational goals and environmental conditions and the goal orientation of the individual, influence the development of the psychological contract

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Following an employment relationship with employers, the employees will find some information from different channels, such as they gained the information from the recruiting process, terms of contract, job description, and so on. The employees will have a general understanding to create an individual thought of their obligations and entitlements. That is the process for employees to have a psychological contract with organizations.

There is a linkage between the organizational goals and psychological contract. Under the developing of economy and changes happened in organizations, some large and stable organizations’ goals can lead to a development of their obligations in employment contract. Employees normally apply a job to match own objectives and it can cause a mismatch between what organizations expect and what employees deliver. On the side of employees in psychological contract, it is often held on from the time of hiring, the efforts that employees make is not matching with the new organization goals. And it is also able to form around with the time of serving the organization and changing in organizational culture.

On the other hand, psychological contract can also be used as a powerful method to improve employees’ behavior and business performance.

Schein (1988) proposed that the psychological contract can influence behavior as:

Though it remains unwritten the psychological contract is a powerful determiner of behavior in organizations.

The case of UK retail brand “John Lewis” can be an example here. A special feature of John Lewis is that the company is owned by its employees as a partnership. While many of UK major high street brands were affected by the recent crisis, John Lewis is still continuing the growth and increasing the sales,

John Lewis is owned by its 63000 permanent employees and it explains on the website:

Commitment of partners to the business at John Lewis is a unique source of competitive advantage which has fuelled 75 years of profitable growth and a reputation amongst customers and supporters unparalled in UK retail industry. (

Table 6: John Lewis’s psychological contract:

What John Lewis expects from partners

What partners can expect from John Lewis

Exceptional quality of customer service

Collective Responsibility – treat colleagues fairly and with respect

Propose new ideas and use skills and knowledge to assist the organization

Honesty and integrity towards colleagues and customers

Competitive pay, bonus based on business success and discounts for staff purchases

Work as a co-owner of the business – with staff committees involved in key decisions

Fair and equal opportunities, and wherever practicable promote from within

Loyalty holiday and leisure facilities in Lake District, Poole Harbour, and so on

The difference in psychological contract for John Lewis is not regarding employees and organization. Partnership makes one partner has the psychological contract with all other partners. This kind of psychological contract drives the employees feel more responsible, makes them a different behavior and also more respective to colleagues to create a team efficiency. Employees focus more on serving and treating customers then expect to share the benefit of business growth.


Over the past few years, psychological contract has played a very important role in the development for businesses.

The psychological contract, as a summary, refers a unwritten expectation between employees and employers. The employees expect a number of things such as pays and personal support and development. Organizations expect the loyalty from people at work, as well as the way they work to reach the results.

The psychological contract can be affected by the changing of organizational culture and goals as Rousseau defined the psychological contract as an individual belifs. The expectations from both parties can be influenced by development of the organization and the challenges they are facing.

Both employers and employees admitted that the psychological contract today is changing. Employees no longer consider about the job security as the only factor in their careers. Flexible time of work and self development are getting more and more respect in the relationship. Organizations think the people can be a major factor of their success. People start changing the way they work. And employers start changing their psychological and written contract for potential employees to achieve a higher standard at work.

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