The Importance of the Psychological Contract

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HR professionals are familiar with contracts.  In almost every industry, companies ask potential new employees to sign at least one form or another.  In some cases, there are multiple types.  However, there is one contract that is not signed:  the psychological contract.

What is the psychological contract?

The concept of the psychological contract was originally developed by Denise Rousseau.  Rousseau is a H. J. Heinz II University Professor of Organizational Behavior and Public Policy at Carnegie Mellon University.

Want to know more about the pros and cons of the psychological contract? Click here!

Unlike a formal, codified employee contract, a psychological contract is an unwritten set of expectations between the employee and the employer.  It includes informal arrangements, mutual beliefs, common ground and perceptions between the two parties.

Communication is a Key Element

Since the contract itself is not formal and codified, it exists in a state of flux.  It is constantly developing based on communication between the employer and the employee.  While consistent communication positively impacts the psychological contract, it is worth noting a lack of communication can negatively impact the contract.  This includes conversations, voice tone, body language and even implication or inference between the two parties.

Without effective two-way conversation, the contract between employee and employer (or even employee and employee) can become imbalanced and a “breach” can occur.  Breaches and how they occur will be discussed later in the article.

A balanced contract shows employees their employer values and respects them and finds their role within the company important to its success.  This leads to increases in productivity and a positive impact on the business itself.  Consistent interaction between employer and employee can improve employee loyalty and further allows the employee to use their talent to promote and progress the company’s goals.

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Contract Diversity

The benefit of a psychological contract versus a more codified contract is that it’s individually focused.  Every psychological contract is different because each employee is different.

Don’t underestimate the impact of diversity.  This can make a huge impact on both the employee and the employer.

Individual psychological contracts allow the employee to see their value and role within the business.  It also helps both sides avoid creating unrealistic expectations of one another.  And it allows for “amending” the terms of the contract if needed, which is done through regular communication.

Exploring the psychological contract

As previously stated, what makes up the "contract" can vary with the unique needs and aspirations of each employee, but that does not imply an organization should seek to satisfy each employee’s unspoken expectations.

Want to know more about the psychological contract and how it can drive employee engagement?  Click here.

It is, however, an area where an organization can leverage the employee-manager relationship by equipping and encouraging managers to discuss and address psychological contract expectations with employees. Managers can help employees explore and, if necessary, modify their expectations, offsetting negative reactions when unrealistic expectations are not met.

Direction communication business concept for building a bridge

Such manager-employee discussions can be used to "re-recruit" top talent. HR can help managers by providing suggested questions to guide the discussion. These questions might include:

  • What attracted you to this organization?
  • Do you still feel the same way? Why or why not?
  • Do you feel like you are doing your best work? Why or why not?
  • Where do you see yourself in five years?
  • How can we help you get there?

By initiating the one-on-one conversation and listening uncritically, managers demonstrate that they care, thereby improving communications and strengthening the manager-employee relationship. 

Contracts gone wrong

Earlier in this article, the term “breach” was used.  A breach is the result of a psychological contract gone wrong.  A breach occurs when one party perceives the other as failing to fulfill promises.  Those include:

  • Pay – promised increases were not fulfilled
  • Promotion – a promised promotion doesn’t happen in the expected timeframe
  • Type of work – important responsibilities of the employee were misrepresented
  • Training – Employee doesn’t receive the promised training
  • Feedback – Promised performance reviews were inadequate or absent 

What happens when breach occurs?

Typically, employers will see negative emotions from the employee such as anger, betrayal, or sadness.  Also, the relationship between the two suffers because there is a lack of trust and respect.  Commitment on the part of the employee is reduced.  There is less job satisfaction.  There may also be a withdrawal of behavior.  For instance, the employee is less willing to work hard, to share ideas, and to be a good work citizen.


At the end of the day, the psychological contract is the responsibility of both the employee and the employer.  Both have separate responsibilities to guard against potential breaches.  For the employer, it’s about making sure not to give the wrong perception to an employee and to make sure promises are upheld.  For the employee, it’s about managing their expectations so that difficult situations or adverse personal circumstances aren’t seen as negatively impacting productivity and aren’t seen as a worker “acting out”.

Taking this information into account will help prevent a breach and will lead to a balanced contract between the two sides.  

State of HR Report

The State of HR is in transition. The days of being merely transactional are extinct and the evolution of the strategic HR department is underway. So, what shape will the future take? Where will the focus lie in order to achieve success? Find out in our latest report: The State of HR.