The Changing Nature of the Psychological Contract and its Impact on Modern Organizations

by

Kheeran Dharmawardena

kheeran.d@its.monash.edu.au

Introduction

Psychological contract, the unwritten agreement between an employer and employee,

is changing in the post job security economic environment. With the popularity of contractual, short term employment within organizations, employees are now seeking to create a psychological contact which is more about self-actualization.

This change in the psychological contract has implications on organizations that seek to have a work force that is motivated and committed towards the organizations goals.

What is The Psychological Contract?

The psychological contract according to recent definitions is an individual's beliefs concerning the obligations that exists between the employee and the organization (Lester, Turnley et. al., 2002) .

The contract is composed of an individual's perceptions about what they expect the organization to provide (competitive wages, advancement opportunities, job security) in return for what they provide the organization (a fair day's work, loyalty) (Lester, Turnley et. al., 2002). Unlike formal employee-employer contracts, the psychological contract is inherently perceptual and therefore employer and employee may have different interpretations of the implied obligations (Lester and Kickul, 2001).

Individual and the Contract

As De Meuse, Bergmann et. al., (2001) noted, in today's fiercely competitive environment companies focus on corporate goals, profit margins, and stock market prices. The 1980s and 1990s saw a plethora of corporate downsizing, restructures and mergers (De Meuse, Bergmann et. al., 2001). Today this is seen as part of the natural course of doing business.

This has brought about a change in the employer-employee relationship. While in the past employment was a long term contract with an employee acquiring skills 'on the job' and rising through the ranks, today it is "dominated by short term contracts for highly skilled professionals and technical workers" (Smithson and Lewis, 2000, Lester and Kickul, 2001). Today staff are "hired on a need to have basis to perform specific high skill tasks" (Lester and Kickul, 2001) and are 'let go' when their specific skills are no longer required by the organization. As De Meuse, Bergmann et. al., (2001) states the "workplace of today is one of increased workload and stress and decreased job security and commitment".

With the lack of job security employees now focus on immediate job needs and career management through performing meaningful work, personal growth, development of transferable skills, and networking opportunities (De Meuse, Bergmann et. al., 2001, Lester and Kickul, 2001).

This change in the employment environment has changed the nature of the psychological contract. In the past the psychological contract was more geared towards a relational exchange, which was based on aspects such as trust, respect and loyalty between the employer and the employee. Today with the insecure work environment transactional exchange are more prevalent.

De Meuse, Bergmann et. al. (2001) define a transactional exchange as an "explicitly and/or implicitly promise to provide specific, monetary remuneration for certain services performed by the employee ". This change to transactional contracts was predicted by Rousseau and Parks research (1993, as cited in Fedor and Farmer, 1999), which indicated that when a violation of the contract occurs it becomes more transactional and self-interested.

Trust between the two parties is crucial to building a relational psychological contract. The lack of job security would make it difficult to build this trust. Thus as De Meuse, Bergmann et. al (2001 ) suggests the loss of job security has made the employee focus on developing transferable skills and contacts, resulting in a transactional contract being formed.

Why is the Psychological Contract Important to the Organization?

As new markets, competitors, and technologies begin to emerge, organizations increasingly have a "need for skilled employees at every level of the organization" (Lester and Kickul, 2001). "Employees today are often selected and recruited into an organization because their particular skills and expertise can assist the organization in achieving high standards of performance, especially in the short term"(Lester and Kickul, 2001).

With competition increasing and advanced technology becoming more pervasive organizations need to keep performing at its best at all times. To achieve this organizations must have a workforce that is committed and motivated to giving their very best towards the organizations objectives.

Research (Bunderson 2001, Lester and Kickul, 2001) shows that a perceived breach in the psychological contract often results in the employee deliberately reducing their effort towards work and customers. Conversely studies done by Shore and Barksdale (1998, as cited in Lester and Kickul, 2001) showed that employees whose psychological contract is satisfied have a high level of commitment and organizational support.

As Lester and Kickul (2001) stated "the current economic and employment landscape place pressure on how organizations structure, motivate, and retain their employee workforce". By understanding the elements of psychological contracts and recognizing that it is a continually changing and evolving contract, organizations are better placed to create the kind of contract with their employees which would lead to a highly committed and motivated workforce.

The Managerial Impact

According to Maslow's hierarchy the highest need for humans is self-actualisation. Lester and Kickul (2001) states that today employees are becoming "increasingly aware of the none monetary rewards that companies are willing to provide" in exchange for their skills. This suggests that employees are now at a point in time where they are able to seek out self-actualisation.

Stalker (2000) suggested that companies which are successful are the ones that manage to balance the unwritten needs of their employees with the needs of the company. Companies then need to invest time, effort and where needed money to make certain that this balance is achieved. As stated by Lester, Turnley et. al. (2002) the manager acts on behalf of the organization thus inheriting the responsibility of achieving this balance with their employees.

Managing the Changing Psychological Contract

Since the psychological contract is dynamic and evolving, organizations need to invest effort into understanding the changes and at various times and when needed renegotiate the contract (Lester and Kickul, 2001). Lester and Kickul (2001) shows that a "pro active approach to the psychological contract is likely to reduce an employees intention to leave" since their needs are more likely to be met by the organization.

Communication is a key element in this and the failure to communicate is seen to be one of the main causes of perceived breaches of the psychological contract (Lester and Kickul, 2001). Lester and Kickul (2001) suggests that open book management techniques when taken liberally can form a framework for providing effective communication between the organization and the employee.

For a successful organization, managing the psychological contract needs to begin even before the hiring of an employee. Niehoff and Paul (2001) states that an organizations publications, the interview process, contract negotiation and the orientation process all contribute towards the formation of the employee's psychological contract with the organization.

An organizations publications and literature creates the first impression of the values espoused by the employer. The interview process then establishes an image of the organization for potential employees (Niehoff, Paul, 2001) promoting expectations ranging from the tangibles such as pay and benefits, to the intangibles such as "treatment of employees or degree of empowerment" (Niehoff, Paul, 2001).

As suggested by Niehoff and Paul (2001) by providing Realistic Job Previews, such as that done by Cisco Systems (Lester and Kickul, 2001), candidates can be given a clear and realistic view of the actual expectations of the duties, work hours, and performance levels (Niehoff and Paul, 2001). The negotiation process after an offer is made to a candidate, provides a further opportunity to clarify the specific details of the expectations of both parties (Niehoff, Paul, 2001). Finally the orientation program (either formal or informal) gives an opportunity to re-enforce the psychological contract that has been formed.

By having all of these in line with each other and in line with the companies expectations allows the company to form a contract that is more likely to be clearly understood by both parties and has a less chance of being breached.

Conclusion

Demands of the modern economic environment has resulted in both the company and the employee having a changed psychological contact. Today the contract formed is more transactional and about self-actualization. Organizations and their managers need to be aware of this change, and today more than ever invest time and effort in forming and managing the right kind of psychological contract with their employees and prospective employees.