The Psychological Contract: How And Why It Works

The psychological contract is an agreement, unwritten but understood, that outlines the expectations, beliefs, ambitions, and obligations that characterize the relationship between employer and employee.

From day one, it influences how employees behave. And, it’s built on the actions that everyone at the company takes (a byproduct of corporate culture, more generally).

Even though it doesn’t technically exist, the psychological contract is still incredibly important and impactful. That’s because, even though it can’t be seen or touched, it can be felt.

When an employee joins your company they sign an employment contract that determines the conditions of their employment.

This will typically stipulate their pay while covering their rights, responsibilities, duties, and employment conditions while they are working for you.

A psychological contract, on the other hand, is never in writing. That means that it doesn’t cover the essentials of employment, but the feelings that influence employment.

It’s virtually impossible to create a psychological contract.

Instead, if you have spent any time investing in your corporate culture, chances are that your organization has already created a psychological contract with your employee. It might even have happened long before they joined your team!

That’s partly why an employee brand is important. It helps define and share your corporate culture with the world. In that sense, your employer brand has immense value.

In fact, according toa study carried out by LinkedIn, 83% of companies agree that an employer’s brand has a significant impact on the talent a company can recruit.

The CIPD factsheet on the psychological contract explains why a psychological contract is often difficult to define: "People’s perceptions of employers’ obligations are often informal and imprecise. They may be inferred from actions (even towards other employees), or from what has happened in the past."

So, you can’t craft your own contract. But, what you do is reap the benefits of a great one, or suffer the consequences of a poor one. We’ll build on that later on in this article!

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Developed by organizational scholar Denise Rousseau, the psychological contract evolved in the 1960s and draws heavily on insights from both psychology and organizational behavior.

The CIPD says that it “describes how the parties themselves understand their relationship, their own views of commitment and what they can expect to receive in return.”

That’s what makes it contractual – both parties agree to give certain things in exchange for others!

Alchemy for Managers explains that the psychological contract is a set of ‘promises’ or ‘expectations’ that are exchanged between the parties in an employment relationship. It follows logically that when these promises or expectations are met, things work smoothly.

Generally speaking, yes. The psychological contract is effective because it governs how people work on a day-to-day basis. But, it’s only effective when it’s maintained. When something happens to violate it, things get very, very dangerous.

As anyone who has ever managed a poorly-performing employee will tell you, when someone feels like their work conditions aren’t meeting their expectations, their heart just isn’t in it and their performance will suffer.

While you can’t fire someone for just ‘doing the job’, there’s a very big difference between a motivated employee and someone who isn’t very invested in what they’re doing, or how well it’s done.

When an employee isn’t committed, it’s clear from their attitude and behavior that they’re just not as interested in the work anymore.

Here are 31 ways to help keep employee motivation high.

Absolutely it can! And when it goes wrong, it goes spectacularly wrong.

In a basic contract, employers agree to provide employment and money in exchange for an employee’s services to meet a certain set of expectations.

But, the ‘conditions’ of a psychological contract aren’t spelled out anywhere (even if you have a culture code, there’s still wiggle room around what is and isn’t acceptable behavior).

These expectations live unconsciously in employees’ heads. When employees feel like their expectations are matched by the company’s behavior, everything is fine.

Because a psychological contract is based on an employee’s sense of fairness and trust, when an organization is perceived to break its promises, violate its norms or not honor the ‘deal’ between them it doesn’t just reduce job satisfaction, it also lowers employees’ commitment and performance.

It also increases the chances that employees will leave the company – or, at the very least, force them to consider alternative jobs (Click here for our full guide to staff turnover’s many reasons).

Disgruntled employees can even potentially damage a company’s reputation – particularly if they take to social media to voice their concerns (which they might do, whether your written contract prohibits this or not).

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Here are four typical signs that an employee ‘opted out’ of their psychological contract:

• The sense that an employee is working ‘to the clock’ on a daily basis.

• An employee may be delivering work late or taking longer to complete tasks.

• A change in attitude (proactive and engaged to surly and temperamental).

• Badmouthing the company or fighting with fellow employees.

However, while it might be relatively easy to see the signs, it’s not always easy to know what made them change their behavior.

If there’s no obvious reason for them to have started behaving differently, something might have changed in their work environment that broke their contract, violated their trust, or made them feel disillusioned.

The logical consequence of this disillusionment is that employees will stop putting any extra effort in. After all, it’s human nature to give and take.

If an employee feels that they’re not getting as much as they give, the chances are that they’ll reduce their efforts proportionately.

While there are many, varied reasons for an employee to feel like their company or employer has violated their trust, a few commonalities stand out.

Employees tend to feel let down by a company when:

• Salary or promotion expectations are not met

• Their line managers aren’t communicating clearly, given them career opportunities or advice, or are just not good to work for (the adage – people don’t leave companies, they leave managers – is true, particularly when it comes to violating psychological contracts!)

• They feel overworked or underappreciated

• Their ideas aren’t considered, or they aren’t listened to

• The company does something wrong, performs well, disappoints employees, doesn’t meet performance goals (or various other situations), and doesn’t communicate the reasons with compassion, understanding, and sincerity

• People are promoted and colleagues don’t understand why they were chosen

• Redundancies take place

• Salaries are cut

• Benefits are cut

• Changes happen that make employees feel uncomfortable

While a company often has a different identity in an employee’s mind, we’re all humans. So, repairing a broken psychological contract is as simple (and as complex) as rebuilding a relationship with someone to regain their trust. It’s not easy, but it is possible.

Companies can start to regain trust by looking for other ways to meet employee expectations, setting more realistic expectations, or explaining – calmly, clearly, logically, and with empathy – why things have changed.

But, most importantly, companies can put initiatives in place that really help them listen to their employees and then find ways to address their concerns. That’s why employee engagement surveys are so important – particularly in tough times!

HR teams have a responsibility to manage people and development practices – which means they also have an obligation to do what they can to help manage employees’ psychological contracts with their organizations.

While much of this remains out of HR’s control (because it lies in employees’ heads!), HR can positively impact:

• The employer brand

• How organizations communicate with employees (including giving room for feedback and making sure employees feel heard)

• How much training and development is available to employees

• An organization’s preferred or ideal management style

• Employees’ expectations (and when to raise or lower expectations – particularly in advance of significant announcements like salary increases, pay cuts, redundancies, and business closures, mergers or expansions)

• How engaged employees are

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It’s worth remembering that HR leaders can only do so much to help fix a broken psychological contract.

If the company makes decisions that are unpopular with employees, HR team members can’t afford to take the blame personally or to beat themselves up about it.

The CIPD reminds managers to consider these important points, whenever a change happens that disappoints team members:

• Employment relationships may break down despite management’s best efforts. Nevertheless, it’s the managers’ job to take responsibility for maintaining them.

• Preventing a breach in the first place is better than trying to repair the damage afterward. Trust, based on the trustworthiness of the parties, is key to the relationship.

• Where a breach of trust cannot be avoided, it may be better to spend time negotiating or renegotiating the deal, rather than focusing too much on delivery.

• Interventions aimed at building resilience skills can help individuals cope better with contract breaches.

It’s also important to consider that the only constant in life is change. And, that employee expectations are increasing all the time.

Perhaps HR leaders and their teams can only really afford to do their best to create and maintain a consistent psychological contract with their employees, and themselves.

After all, HR team leaders and members are employees too!