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Psychological Contract in HRM

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A psychological agreement expresses a combination of beliefs about what an individual employee and their employer expect from each other. This article discusses the meaning and nature of the psychological contract and the role of human resource practitioners in enhancing psychological contracts at the workplace.

What is a psychological contract?

Unlike a business or employment contract, a psychological agreement is neither written on paper nor are all of its terms explicitly negotiated,

According to Schein, the notion of a psychological agreement refers to an unwritten set of working expectations at all times between each member of the organization and the various administrators and others within that organization. It refers to individuals’ beliefs about the promises they have made, accepted, and relied on. The formal contract in employment would detail the expectations of both employee and employer. Typical contracts, however, are incomplete due to bounded rationality, limiting individual information seeking, and to a changing organizational environment that makes it impossible to specify all conditions upfront.

It also depends on the nature of what is actually to be exchanged, for example, money in exchange for time at work; social need satisfaction and security in exchange for hard work and loyalty; opportunities for self-actualization and challenging work in the business for high productivity, high-quality work, and creative endeavours in the service of organizational goals; Or various combinations of these and other things.

According to Buchanan, psychological contract plays an essential role in the relationship between the organization and its employees. As long as both parties agree that the contributions provided by an employee and the inducements provided by the organization are balanced, both parties are satisfied and will likely maintain their relationship. But if a severe imbalance occurs, one or both parties may attempt to change the relationship.

Nature of psychological contract

The individual makes various contributions to the organization, for example, skills, effort, ability, time, and loyalty. In return, the organization provides inducements to the individual, such as career opportunities and pay. Organizations can also offer intangible benefits such as job security and status. The psychological agreement is a system of beliefs that may not have been articulated and encompasses the actions employees believe are expected of them and what response they expect in return from their employer. It is concerned with assumptions, expectations, promises, and mutual obligations.; It creates attitudes and emotions that shape and manage behaviour. For employees, a psychological contract is implicit and depends on how the employer treats them in terms of fairness, equity and consistency; security of employment; scope to demonstrate competence; involvement and influence; trust in the organisation’s management to keep their promises; safe working environment. On the other hand, the employer’s expectation includes competence, effort, compliance, commitment, and loyalty.

According to Rousseau, there are two primary forms of psychological contract: relational and transactional. The relational can be seen as more permanent and long-term employment and situational psychological contract more aligned to a contractor-type arrangement. This change occurs under the changed needs of both an employee and the organization. What an employee expects of an organization or the employer at the age of twenty-five differs dramatically from what that same employee expects at the age of fifty. A newly married employee of twenty-five is primarily interested in career prospects and an excellent salary to provide their family with housing and a good standard of living. At the same time, at fifty, the same person would pay more attention to what the organization can offer on retirement.

According to Lester, the organization’s expectations of its employee differ from time to time. For instance, the organization may expect its members to do their best and remain loyal and diligent in terms of economic recession or promote its image in times of economic prosperity. Employees would like to determine if they have all the skills needed to do the job they are appointed; therefore, they expect organizations to provide them with challenges to test their skills and knowledge in terms of goal achievement. This is where the problem of conflicting goals comes from. Employees are usually disappointed if they are kept in meaningless training programs for too long or occupied with tasks that bear no relation to the organization’s primary goals.

It is expected that as needs and other external factors change, expectations also change. An individual employee enters an organization with a particular set of requirements. If the organization has an organizational climate that promotes need satisfaction, employees should behave positively. If such a climate is not present, employees will tend to subordinate organizational goals to their personal goals for need satisfaction (Guest, 2004). It should, thus, be clear that there is a critical link between the successful integration of personal goals and the goals of the organization as well as organizational success

Most organizations are characterized by a heterogeneous workforce with diverse approaches to living and viewing the concept of work. This has resulted from the rapid and advances in technology, new mindsets, and increased global labour mobility opportunities in most market-driven economies. There is a diverse workforce in terms of age, racial background, and authority owing to the world becoming a global village. Different ages have different expectations.

Downsizing and cutbacks, such as the case in organizations, have complicated the psychological contract process. Organizations that used to offer at least reasonable assurances of job permanence as a fundamental inducement to employees turn out not to assure job permanence due to reduction of some of the employees because of economic hardships. Increased globalization of business also complicates the management of psychological contracts. As psychological agreements are affected by the tremendous rate of change and economic conditions, the result has been marked change in workplace expectations and psychological contracts, which is another reason HR managers should be concerned about creating a favourable psychological contract. According to Joyce, corporate mergers, downsizing, restructuring, reengineering, subcontracting, and relatively low union representation have also changed the picture of employment over the years. Many organizations nowadays have different characteristics, thereby altering the psychological contract from traditional to contemporary.

In the old paradigm, an employee’s current and future position was unequivocal and predictable, which resulted in employee loyalty being fostered for this loyalty, employers would provide good pay, regular promotion, and benefits and also invest in the training and development of their staff. However, nowadays, the association has become strained in the new work environment in which cutting costs and improving productivity are management goals.

The role of HRM practitioners in managing the new psychological contract

The attachment by employees to an organization may be regarded as the function of their perception of the psychological contract. With the competition increasing and advanced technology becoming more pervasive and variation of interests and expectations between the old and the new psychological contract organizations widening than ever before, organizations need to have a committed and motivated workforce to give their best towards achieving the organization’s objectives. Therefore, Human Resource Managers must implement some of the activities that best suit the current type of organization.

HRM should carefully define responsibilities and expectations of the employment relationship, including behaviours on both sides of the relationship. According to (Nel), there should be a transparent and honest discussion of mutual obligations such as expectations, corporate culture, career development, and mechanisms for continuous dialogue.

Some companies provide additional training opportunities and increased flexibility in work schedules as new forms of inducement to meet positive employee expectations. The organization can initiate change by training the worker or transferring him to another job that best suits him.

Additionally, organization structure needs to be made flat and decentralized, based on autonomous business units producing high quality, high value-added goods and services for a carefully defined niche market (Joyce). Management style must emphasize mutual trust, respect, and autonomy, not rigid rules and procedures. It should also encourage flexibility, cooperation, commitment, and high performance (Joyce). 

Integrated HR policies must emphasize flexibility, teamwork, customer focus, total quality, empowerment, learning, and skills development. According to Hunsaker (2010), early organizational experiences significantly impact future performance. There is a consistent relationship between the organization’s initial expectations of a manager during their first year on the job and that person’s future performance.

For Ulrich, HR managers should do the following to add value to the organization.

  1. Strategic partner refers to the essential role HR plays in enabling an organization to achieve its objectives by executing strategic HRM aligned with its strategy.
  2. Administration expectation refers to the fact that HR activities should be offered in transactional (day-to-day) activities and add value to the organization in the process.
  3. Employees champion, which refers to the approach to HRM, where the HR manager represents the employee’s voice in the management activities.
  4. Change agent refers to HR proactively participating in activities that would positively meet change and capitalize on it to act in a transformational manner in assisting the organization in reaching its objectives.     


The psychological states of employees are essential factors in determining their behaviour and responses at work. The management of these states can improve organization effectiveness, improve customer service, lower absenteeism, increase commitment and trust, improve productivity, and lower turnover. Employees who are well treated are committed to the organization, exceed their explicitly required responsibilities, and respond flexibly to the organization’s problems and opportunities. It is essential to know that individual performance is the result of motivating employee behaviour, which is best achieved by integrating personal goals with the organization’s goals. Personal goals can be combined with those of the organization only if employees’ expectations of individual employees are spelt out during the negotiation phase of the psychological contract. The psychological contract does, however, imply that those personal expectations and those of the organization change over time. The HR Managers have an essential role in developing and managing a favourable psychological contract in their organizations.

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