The ‘Psychological Contract’: The Ties That Bind Companies and Employees

Salary, vacation time, working hours: An endless number of points need to be negotiated in any labor contract, but these may not be the most important things to consider. Today, labor relations are being redefined because the battered economy — including stock market crashes, panic in international exchanges, a shortage of investor confidence, bank bailouts, thousands of corporate shutdowns and rising unemployment — has shaken the foundations of the current working environment.

In this context, the "psychological contract" — an unwritten pact that complements the economic arrangement between the employee and the company and defines the psychological commitment between the two parties — has taken on critical importance. Reciprocity between an individual and the company brings balance to the organization. Any disturbance of this delicate balance can lead to an employee's lack of commitment to the company and low levels of productivity, human resources and other experts say.

There’s nothing new about the concept of psychological contracts. As early as 1991, Keith Davis and John W. Newsroom, authors of a book titled, Human Behavior at Work: Organizational Behavior, defined it as “an acceptance of the economic agreement that covers salaries, working hours and [working] conditions…. It sets the limits of the scope of the worker’s psychological commitment to the system.” This combination of unwritten expectations, notes José Miguel Ucero, professor of human resources at the ESIC business school, in Madrid, “is directly related to the level of satisfaction of the people involved in the relationship, and it is the key to the continuity of the relationship. So it has an impact on personal motivation, the level of commitment, the labor climate and the flight of talent.”

Given the current economic and business environment, how should companies manage their relationships with employees?

Techniques of Recruitment

Experts note that whenever someone becomes part of an organization, the company must be concerned about creating conditions that enable that worker to best utilize his or her professional assets so that he or she can achieve personal and organizational goals.

But because of the way the hiring process operates today, many companies have made mistakes that prevent them from being able to fulfill this element of the psychological contract. According to a research paper titled, “New Techniques in Recruitment Seen through the Prism of the Psychological Contract,” published last year by the School of Management in Lille, France, tools used for selecting personnel — such as informal events, rapid hiring and recruitment based on web applications – can lead to a rupture in the relationship between employers and employees.

These techniques are not faulty in themselves — only in the way that they are being applied, according to the paper's author, Tamara Podlunsek. She recommends that companies establish linkages between the new processes of employee recruitment and the goals of the corporation. Companies must also improve the way that they supervise the oversight process during each employee’s first years inside the company. Companies must also improve working conditions and, especially, establish good channels of communication that facilitate the flow of information up from the bottom of the corporation toward the top, Podlunsek notes.

According to Ucero, “[Firms] have to be careful about key elements, such as processes for selecting employees and evaluating their performance and potential. Otherwise, companies often make promises that are hard to keep later on.” He adds, “Memory about these sorts of moments is selective, and the interested parties do not forget your promises.”

Juan Carrión, also a professor of human resources at the ESIC business school, notes: “Many companies, along with those managers who have a particularly short-term focus, don’t think very much about the importance of the psychological contract. What’s more, many think that people have to come in standard sizes.”

When the relationship goes well between the company and the individual employee, the upsides of the psychological contract can be tremendous. Margarita Mayo, head of the IE Business School’s Leadership Department, cites the example of an employee who must throw himself into his work more than he anticipated, but does so willingly. For example, the employee may have to stay in his office for longer hours in order to finish a project on time, or deal with the unique problems of individual customers. One stewardess at an American airline offered to take care of a customer’s dog for several days because the customer was unable to take the dog on the flight. “You get this type of conduct from employees — going beyond what is expected in the labor contract — only when there is an emotional relationship based on employee loyalty and the identification of the employee with the company and its mission.”

Broken Commitments

Over the past decade, these kinds of psychological contracts have often been broken, notes Carlos Obeso, a professor at ESADE and author of numerous studies in this area. His latest study, “Young People, Professionals and Urbanites,” was published in Spain this year in cooperation with Randstad, a temporary employment company. According to Obeso, “In the past, companies provided security to workers, and if they met their goals and requirements, workers were convinced that they were going to be promoted and properly compensated. Thus, worker loyalty led to proper compensation. Nowadays, this unwritten agreement has been broken because you need to have an economy is stable and expanding.”

Obeso notes that, in terms of a psychological contract, professional workers ask the corporation for “a project in which he or she can develop their skills and competencies; for a proper policy for reconciling their work life with their family life; and for business relationships that are based on authenticity, not on forcing people to behave [one way or another] just because you are their boss.”

He adds, “Clearly, there is [uncertainty] now. An indefinite contract does not mean anything [anymore].” In his opinion, a psychological contract with a company is a lot like a marriage. “When you get married, you think it is for your entire life, but people are not doing that now.” Mayo says that the rupture in this unwritten agreement “is like a divorce between the company and the employee, in which satisfaction and commitment to the organization are declining; productivity is dropping and there is growing desire to abandon the company.”

Francisco Mesoneros, general manager of the Adecco Foundation, which helps find employment for people who are having trouble in the job market, notes, “Obviously, you need to have a balance between your salary, measured in terms of money, and the emotional payback [you get from a job]. When economic compensation is unfair, workers can lose motivation and have few expectations. And when employees lack commitment to the company, there can be harmful consequences that have a direct impact on productivity.”

If a worker does not sense that there is a psychological contract with his or her company – or if he breaks that contract or he doesn’t view the goals of the organization as his or her own, or cuts his ties with the organization — then the relationship between the worker and the company ultimately can fail.

For Obeso, the key word is “commitment.” Says Obeso, “The worker may not feel as if the company is really his own, and that he can work in one company today but another company tomorrow. Still, he may feel that he has to commit himself to his work while he is at the organization, and give his best to fulfill the goals of the organization.” Carrión adds: “Whenever the psychological contract breaks, the working relationship is treated as if it were an object. For both parties, [the actual employment contract] becomes simply a means toward an end.” Every employee expects to derive from his work not just a salary or some economic benefits “but also a sense of belonging to an organization that he can feel proud of, and with which he can build his own professional identity,” adds Mayo.

In the eighteenth century, Adam Smith wrote: “Man seeks maximum pleasure from his work with minimal effort.” The goals of companies and individuals are not identical. Workers try to get more benefits from the company without making excessive contributions, while many business people exploit their workers to obtain greater profitability. Notes Mesoneros, “Whenever a worker begins to provide services to the company, he acquires rights and obligations. Without doubt, one of those rights is to negotiate and understand the expectations and possibilities that he is going to have within the organization. Communication between a manager and his subordinates must be reciprocal, transparent and sincere, so that it doesn’t lead to disillusionment or professional frustration.”

Whenever the psychological contract breaks, the results are negative both for the employer and the worker. Both wind up losing. “The employee feels that he has been betrayed; he experiences a period of frustration that manifests in his behavior. Once this happens, he will either choose to leave [the company] or, even worse, stay [at his job], while generating a strained and negative atmosphere all around him,” notes Ucero.

Avoiding a Break

Whether the process takes place consciously or unconsciously, contracts are broken as a result of ignorance of the rules, human resources experts say. If there are business reasons that justify other rules of the game, the worker must know about them. So, it is important to communicate any changes that are going to take place in order to avoid speculation and minimize uncertainty. “The most important thing is to be aware that the relationship between the worker and the employer is not just a means [to an end], but it also has a social and emotional aspect,” says Mayo.

“A business executive must be concerned about employees’ motivation — applauding them for work that is done well, recognizing their extra efforts, dealing with their doubts, concerns and professional expectations,” notes Mesoneros. “The advice and good will of the manager are essential.” Adds Ucero, “Specifying all parties’ unwritten expectations and facilitating the psychological contract [are processes that] should be closely interrelated. And if they aren’t, it’s more likely that the contract will not be fulfilled. That’s why good interpersonal communication is vital.”

One thing that all the experts agree on is this: Strengthening such values as coherence, integrity and commitment makes it possible to create an ecosystem in which personnel, co-workers, bosses and organizations respect one another. That’s how the various expectations involved in a psychological contract can be fulfilled.

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