The concept of the psychological contract

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

3) Outline and critically evaluate the concept of the 'psychological contract'. Why is an understanding of the psychological contract considered to be important to the management of the contemporary employment relationship?

The concept of psychological contract


There are two kinds of contracts which are the formal, written economic contract as well as the euqally important, informal and unwritten psychological contract. It's all about how people think they should be treated. Both involve rights, obligations and expectations on the part of employer and the employee.

The key feature of the word 'contracts' is exchange in term of reward or the effort that employee puts in etc. For instance, the level of effort which employee puts in or employee's perception can be affected by how they are being treated by the organization.

A quite large research literature on the psychological contract has been produced in only a short time with the key players being, in the United States, Denise Rousseau (Rousseau, 1995, 2001), Schein (1980) etc. Although much of the interest in the psychological contract is recent, its roots go back a long time, it having originally been discussed by Argyris (1960).


The concept of a "psychological contract" was first coined by Argyris (1960); it refers to employer and employee expectations of the employment relationship as well as represents the mutual beliefs, perceptions and informal obligations between an employer and an employee. Expanding the concept of the contract was Schein (1980). According to Schien it may be defined as an"…unwritten set of expectations operating at all times between every member of an organization and the various managers and others in that organization."

More recently Rousseau and her co- workers (Robinson and Rousseau, 1994) have suggested a more specific definition of the psychological contract. According to them, the psychological contract is characterised not only by expectations, but by promissory and reciprocal obligations. When these obligations are broken, they produce more emotional and extreme reactions than weaker expectations produce feelings of disappointment. Broken obligations lead to feelings of anger and reassessment of the individual's relationships with the organization.


The term psychology is derived from the Greek, meaning 'mind, spirit or soul' and contract is that the expectations concern non- tangible, psychological issues. There are significant elements of all definitions of the psychological contract include:


integration of beliefs, values, expectations and aspirations of employer and employee, the beliefs of implicit promises and obligations are included, the level to which these are perceived to be met or violated and the level of trust within the relationship.


All the expectations must not be made explicit. It could be the implicit deal between employers and employees. Fairness and good faith are involved.


An significant feacture of the concept is it can be repeatedly re-negotiated, changing with an individual's, and an organisation's, expectations, and in shifting economic and social contexts. Yet, a snapshot of one point in time was only provided thus capturing only one stage in this social process.


Because it is based on individual perceptions individuals in the same organisation or job may perceive different psychological contracts, which will, in turn, influence the ways in which they perceive organisational events for instance redundancies or developing or modifying a flexitime system.

1.4 Advantages

1.4.1 It mitigates uncertainty, forms behaviour, and gives an understanding of situation in the organisation to employee.

1.4.2 It helps explain the reason why recruits leave during initial training, satisfaction and commitment levels drop, and turnover rise.

1.4.3 it's useful in evaluating people's responce to the changing context of careers.

1.4.4 it's consistent with times, helps to make sense of current employment relationship, and helps to highlight who has power.

1.5 Disadvantages

1.5.1 There is no agreement, written of psychological contract; hence it is doubtful whether it can be considered a contract at all.

1.5.2 Organisations consist of many different individuals and each employee may have specific expectations about his or her rights and obligations those individuals and groups. Therefore it's hard to unite the expectations.

1.5.3 Violation of the psychological contract carries a clear view of a broken promise. It is not yet clear whether the psychological contract explains people's work behaviour any better than more neutral and simpler concepts.

1.5.4 The psychological contract may be a redundant and complicated concept. It goes beyond with other psychological constructs such as job satisfaction and organisational commitment.


Contemporary employment relationship

The relationship between employers and employees is currentlty shifting in ways that managers need to understand. Nowadays, the employee concerns about security and their need to build up a 'portfolio' of skills and competencies. Employees can be helped to develop occupational and personal skills, become more proactive and take more responsibility for their own careers. Collective agreements often state that compulsory redundancy will be used only as a last resort.

Younger people want excitement and a life outside work. They are not interested in a job for life. They also expect to be treated as human beings such as to be treated respectfully.

Woodruffe (1999) currently sees employee needs focusing on three areas:

2.1.1 Reward package

Employers need to offer pay and conditions that will attract and retain good people for example, the opportunity to trade some pay for more holidays. Employees also need to feel that their pay is 'fair'.

2.1.2 Employability

Woodruffe identifies three elements of the employability. These are career advancement, the opportunity for personal development, and being part of a respect-worthy organisation. CIPD recruitment surveys in recent years have shown that people want to work for an organisation that they feel proud and employers are building this into their recruitment strategies and practices.

2.1.3 Job satisfaction

In particular, there is an important link between employees feeling they have a satisfactory balance between their work and lives, and having a positive psychological contract. Employers need to think through how employees can be helped to achieve such a balance.

Relationship between employment and psychological contract

A meta-analysis between the relationship of psychological contract breach and revealed that once the organisation less meets the expectations of its employees, the more serious the consequences (Wanous, Poland, Premack and Davis, 1992).

Schalk et al. (1995) concluded that a poor psychological contract due to lower commitment to the job and to the organization, less identification with the organization and higher turnover intentions.

Further Robinson, Kraatz and Rousseau (1994) concluded that the occurrence of breaches was negatively related to trust, job satisfaction, and intentions to remain and was positively related with turnover.

A longitudinal study conducted by Robinson (1996) revealed a negative relationship between psychological contract breaches and "organizational citizenship behavior", performance, intentions to stay with the employer and a positive relationship with turnover.

As psychological contracts are formed by trust, breach may lead to strong reactions and feelings of betrayal (Robinson and Rousseau, 1994).

Less severe breaches also have consequences; however, such as higher turnover (Guzzo et al., 1994; Robinson and Rousseau, 1994), lower trust and job satisfaction (Robinson and Rousseau, 1994), lower commitment to the organization (Guzzo et al., 1994), and less Organizational Citizenship Behavior (OCB: Robinson and Morrison, 1995).

Case Study

3.1 HSBC is trying to achieve a strong psychological contract

HSBC is the largest bank in the UK. Having been founded in 1927, the bank has a long tradition. In the UK alone, the bank serves some 20 million customers across its 2,287 branches. The bank employees some 114,000 people worldwide of which around 60 percent are female.

HSBC has adopted strategy to provide more flexible working practice for its employees at the same time help them to achieve better work-life balance. The bank introduced many flexible arrangements, for example, variable hours, part-time working, home working, term-time working, job share, compressed hours, etc. maternity 'phase back' and 'wind down to retirement'. The company has also tried to over-deliver by offering a number of options to employees where they are away from work. These include holiday 'banking', buying and selling holidays, short- and long-term career breaks, special leave, compassionate leave, study leave and IVF leave. By providing this flexibility HSBC is trying to achieve a strong psychological contract with its employees what is potentially going to result with increased employee commitment, motivation, reduced absenteeism and better productivity. (HSBC, 2005).

3.2 The outcome

As the result of psychological contract, it can be seen that the employees are willing to have a good performance and for the organisation. In addition, they are willing to work longer for the organisation instead of temporary. That is why psychological contract is so significant. It can reduce employees insecure and shapes their behavior. As all possible phases, the relationship between both parties cannot be written in a formal way, therefore psychological contract fills the gaps in the relationship.

It's a useful tool in work-life as it enable employers get know the need of employee then fulfil their need in order to increase the productivity and efficiency.

3.4 Conclusion

The psychological contract is a very subjective concept which influences employees' beliefs and behavior in the workplace. From the recruitment stage of an employee's work to retirement or resignation, it can have a reflective effect on the attitudes and well-being of an individual. Although it is an unwritten contract it has a central role in work behavior by better specifying the dynamics of the employment relationship. It is clearly an important ingredient in the business relationship between employers and employees and can be a powerful determinant of workplace behavior and attitudes. The military would gain a great deal when taking into consideration the psychological contract and its abundant implications.

It seems likely that attention to the psychological contract will continue to increase in the literature. By capturing important aspects of people's experience of work, it offers considerable possibilities for understanding work attitudes and behaviour.