Psychological contract

History

As commercial organizations grew in size and complexity, there was a tendency to standardize rather than individualize the treatment of labor. Trade unions emerged to offer protection to ever larger groups of employees. The result was collective bargaining to define pay and conditions by reference to grades across industries and trades, and in public service. More recently, unions have lost some of their significance, leaving management in more direct control. But societies have developed expectations of a better work/life balance, reinforced by legislation, and employers have found it in their own best interests to develop practices that respect equal opportunities and employment rights through professionalized human resource services because:

    * the workforce has become more feminized;

    * the workforce is better educated, less deferential of authority and less likely to remain loyal;

    * the workforce is required to be more flexible to meet new challenges quickly and effectively, but this need to change can be a source of insecurity; and

    * automation has both empowered a greater percentage of the workforce and allowed the emergence of teleworking which fragments the old social orders of a single location workplace and generates greater freedom and flexibility in an ever increasing global workforce.

The formation of the contract

During the recruitment process, the employer and interviewee will discuss what they each can offer in the prospective relationship. If agreement is reached, most employers will impose a standard form contract, leaving the detail of the employee's duties to be clarified "on the job". But some of the initial statements, no matter how informal and imprecise, may later be remembered as promises and give rise to expectations. Whether they are incorporated into the parallel psychological contract will depend on whether both parties believe that they should be treated as part of the relationship. The better organized employers are careful to document offers to reduce the risk of raising false expectations followed by disappointment.

In the Common Law states, the law implies duties requiring the employees to be loyal and trustworthy. These are imprecise in their definition and uncertain in much of their operation. But, in psychological terms, issues as to whether promises and expectations have been kept and met, and whether the resulting arrangements are fair, are fundamental to the trust between the employee and the employer. The first year of employment is critical as actual performance by the employee can be measured against claims and promises made during the interview, and the management has begun to establish a track record in its relationship with the employee at supervisor and manager level.

Feldhiem (1999) reflects these two strands by dividing the psychological contract into:

* transactional: this is the economic or monetary base with clear expectations that the organization will fairly compensate the performance delivered and punish inadequate or inappropriate acts; and

* relational: this is a socio-emotional base that underlies expectations of shared ideals and values, and respect and support in the interpersonal relationships.

Breach of the psychological contract

If those in power breach the psychological contract by not paying a fair rate, or failing to make fair evaluations of performance, or treating the employee with a lack of respect, it rapidly causes disillusionment, dissatisfaction, and exit. This may arise shortly after the employee joins the company or after years of satisfactory service. The impact may be localized and contained, but if morale is more generally affected, the profitability of the organization may be diminished. Further, if the activities of the organization are perceived as being unjust or immoral, e.g. aggressive downsizing or outsourcing causes significant unemployment, its public reputation and brand image may be damaged.

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