The term psychological contract has been around since the 1960s and was first used to capture the relationship between a work group of employees and a plant foreperson in terms of what the two parties exchanged in their relationship (acceptable wages and job security in return for higher productivity and lower grievances). This initial definition of the psychological contract is similar to what is currently known as normative contracts. A number of other definitions of the psychological contract subsequently appeared, giving rise to different views on what the psychological contract was capturing. For example, the psychological contract was defined as mutual expectations, an implicit contract, and a set of unwritten expectations between an individual employee and the organization. While the early work on the psychological contract was characterized by disagreement, since the late 1980s there seems to be broad consensus that the psychological contract captures an individual’s perception of the mutual obligations that exist between that individual and another party.
In the context of the employment relationship, psychological contracts encompass what employees believe their employer has promised to provide in return for certain employee contributions. Whether the employer fulfills these obligations is contingent upon the employee fulfilling its obligations to the employer. For example, an employee may believe that the employer has promised to provide long-term job security, career development, interesting work, and competitive rewards in return for employee loyalty, flexibility, and meeting the formal requirements of the job (in-role performance) as well as going beyond the formal requirements of the job (extra-role performance). Consequently, the degree to which an employee receives career development, competitive rewards, and so on is dependent upon the extent to which the employee performs at the required level, is flexible, and so on. The terms of the psychological contract may be unspoken and unwritten, and there may not be agreement between the employer and employee regarding the obligations each has to the other.
A distinguishing feature of the psychological contract is its focus on contingent obligations whereby one party (the employee) must fulfill its obligations in order to receive promised benefits from the employer. As such, providing a safe work environment or treating employees fairly in terms of the procedures adopted to make decisions or interpersonally through the enactment of those procedures would fall outside the realm of the psychological contract; in most cases, these obligations are deemed universal, that is, the employee should not need to fulfill any obligations in order to be treated fairly or to have a safe working environment.
Types of Employment Contracts
Psychological contracts sit alongside other types of contracts such as social, legal, normative, and implied contracts. However, the distinctive focus of the psychological contract on an individual’s perception of mutual obligations differentiates it from social contracts that reflect culturally shared beliefs regarding the appropriateness of behavior within a given society. Legal contracts require objective evidence that contractual obligations exist—an acknowledgment by the parties to the contract or a judicial determination that an offer was made and accepted. In contrast to the objective standard required of legal contracts, the psychological contract is subjective; it resides in the eye of the beholder in terms of the perceived obligations that exist between the parties. The employee and employer may not objectively agree on their mutual obligations, but in the employee’s mind, there is a perception of agreement.
A normative contract captures the psychological contract at the group level. In other words, where a group of employees working for the same employer hold a common set of beliefs regarding the employer’s obligations to them and their obligations to the employer, a normative contract exists. The primary difference with the psychological contract is the level at which the contract is captured—normative contracts exist at the group level and psychological contracts exist at the individual level. An implied contract differs from a psychological contract in terms of the perspective adopted—the observer. An implied contract captures the attributions of a third party/outsider regarding the terms, acceptance, and mutuality of the contract in contrast to the “eye of the beholder” perspective adopted by a psychological contract.
Psychological contracts may not be enforceable (in contrast to legal contracts), they reside at the individual level (in contrast to social and normative contracts), and they capture subjective beliefs regarding obligations (in contrast to the objective stance of legal and the third-party perspective of implied contracts). Thus the psychological contract offers a distinctive and complementary lens to viewing “contracts” and in doing so offers a valuable framework for understanding the exchange integral to the employment relationship.
Conceptual Grounding of Psychological Contracts
The theoretical basis of psychological contracts draws on social exchange and the norm of reciprocity. Social exchange involves unspecified obligations such that when one party does another a favor, there is an expectation of a future return. This type of exchange relationship relies on both parties accepting the norm of reciprocity—when one exchange partner provides another with a benefit, there is an obligation on the recipient to return a benefit at some future point. The timing of the benefit and the nature of the benefit are not specified, which requires the donor to trust that the beneficiary will reciprocate at some future point. Because the relationship is long term, the recipient’s willingness to remain obligated to the donor and the donor’s trust in the willingness of the recipient to “repay” serve to strengthen the ongoing conferring of benefits and the discharge of obligations during the course of the relationship. In stark contrast, economic exchanges are tangible and do not require trust, as the investment in the relationship is minimal and time limited.
The distinction between economic and social exchange is paralleled in the literature on the psychological contract where two types of psychological contracts are distinguished: transactional and relational contracts. These contracts can be differentiated based on their focus, time frame, stability, scope, and tangibility. A transactional contract is one where what is exchanged is economic and extrinsic, and it remains static and observable over the specified length of the relationship. An example of a transactional type of contract would be seasonal work where an employee is hired to work for a specific period of time in return for economic rewards. The terms of the contract are tangible and remain static over the length of the relationship, for example, piecework whereby the employee is paid based on the quantity of strawberries picked. Finally, the scope of the contract is narrow where there is little spillover between work and personal life. When the seasonal worker’s shift has ended, he or she has no obligation to the employer, and thus there is little chance that the worker’s employment situation would affect their personal life. In contrast, doctors would be expected to help at the scene of an accident even though they are not on call, and as such, the boundary between work and personal life is porous.
A relational type of contract is manifested in employment relationships where employers hire employees at entry level with the view that they will be developed and remain with the employer until retirement. As the employer cannot specify in advance what an employee will have to contribute under a variety of unforeseen circumstances, the content of what is exchanged will be dynamic over the course of the relationship; it will involve an exchange of tangible and intangible resources that may not be specified and thus contain an element of ambiguity. The boundary between an individual’s work life and personal life is permeable, as the employer provides a sense of identity and self-esteem for employees and thus the employer becomes important to an individual’s self-identity.
Although both types of contracts are extremes, they reflect the potential gamut of types of employment from seasonal work to entry-retirement relationships. Within each, the nature of what is exchanged, the timing of the exchanges, and the perspective of each party to the exchange are very different. In personal relationships, the difference is akin to a “date” and marriage. The two parties in a relational exchange offer a range of benefits (status, love, money, services), have a view that they are entering a long-term relationship that facilitates delayed reciprocation that in turn enhances trust in the relationship.
Changes in the Employment Relationship
Times are changing, and not surprisingly these changes have significant implications for the employment relationship. In particular, two general trends are visible: the decline in a collectivist and legalistic approach to employment relationships and the rise in different types of work arrangements as organizations respond to deregulation, increased uncertainty, and volatility in the economy and the pressures emanating from globalization. Together, these trends have given rise to increasingly diverse employment relationships that inject a degree of ambiguity as to the nature of what is exchanged in the employee-employer relationship.
In many countries, traditional labor laws have become less influential in determining the employment relationship. Declining trade union membership on a worldwide basis and the increasing proportion of individuals being employed in sectors not traditionally covered by labor statutes have resulted in fewer employees’ employment conditions being negotiated on a collective basis and fewer employment conditions being subjected to regulation by legal standards. Even in countries (e.g., Sweden) where trade union membership is among the highest worldwide, there has been a decline in membership and, arguably with it, a decline in collectivistic and solidaristic values.
Parallel to these changes, organizations have come under significant pressure to become more flexible and respond to changing market conditions. Technological advancements have changed not only where work is done but also when it is done, and they have given rise to and facilitated the view of a 24/7 society. In addition, the workforce has become more diverse, and to speak of the traditional male sole breadwinner is no longer appropriate. In addition to facing demands to become more outwardly flexible, organizations are confronted with pressures to become inwardly flexible, where employees themselves are increasingly expecting organizations to be more flexible in terms of the employment conditions being offered (e.g., variation in working hours, support facilities for young children, support for career sabbaticals, working from home part of the working week, etc.).
The need for organizational flexibility is leading employers to adopt more diverse employment arrangements, and this is taking the form of the increasing use of temporary employees, on-call contracts, fixed-term contracts, agency employees, seasonal workers, independent contractors, floats, and part-time workers. The diversity in employment arrangements is evident in a recent Bureau of Labor Statistics report, where 8.6 million U.S workers identify themselves as independent contractors, 2 million as on-call day laborers, 1.2 million working for temp agencies, 0.5 million working for organizations that provide a client service on the client’s site, 23 million as part-timers, and 7 million holding multiple jobs. The complexity of the current changes in the employment relationship is reflected in the rise of employees falling in the domain of multiple agency relationships, in which an employee works for two organizations simultaneously: the agency and the client organization. Furthermore, organizations are adopting greater flexibility in terms of business risks as they transfer some risks to employees through the introduction of profit sharing and profit-related pay schemes, share ownership, and finally differentiate between core and peripheral employees. Concurrently, employees are seeking individualized opportunities that fit their career and work-family relationships and thus are expecting greater flexibility on the part of their employer to provide opportunities for the achievement of these goals.
In the context of changing societal expectations for speedier responses from organizations, the decline in legalistically driven regulatory frameworks, and the ever-decreasing collectivist approach to the employment relations, organizations are faced with the opportunity and pressure to develop idiosyncratic employment relationships with employees. In these changing circumstances, a conceptual framework is needed that allows researchers to explore diverse types of employment relationships, and the psychological contract offers this prospect.
Formation and Development of the Psychological Contract
Individuals begin to form their psychological contracts during the anticipatory socialization phase, at which point their anticipatory contract consists of a naive and imperfect schema about the nature of the exchange. An individual’s contract schema originates in childhood and adolescence, where family, school, peers, and media influences as well as direct interactions with working individuals shape beliefs about what one should give and receive in an employment relationship. An additional influence is past work experience, and together these influences shape the lens through which an individual interprets a new employment relationship. Therefore, when organizational agents involved in the recruitment and selection stage send signals to potential employees regarding what the organization promises to give and requires in return, these cues are being interpreted by employees in the context of their own schemata. Furthermore, individuals’ psychological contract schemas are shaped more implicitly through their inferences about perceived implicit promises made, interpretations of ambiguous or indirect statements, as well as the more subtle cues such as body language or how questions are answered.
Employees bring their anticipatory schema to the encounter stage, and during their first few months at work, they begin to experience what it is like to work in the organization, and this begins to modify their anticipatory psychological contract. During this stage, newcomers engage in a sense-making process where they actively search for information with the view of making their psychological contract more complete and thus reducing the uncertainty and making their organizational experience more predictable. As a consequence of this sense-making process, employees’ perceptions of employer obligations are adapted based on their interpretation of their organizational experience. For example, the promise of rapid promotion during the recruitment stage could be interpreted by the newcomer as promotion within six months, but based on their socialization experience (and more accurate information), they may revise their interpretation as meaning promotion after two years contingent upon an excellent performance rating at the annual performance review. Consequently, individuals may adapt their psychological contract schema as a result of actively searching for information as part of a reality check—a test between the anticipations of and the reality of the organizational experience.
Another process that shapes an individual’s schemata is the norm of reciprocity. Here, employees adapt their psychological contract contingent upon how they perceive the behavior of the employer. Employees may adapt their obligations and contributions based on their perception that their employer has fulfilled its obligations to them. Thus, the ongoing conferring of benefits and discharging of obligations over time is likely to increase the number and diversity of the obligations exchanged as individuals attempt to create a positive imbalance, thus alleviating the tension associated with being in debt to the other party.
Once an individual’s psychological contract schema is fully developed and reality tested, it becomes highly resistant to change, and individuals will take steps to preserve their initial schemata rather than fundamentally revise their contract. However, a fundamental revision may be necessary when organizational circumstances dictate a drastic change in its exchange relationship with employees. For example, in response to severe competitive pressures, organizations may consider moving a group of employees from permanent employment status to a contingent one or outsourcing the function to a different organization. Thus, an employee’s contract schema that included job security, career development, and support in return for loyalty and performance may be irrevocably challenged.
Organizational agents may hold different psychological contract schema in terms of what is promised to employees and what employees are required to contribute in return. Thus, while employees may be experiencing contract breach (e.g., as a consequence of moving to contingent status), organizational representatives may not have held the same schemata, and hence the divergent views and experience is a consequence of incongruence.
Incongruence arises when the two parties to the exchange have different perceptions regarding each other’s obligations and the extent to which those obligations have been fulfilled. In other words, the employer and employee may disagree on whether an obligation exists or the specifics of that obligation. For example, both parties may agree that the employee is obligated to work overtime when needed, but the extent of the overtime and whether the overtime is compensated may be subject to differing perceptions. Consequently, incongruence can lead to either party perceiving that the other has not fulfilled one or more obligations, and this occurs as a consequence of both parties having a different perception regarding the existence and or meaning of the obligation. Organizations, therefore, need to take steps to minimize the occurrence of incongruence and hence reduce the likelihood of the resultant perception of contract breach.
Organizations can attempt to manage incongruence in a number of ways. First, they could take steps to ensure greater consistency in the signals sent by different organizational agents. For example, during the recruitment process when employees are forming their psychological contract, recruiters need to exercise caution that they don’t make promises that others in the organization cannot fulfill or have no intentions of fulfilling (i.e., provide realistic job previews). Therefore, organizations need to ensure coordination and communication among agents to increase the likelihood of employees receiving similar messages irrespective of the source.
In addition to consistency in communication, organizational agents can communicate with employees on a regular basis to discuss mutual obligations. Frequent regular communications can serve as a mechanism for the adjustment of obligations and provide the opportunity to discuss and resolve divergent views. Agents may also influence employees’ attributions of why they did not receive what they were expecting through communication—adequate justification for a decision can mitigate the effects of contract breach or reduce the likelihood of breach occurring. The use of formal and informal communication channels can serve to increase agreement between organizational agents and employees concerning their mutual obligations and the fulfillment of those obligations, thereby reducing the subsequent development of contract breach due to differing perceptions.
Consequences of the Psychological Contract
A central thrust of much of the research on the psychological contract has focused on its consequences on employee psychological and behavioral outcomes. Specifically, researchers have examined the consequences of perceived contract breach that can occur as a result of incongruence or reneging. The latter reflects an employer’s unwillingness or inability to fulfill its obligations to employees. An employer may be unwilling to deliver on a promise to promote if the employee has underperformed or an employer may not be able to deliver on a promise of job security due to financial pressures.
The empirical evidence is strongly supportive of the negative consequences of perceptions of psychological contract breach. In terms of psychological outcomes, contract breach is associated with reduced employee obligations to the employer, lower trust in the employer, reduced affective commitment to the organization, greater intention to exit the organization, increased commitment to trade unions, and increased cynicism toward the subsequent employer. Empirical research has established a link between psychological contract breach and behavior: perceptions of breach are associated with reduced in-role and extra-role performance, less fulfillment of employee obligations, and increased acts of retaliation against the organization. Irrespective of the type of employee or cultural setting, the empirical evidence is reasonably clear: When employees perceive that their employer has broken a promise to them, negative consequences occur. However, the intensity and nature of these consequences may vary across individuals and situations.
Individual dispositions play a role in how individuals interact in exchange relationships. Some individuals will contribute to the organization contingent upon how well they perceive the organization as treating them. These individuals who are high on exchange ideology will contribute to the organization as long as they believe their employer is fulfilling its obligations. On the other hand, individuals who are low on exchange ideology will continue to contribute to their employer even if they feel they have been treated badly or unfairly. Individuals will also vary in terms of the degree to which they have internalized the norm of reciprocity. Individuals who are high on creditor ideology will “overpay” the employer for benefits received. These individuals do not want to be in debt and thus will return benefits to the employer to a greater value than the benefits received. Individuals who are low on creditor ideology are likely to “underpay” the employer for benefits received. Similarly, individual dispositions are likely to affect whether individuals perceive a contract breach. Individuals who are high on self-esteem and who are “entitleds” are more likely to interpret the slightest discrepancy as a psychological contract breach. These types of individuals are more likely to think that they have fulfilled their obligations to their employer and that the employer has not adequately fulfilled its side of the exchange.
How employees react to contract breach is not solely dependent upon their dispositions but also the justice context in which the breach occurs. Organizations can mitigate the effects of contract breach by providing a credible justification for the breach (interactional justice). For example, a pay freeze is a consequence of the severe financial situation of the organization. Organizations can also conform to the tenets of procedural justice (e.g., bias suppression, advance notice, appeals mechanism, representativeness) in breaching an individual’s psychological contract. Therefore, in the case of the pay freeze, it is applied consistently throughout the organization, giving advance notice and allowing employees to appeal the decision. Finally, distributive justice may come into play after a contract breach as a way of honoring the spirit but not the letter of the contract. In this case, the organization substitutes a benefit in lieu of the broken promise (e.g., increasing entitled vacation time). Therefore, different facets of justice have a role in the breaking of promises but also in minimizing the effects of broken promises.
Significantly less research has been conducted on how employer representatives react to employee psychological contract breach; in this case, the employee has not fulfilled his or her obligations to the employer. The little research that does exist points to managers, as organizational representatives, rating an employee lower on performance and organizational citizenship behavior when they perceive the employee as having breached his or her obligations to the employer. Therefore, it looks as if negative evaluations follow the perception of breach by either party in the exchange relationship.
Career Management Implications
Many psychological contracts theorists have argued that a “new deal” is emerging in the employee-employer relationship in response to the increasingly diverse pressures facing organizations. As organizations are no longer in a position to offer job security and a “career for life,” they are emphasizing flexibility and employability. Thus, job security is being replaced with job security based on an individual’s value in the marketplace. Although individuals may no longer have a job with the same organization, as a result of their value they will have a job with an organization for their working career. As a consequence, organizations are emphasizing giving employees the opportunity to develop a broad range of skills, and in return employees must be willing to change jobs and become more flexible. This in turn will increase their marketability and hence their future employability in the marketplace.
The implication is that the nature of careers is changing as well as the view of what constitutes career success. In place of a linear trajectory within a single organization is the idea of a “boundaryless career” in which individuals may have a number of employers and a number of jobs within the life of their career. Therefore, career success is defined (among other criteria) as one of individual marketability, where an individual is able to add value to the existing organization and concurrently is deemed marketable by external organizations. In this respect, the goal of managing individual careers becomes one of remaining employable throughout one’s career.
Who, therefore, is responsible for career management in organizations? Traditionally, organizations took responsibility, and organizational career management was planned and managed by the organization. The type of formal activities may range from training courses to mentoring. Therefore, it was the organization that was responsible for facilitating and managing the careers of its employees. However, the onus of responsibility is shifting toward individual employees, where employees are increasingly expected to self-manage their own career. This clearly places greater ownership on employees to take steps to manage and promote their own career. Employees, therefore, need to engage in continuous improvement in their own job and take steps to increase their preparedness for job mobility. Thus, the deal has changed from a guarantee of a career to the opportunity to have a career.
The implications for the exchange relationship are quite clear—”It takes two to tango”—and organizations need to offer different career management interventions in return for employees proactively managing their own careers and implicitly being self-starters, flexible, and adaptable to new experiences. Thus the responsibility for career management lies with the two parties to the relationship, and the idea that the employee is the passive recipient of organizational career management interventions is slowly becoming outdated.
Organizations need to offer a different set of career supportiveness practices such as providing opportunities for employees to develop their skills, build internal and external networks that will increase their social capital, and develop mentoring relationships. The benefit to an organization is having an enhanced knowledge base and also having externally marketable employees who will increase the quality of its applicant pool. In return, employees need to take advantage of the opportunities provided by the organization and concurrently create further opportunities to enhance their marketability to any organization by engaging in networking activities internal and external to their organization. Furthermore, in taking responsibility for their own career, individuals need to consider expanding and updating their portfolio of skills so as to remain an attractive investment to their current employer and marketable to external organizations. To draw an analogy, lifelong marriage has been replaced by serial monogamy.
The implications of the changing nature of careers for the psychological contract is that organizations need to exercise caution in the promises they make to employees, particularly during the recruitment stage, to avoid perceptions of contract breach in relation to career issues arising at some future point in the relationship. When employees join the organization with traditional career expectations in mind, organizations should take steps to ensure that when newcomers undergo their reality check, their expectations of what the organization is willing to do to assist employees in developing their career is explicitly, consistently, and accurately communicated. This will facilitate congruence between employees and employer representatives and help avoid the consequences associated with perceptions of contract breach relating to career management.
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