Theory of Psychological Contract - Essay Example

Organisational Behaviour: Theory and Practice Theory of Psychological Contract: Critical Analysis and Usefulness in an Organizational Context Introduction Times change and the way organizations adapt to changes determines how successful they will be. Therefore, a number of new concepts related to managing employees has appeared in the recent decades. Among them is the theory of psychological contract. This concept has been widely discussed by the scholars lately and showed to have certain impact on the overall performance of an organization. Psychological contract is believed to have a direct influence on employees’ commitment, satisfaction and, consequently, individual performance (Guest and Conway, 2004). Individual performance, in its turn, is directly related to the overall organizational performance (Purcell, Kinnie and Hutchinson, 2003). As Purcell et al. (2003) state, organizational performance is directly related to the relationship between employee and employer, and employee’s satisfaction and commitment in particular. However, in order to determine why a healthy psychological contract between an organization and its employees is important to the organization’s effectiveness, and whether it is useful in an organizational context, it is necessary to build a clear definition of what a psychological contract is. For this purpose it is important to scrutinize and evaluate the underlying theoretical assumptions that underpin the theory of psychological contract. Therefore, the goal of this paper is to subsequently address the main conceptual and theoretical issues surrounding the theory of psychological contract, as well as to comment on the validity, reliability, and predictability of the theory of psychological contract that may contribute to understanding of organizational success and failures. Defining Psychological Contract The theory of psychological contract is varied, deep and has been a subject to a whole range of theoretical studies and interpretations since its emergence in the 1960s. Therefore, this concept can be viewed as relatively new and its definition is one of the main theoretical complexities. Different authors define the psychological contract differently. While some emphasize upon the importance of the agreeing parties implicit obligations toward each other, others emphasize upon the need to comprehend the expectations of people from the employment. There is yet another school of thought that considers reciprocal mutuality to be a fundamental determinant of the theory of psychological contract (Atkinson et al. 2003; Rosseau and Tijoriwala, 1998). Though the scientists are still arguing on what exactly psychological contract is, the classical definitions state that psychological contract is either “the perceptions of both parties to the employment relationship, organization and individual, of the reciprocal promises and obligations implied in that relationship” (Guest and Conway, 2002, p.1) or “an individual’s belief in mutual obligations between that person and another party such as an employer” (Rousseau and Tijoriwala, 1998, p.679). A quite similar definition have Hall and Moss (1998), who claim that psychological contract consists of the mutual expectations in the employer-employee relationship. So, it can be assumed that a psychological contract primarily refers to the relationship between an employee and an employer and is integrally linked with the mutual expectations of the employee and the employer regarding the inputs and outcomes of each other’s activities. At the same time, it seems that the concept of psychological contract is more related to employees, because organizations, as employers, cannot have any beliefs or expectations. People are the ones who have them. That is why a psychological contract is traditionally viewed from a standpoint of the employees’ feelings. However, in order for it to be understood in entirety, the perspectives of both, employees and employers, should be considered. In an organizational context, the psychological contract is simply the balance or fairness, as visualized by the employees, between the effort employees make in a job and the way they are treated by the employer. Even more interesting is that, according to George (2009) a psychological contract refers to the promises that, as employees believe, were made to them by the employing organization even before an employee joined the organization” (George, 2009). Levinson et al. (1962), for instance, explained the psychological contract as “a series of mutual expectations of which the parties to the relationship may not themselves be dimly aware but which nonetheless govern their relationship to each other” (Levinson et al., 1962, p. 21). These mutual expectations between employees and their organization may, according to Schein (1978), cover such aspects of employee-employer relationships as privileges, rights and obligations of both parties that are not prescribed by the official contract an employee signs when joining an organization. This lays the basis of the idea that employee dissatisfaction, labour unrest and employee alienation originates from the psychological contract breach by one of the parties. Such a violation of the contract may be related to issues like working hours, compensation or employment conditions. If, for examples, an employee expects to be paid for working extra hours, but is not compensated for them, he or she might feel frustrated and insecure, since one’s expectations were not met. In either case, a psychological contract might be described as an unwritten agreement between management and employees that outlines how both parties see and understand their cooperation. Psychological Contract vs Legal Contract Various researchers and theorists including Boxall and Purcell (2003) and Guest (2004) to date have attempted to evaluate the extent to which the psychological contract can be justifiably considered a contract. In the conventional legal terms, the term contract means an agreement between two or more parties or its outward appearance for the least. However, considering the orientation of the psychological contract toward the subjective perceptions, it seems problematic to locate a zone of acceptance or reach an agreement. In other words, the point at which the psychological contract may be discussed effectively between an employee and an organization is hard to pin down. It becomes even more of a problem when the contract is visualized as a kind of an on-going process (Herriot and Pemberton, 1997). A legal contract, as opposed to a psychological contract, is a clearly stated formal document. Breach of such a contact may lead to one party’s seeking enforcement in court. If, however, there occurs a breach of a psychological contract, what an aggrieved party can do is to either withhold contributions or withdraw from the relationship (Spindler, 1994). The parties bound together by a legal contract agree to the contract’s terms and conditions and know what their individualistic and collective rights, duties and responsibilities toward one another are. In case of a legal contract, no alteration or amendment in the contract can be done without the mutual consent of the involved parties. On contrast, a psychological contract is subject to no contractual obligations or restrictions primarily because it results exclusively from the subjective feelings and expectations of the contracting parties that have not been voiced out. In other words, as Shore and Tetrick (1994) suggests a psychological contract covers the ‘hidden’ aspects of the employer-employee relationship. Psychological contracts also differ from legal contracts because the parties may have different expectations towards the employment relationship and, in most cases, just of few of such expectations are likely to be discussed. Unlike the terms of a legal contract, most of the expectations determined by a psychological contract are inferred only, and are likely to change with time (Rousseau, 1990; Sims, 1991). For instance, it is a psychological contract between employees and an organization that the performance of each employee would be judged fairly and in an unbiased manner by the management and the increments would be assigned to the individual employees accordingly. Importance of Healthy Psychological Contract to Organization’s Effectiveness It is rather well-know that a happy and satisfied employee is a good worker. Consequently, good employees that show loyalty and devotion to their companies must have all their needs met and, thus, be happy. This is, according to Cyril van de Ven (2004), one of the major goals of a psychological contract. It, according to the researchers, reduces employees’ insecurity regarding their jobs. Since it is physically impossible to state all the aspect of the employee-employer relationships in a written contract, a psychological contract helps by means of filling the gaps in the official one. A psychological contact, consequently, helps employees to evaluate and measure their obligations to the company, as well as the company’s obligations to its employees. So, if an employee believes that both parties fulfil their obligations, he or she is likely to show positive behaviours that contribute to the quality of his or her job performance (Chartered Institute of Personnel and Development, 2005). Another important function of psychological contract is giving employees the feeling that they have some power over events within the organization (Anderson and Schalk, 1998). This means that with the help of a psychological contract employees perceive the interrelation of roles and events as something they have agreed upon and have control over. As a result, even their self-esteem gets higher, since they believe it were they who had the major influence on certain events or attitudes. Therefore, psychological contracts help employees to determine and influence their roles within an organization on the basis of the belief that they are a part of the contract and have a right to decide whether to carry out their part of the obligations (Shore and Tetrick, 1994). So, if the psychological contract does not get broken, the employee will feel secure in the job. In addition, he or she will be performing well, thus fulfilling own obligations on the contract in response to the company’s fulfilling its obligations on the psychological contract. Consequently, when employees perform their jobs well, the organization in general becomes more effective. A healthy psychological contract ensures that employees are satisfied with their jobs, loyal to the organization, have adequate work-family balance, and feel fair treatment form the side of the employer (Sturges et al., 2005). As a result, the company gets reduced employee turnover and absenteeism, as well as improved individual and organizational performance. This point of view is, though not fully, supported by Sparrow (1996), who argues that healthy psychological contracts do not always result in superior performance. However, if the contact is poor, it is definitely sure to demotivate and, consequently, lead to poor commitment and high rates of absenteeism and turnover (Sparrow, 1996). One more role of a psychological contract is described by Robinson, Kraatz and Rousseau (1994), who outline that among the contract’s functions is that of binding people and organizations together and regulating their behavior. This helps the human side of the company to work smoothly and, as a result, potentially minimize possible negative effects of a change, which, of course, brings uncertainty and risk (Morrison 1994). A psychological contract, thus, provides both employees and employing organization with some predictability of each other’s behavior. Such predictability, according to (Vroom 1964), is directly and positively related to motivation: an employee is more motivated to perform well if he or she can predict that the good performance will result in positive and desired outcomes. Together with sense of control provided by a psychological contract, predictability helps to minimize stress at the workplace and to develop trust (Sutton and Kahn, 1986; Morrison 1994). Practical Usefulness of Psychological Contracts Although a psychological contract between an employee and an employer is very subjective and leads to a lot of doubts and confusions in a vast majority of cases, yet its usefulness in certain circumstances cannot be denied. One of the examples of practical usefulness of a psychological contract is situations where the tasks are too small to make a legal contract in written form for. According to Cheung and Chiu (2005), when the employer’s obligations on a psychological contract are fulfilled and the employees received more than they expected, their task performance increases along with job satisfaction and organizational commitment. Considering this it can be assumed that such a satisfied employee, whose expectations are met or exceeded, is more likely to perform better. For instance, when an employer sends such an employee to fulfil a small task, which, although is just a part of the job, is not recognized in the legal contract, the employee functions according to the psychological contract simply because it is more feasible. Furthermore, a satisfied employee may as eagerly carry out a small task that is not a part of his or her legal job obligations. This idea is also supported by Conway and Briner (2002), who outline that fulfilment of a psychological contract by the employer increases employees’ levels of affective commitment, task performance and attachment to the manager (supervisor). This attachment, expressed in a form of positive supervision experience, results in reduced possibility of contract breach. The formed commitment between an employee and an employer reduces the perception of contract breach due to incongruence (Morrison & Robinson, 1997). Furthermore, it reduces the level of turnover intentions, which also has a positive effect on organizational performance (Conway and Briner, 2002). Another important practical application of the psychological contract concept is when decisions have to be made in urgent circumstances or, more precisely, when an organization is facing a change. In such a situation employees are forced to change their psychological contract with the company (Chreim, 2002). This, as a result, may lead to losing a feeling of job security (Anderson and Schalk, 1998). Uncertainty that arises from this process leads to the feelings of anxiety and loss, which are very likely to have a negative impact on motivation and commitment, and, consequently, organizational performance. Chreim (2002) also points out that introducing changes and innovations makes employees change their attitudes and behavior. This, in its turn, leads to the fear of unknown and desire to get back to the old ways. So employees’ uncertainty, anxiety and feelings of loss are the factors that evoke resistance to change and raise the possibility of company’s abandoning that change. Therefore, Chreim (2002) recommends organizations to improve their communication strategies and channels before attempting to implement a change in order to change the psychological contract smoothly and effectively. Improved communication, according the author, will help to provide the employees with meaning and background to change, and will help to clarify certain points of a new psychological contract, understanding and accepting of which will help employees to adapt to a change faster and easier. This idea is supported by D’Aprix (1996), who states that a powerful rationale for a change will reduce uncertainty and confusion the employees might feel. Furthermore, such communication should be strategic – well-planned and thought over in advance (D’Aprix,1996). Therefore, effective management of a psychological contract (in particular – replacing old contract by a new one) will help the organization to overcome resistance to change, speed up the process of change acceptance and, as a result, maintain the rates of employee satisfaction, loyalty, commitment and motivation at sufficient levels. The uncertainty related to the contract change, according to Jimmieson, Terry and Callahan (2004) can be categorized into four different groups. They are role conflict, role ambiguity, and role overload. The role conflict can be said to have a direct relation to the change of the previous psychological contract: an individual’s role expectations have to change. Similarly, role ambiguity takes place when post-change role expectations are absent or not clear (Jimmieson, Terry and Callahan, 2004). So, uncertainty caused by a change leads to job dissatisfaction and a decrease in confidence. Job dissatisfaction, as a result, may lead to poor performance and employee turnover. At the same time, it should also be remembered that turnover intention may depend on organizational commitment, job satisfaction, motivation and many other factors. All of these factors are not so easy to measure. Furthermore, turnover intention may result from a combination of such concepts as organizational identification, job commitment and satisfaction, and so on. So, it is rather difficult to identify a direct link between organizational identification and turnover intention. Another implication of the process of changing a psychological contract is its relation to how people identify themselves with their work group or profession. The study conducted by Pate, Blaumont and Pryce in 2009 was based on the need to identify how employees rethink their relationships (psychological contract) with employers in terms of commitment, loyalty and organizational identification. The researchers noticed that psychological contract that entails employees’ being loyal and committed in exchange to job security and development, is gradually becoming less efficient, as people’s relationships with employers become less affective with time (Cappelli 1997, 50). Psychological Contract on Practice Wellin (2007) outlines that practical application of the psychological contract concept is, in most organizations, expressed in an attempt to clarify the employee-employer understanding and relationship. A sandwich company Prêt à Manger, for example, has even described the major points of its psychological contract with the employees on the company’s web-site. The company outlines what in particular it expects from the employees, as well as how they will be rewarded for meeting the company’s expectations. Such an approach makes it clear to employees what particular behaviours will be rewarded, how they will be rewarded and what benefits they can expect from the organization (Wellin, 2007). At the same time, there exist examples of situations that clearly show that poorly managed psychological contracts lead to employees’ dissatisfaction and, consequently, worse organizational performance. For instance, Hallier and James (1997) provided a case in which they evaluated the way line managers and employees in an organization of air traffic service (ATC) used a psychological contract while introducing a change in the organization. Haller and James (1997) noted that the managers rapidly adjusted their expectations from the employees in times of acute pressure for change. It happened so that due to an increase in the pressure of having greater competition and costs, the previous commitments regarding satisfying the needs of job security and career preferences of the employees could not be maintained. The managers expected the employees to understand this and modify their needs keeping in view the changing commercial priorities. In addition to that, changes surfacing from the external pressures were thought to be externally justified as well as inescapable. The belief of ATC management regarding its employee’s position was that “Every one of them has an unreal expectation that ATC owes them a living” (Hallier and James, 1997, p. 715). However, the real problem was that the company did not manage to modify the old psychological contract. Employees were feeling comfortable with the old contract and the changes the organizations had to introduce naturally facilitated the need to change the psychological contract. Whatever the ‘unrealistic’ expectations of the employees might have been, the management should have communicated the innovations effectively in order for employees not to get frustrated and demotivated, as it happened (Hallier and James, 1997). This means that a psychological contact, as a tool for driving employees’ behaviour, was not used by the organization properly. As Altman and Post (1996) outline, psychological contracts ought to be changed together with the changing circumstance of organization’s operations. Employers’ influence on the state of the psychological contract Employers, in their turn, should take all the possible measures for ensuring that psychological contract breach is avoided. On this matter Herriot, Manning and Kidd (1997) write that companies may expect employee commitment only if the organization itself fulfils its side of the contract. This notion is supported by the studies conducted by Robinson (1996) and Turnley and Feldman (2000) that revealed that psychological contract breach, which leads to the lack of trust and job dissatisfactions, is directly related to the unmet expectations of the employees. Employees, of course, do have the power to influence the state of psychological contract on their side. However, it can be regulated by the organization as well. The very first thing a company must do is to ensure that it is fulfilling the contract’s obligations. If the company fails to perform the duties an employee lays on the organization via psychological contract, then the employees’ morale will go down as a result of unfulfilled expectations and hopes. So the company’s management must, first of all, determine what their subordinates expect from them, incorporate fulfilment of those expectations into corporate culture and, finally, continuously ensure that the set priorities are always met. Another thing an organization can do is to control the formation of employee’s expectations. Beliefs and hopes that later become the basis of a psychological contract are usually formed during the period of employee’s recruitment, hiring and onboarding. Therefore, it might be partially a function of HR to ensure that a potential or a just hired employee does not form a wrong or exaggerated impression regarding the positive characteristics of the company. Whatever such an employee is told on his or her first weeks at work, all the statement must be true enough as not to make the employee overestimate the obligations a company is to fulfil. For example, when a new employee is hired, making a legal contract tells the employee the duration for which his/her job is secure, the salary and the benefits that would be given by the organization to the employee. Knowledge of these fundamentals helps the employee to prepare oneself for the needs and demands of the work and the challenges lying ahead. The employee, therefore, works diligently and has objective grounds to question any unjustifiable move on the part of the management or the employer. Lack of awareness of these fundamentals leads to demotivation in the employee and this reflects in his or her performance in the form of poor productivity and poor quality of work. Establishment of a legal contract between an employee and an employer clarifies to both what their respective rights and responsibilities toward each other are. In case of a psychological contract, and especially if it not managed properly by the employer, no official rights and responsibilities are established. As a result of lack of the clear depiction and statement of the rights and responsibilities, the employee and the employer are not able to connect to each other in a way that is favourable for the organization as a whole. In general, the psychological contract’s validity is highly questionable because the concerns and interests of the parties in agreement with one another are, in most cases, never voiced out. As a result, neither of the two parties knows for sure what are the expectations of the other party, while one of the most fundamental objectives behind making a contract is to clearly state the expectations of the agreeing parties so that they are clear. Therefore, reliability of a psychological contract is highly questionable, because different employees have different expectations towards the managers and vice versa. Furthermore, psychological contracts are dynamic – they change with time, as organizations and employees’ perception of organizations changes. Employees, according to Sparrow (1999), have a tendency of adding new expectations as perceptions about the employer’s commitment evolve (Sparrow, 1999 cited in Armstrong, 2007, p. 226). Conclusion Psychological contract is a set of unwritten beliefs and expectations an employee has regarding the employer. This contract is usually a positive thing because, if fulfilled by the organization, ensures the employee’s positive attitude, job satisfaction and, consequently, good individual and organizational performance. Therefore, the company should make sure that major points of the psychological contract are implemented through corporate culture. In addition, company’s responsibilities and obligations should not initially be over exaggerated by a potential or current employee. However, there is a lot of subjectivity about the status of psychological contract as a contract because of the immense deviation of it from the legal contract in a range of ways. One conclusion that can be drawn from the critical analysis presented in this paper is that the psychological contract between an employee and an employer is never as valid, reliable, and predictable as a legal contract because, as happens with many companies, the terms of a psychological contract are not clearly defined and communicated. Lack of any evidence of the psychological contract lays the basis of frequent changes in it over the period of time. Since management happens to be more powerful and authorized than the employees, the changes in psychological contract are more often than not introduced by the management rather than the employees. In many cases management incorporates these changes into the psychological contract without any consent of the employees and expects the employees to understand the on-going challenges and agree to the changes in the psychological contract thus made. This provides management with an edge whereas the employees are mostly placed on the giving side of the contract. Since there is nothing written in the psychological contract, neither of the two parties can be held accountable for the violation of the conditions of contract. However, if psychological contract if effectively managed, it gives a lot of benefits to both employees and organizations. Among them are higher motivation, commitment, loyalty, job satisfaction and performance and, as a result, better organizational performance. References Altman, B. and Post, J., 1996. Beyond the social contract: An analysis of executives; views at 25 large companies. In: D. Hall, ed., 1996. 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