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What is a psychological contract? (And 8 signs yours needs help)

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Why every leader should care about the psychological contract

The moment an employee joins a company, they and the employer embark on a work relationship. While one half of this is formal, governed by a contract; the other is an informal set of obligations and mutual beliefs. While it starts with the initial moment of employment, these relationships evolve over time. 

This dynamic though unspoken arrangement has existed as long as people have employed other people. But, it wasn’t until the 1960s that it became academically understood. 

This relationship is now called the “Psychological Contract”. As will be seen below, the psychological contract between company leaders and employees is absolutely vital when it comes to a company’s team management approach. 

Table of contents
What is a psychological contract?
Signs that a team’s psychological contract needs help
The Psychological Contract & Covid-19
Some final thoughts

What is a psychological contract?

In the broad terms, the psychological contract is an unstated and dynamic arrangement that includes things like respect, honesty, trust, empathy, and other feelings and expectations. It’s imperative that company leaders cultivate the emotional intelligence to pick up on cues from employees that the contract might have been violated. Similarly, companies should create a sense of psychological safety within the work culture, so that employees will feel comfortable raising issues related to the psychological contract. 

What’s interesting about the psychological contract is that it’s neither a process nor toolset. Rather, it’s an organic process between an employer and their team members, and might actually be best described as philosophy. If a good psychological contract exists, a company’s employees can expect a more stable, welcoming, and fruitful workplace. 

“The Psychological Contract is quite different to a physical contract or document,” Business Balls writes. “It represents the notion of 'relationship' or 'trust' or 'understanding' which can exist for one or a number of employees, instead of a tangible piece of paper or legal document which might be different from one employee to another.” 

Writing in the Harvard Business Review, Marla Gottschalk elaborates on the psychological contract’s definition. She notes that it is an “unstated” agreement or “set of promises” that unite employer and employees. 

“Sadly, once stressed or broken, this contract is very difficult to repair,” Gottschalk writes. “Reviewing the health of these contracts is a unique opportunity to increase stability, and in turn, to retain valuable employees, as the psychological contract has been shown to correlate with outcomes such as job satisfaction, commitment, performance, and trust.”

Signs that a team’s psychological contract needs help

It goes without saying that workplaces with good psychological contracts don’t violate or break them, or do so rarely, and then correct course. When it’s violated, employees can feel let down or betrayed. This might lead to changes in an employee’s work behavior and even lower the quality of work. 

“Reciprocity between an individual and the company brings balance to the organization,” writes the Wharton School of the University of Pennsylvania. “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.

Below are some instances where a team’s psychological contract might have been violated. Each violation is followed by ideas for how to create a solution to the breach. 

Salary Expectations

An obvious place to look for a psychological contract gone wrong is in worker pay. Salary is important to both employee and employer. Indeed, a worker’s pay is explicitly stated in their contract with the company. But, over time, salary expectations may be overlooked in the day-to-day work culture, unless employer or employee broaches the subject. 

If, for instance, an employee is hired with the expectation that they will be able to get raises over time, and this promise goes unaddressed or unfulfilled, the psychological contract can be broken. The employee may feel the pay is unfair or not competitive in the job market, and so they start to feel as if the employer or manager hasn’t fulfilled their end of the bargain. 

Ultimately, this may cause the employee to begin looking for a job that pays more. And with it, it could impact the company’s productivity and revenue. 

“Obviously, you need to have a balance between your salary, measured in terms of money, and the emotional payback [you get from a job],” Francisco Mesoneros, general manager of the Adecco Foundation, told the Wharton School. “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.”

Company leaders can prevent or eliminate this type of broken psychological contract by creating open lines of communication about salary with employees. It could be as simple as encouraging employees to see them about any issues or concerns, which opens the door for discussions about pay. 

Workplace culture

Some workplace cultures are great and healthy. These companies typically do work that employees value, and make the work experience enjoyable, fulfilling, and in many other ways engaging. Other workplaces are toxic, and can variously be full of disorganization and unhealthy team dynamics

Imagine that an employee joins a company with the expectation that the workplace culture will be positive, welcoming, and stimulating, amongst other things. However, they quickly note the reality is quite different—the workplace culture is such that few people actually like the work, or the top-down management is too controlling, and so on. This could quickly create a psychological contract breach. 

A company should be perceptive enough to realize whether or not the workplace culture is healthy and engaging. Many company leaders are astute enough to create such a culture from the get-go, but many others have to learn—sometimes the hard way. And when company leaders realize work culture is lacking, and possibly breaking the unspoken psychological contracts with employees, they should ask employees to offer advice on how to improve and/or even seek outside counsel.

Work exceeds job description

Another thing company leaders should keep an eye out for is employee workload exceeding the job description. When a person is hired for a specific job, that job should not include other tasks added later; unless this is openly discussed and agreed upon. And even then, the pay will have to reflect the new workload and responsibilities. 

For example, if an employee is hired to lead a company’s marketing, they shouldn’t be pulling double duty as the public relations manager, and vice versa. Company leaders must be aware if they are asking for too much outside of an employee’s job description.

To avoid breaking the psychological contract, company leaders should first ask if the employee wants more responsibility. If they do, again, pay should reflect this. If they don’t want the added workload and responsibility, then they will appreciate the consideration. 

Company ethics

Somewhat related to an unhealthy work culture is company ethics. As we have seen in recent years, company ethics can be very important to employees. In fact, research by the Stanford Graduate School of Business found that corporate social responsibility impacted MBA graduates’ job choices.

Picture a company with a brand built around sustainability practices. Now imagine if the company strayed from its sustainable brand image. This is the type of move that, in the eyes of many employees, could break the psychological contract. 

To prevent this from happening, or correct course if it has already occurred, company leaders should examine the company’s ethics. If the ethics are off base, leaders must work to get them back in line, which will reestablish the psychological contract. 

Change Management

Change comes to all companies in all sorts of ways. Within a company, change can come manifest in new ways of thinking, working, and dealing with emerging technologies, amongst other factors. So, change management becomes incredibly important in maintaining a company’s psychological contract with its employees. 

In a paper published in the SA Journal of Human Resource Management, researchers found that managing change is vital in maintaining the psychological contract.  

“The organisational environment is continuously changing and organisational leaders need to be aware of the employment relationships in various situational circumstances,” the researchers concluded. “Safeguarding the psychological contract is paramount if good staff are to be retained and a positive organisational culture established within which staff can flourish during periods of change and thereafter.”

The Psychological Contract & Covid-19

As noted in the above section, managing change is vital to the psychological contract. Doubly so in this time of major upheaval and change caused by the Covid-19 pandemi. Keeping the psychological contract healthy and flexible has taken on added urgency. 

With all of this societal uncertainty, a company’s employers and team must work together to enhance and reinforce the psychological contract. How might they do this? 

“As things inevitably shift within the organization, there should be ongoing discussions about how the changes might affect the work and the individual,” Harvard Business Review’s Marla Gottschalk writes. “During times of major change, psychological contracts should be revisited often. For example, goals and performance metrics should be recalibrated from time to time, and certainly after any organizational changes take place.”

Again, opening up lines of communication is paramount. Company leaders and employees need to talk openly about things like job security or pay. They need to address more recent issues to emerge during the pandemic, like navigating new virtual workplaces, depression at work, and stress that can lead to absenteeism and lost revenue. 

With the pandemic’s pressures, both in and outside of work, company leaders must reassure employees that they are there for them, and that they won’t unnecessarily or unethically risk employees’ physical health.  

If company leaders and employees can tackle these and any other issue, they can maintain psychological contracts, but also respond well to other future crises.

Some final thoughts

We talked about a few ways that psychological contracts can be broken, and various ways to fix and strengthen them. The key to maintaining psychological contracts is to have effective communication between company leaders and employees. 

“Managers can address psychological contracts more openly by having regular discussions about what is being exchanged in the employee/employer relationship,” writes Marla Gottschalk in the Harvard Business Review. “This can help clarify goals, drive performance, encourage developmental conversations, and help employees begin to explore career planning.”

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