The Psychological Contract: Relevance for Our Everyday Business Operations

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Vera Hillmann

The Psychological Contract has been of increasing interest for HR departments as it can be used to measure factors impacting behavior in the workplace. This contract can be used as a powerful instrument for driving behavior and business performance. This article will outline essential aspects of the Psychological Contract, what implications it has for your work relationships, and how it can be applied in a useful way at your workplace. 

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What is the Psychological Contract?

The Psychological Contract, a concept that describes the perception of the business relationship between two parties, has become a point of interest in the HR community. The contract, usually thought of between employees and their employer, refers to the mutual expectations people have of one another, and how these implicit expectations impact and change our behaviour. For HR professionals, an understanding of the psychological contract can help to measure the factors that impact behavior in the workplace.




These are the essential aspects of the Psychological Contract:

  • It is covert, imprecise and implicit: often expectations are not directly communicated and verbalised.
  • It is unstable: the PC is always potentially unstable because it is based on hidden expectations and assumptions feeding into how situations are perceived.
  • It is unwritten: there is no written agreement, such as a legally binding employment contract.
  • It is dynamic: expectations shift over time and change constantly, such as when new colleagues join the team. This also shapes the PC as new situations might require reconsidering the employee-employer relationship.


Why is it Important for the Work Relationship?

The problem with the PC is that employees think that their expectations are generally accepted and agreed upon. The so-called violation of the PC simply means that these expectations are not fulfilled. Often what we say is not what we think, specifically in the context of work. This leads to hidden assumptions on both sides—for the employee and the employer –and results in violating the PC.

The true scope of the PC only becomes apparent to both parties when a specific behavior reveals the assumptions. When employees feel that the PC has been violated, they lose trust in the organization and adjust the PC according to their experiences. In this case, employees feel they do not get much out of the business relationship, they will lower their efforts correspondingly.

Possible consequences of a violation of the PC include employee dissatisfaction, demotivation, withdrawal, and underperformance, which might lead the employee to think about leaving the organization. On the other hand, when employees feel that the PC has been fulfilled and that the employer is ‘sticking to their part of the deal,’ the results are increased performance, job satisfaction, and loyalty towards the organization.

For example, if one employee puts in extra hours each day and ‘goes the extra mile’ to provide excellent customer service, he or she might feel that they should be first in line for a promotion. If another colleague gets promoted before him or her, the PC is violated as the expectation remains unfulfilled. It’s likely that the manager wasn’t aware of this expectation and could expect someone who wants to be promoted to mention this during performance appraisals. This demonstrates an expectations gap between employee and employer, and could result in the employee showing lower effort in the workplace because he or she assumes that his or her top performance has not been rewarded.


Impact of an International Workplace on the Psychological Contract

The cultural aspect brings a whole new dimension to the PC—and it does not make things easier! It is already difficult to guess what your staff or your employer might think when you are from the same culture. Cultural differences add an additional layer to the vagueness and implicitness of the PC, which can lead to misunderstandings and misjudgement.

People from different cultures can have very different expectations when it comes to management style, reward systems, and work ethic. Also, different cultures have diverse opinions when it comes to leadership preferences (see GLOBE Project).These nuances are often not discussed when hiring international staff—as everyone assumes that they have a ‘common ground’ of understanding. However, reality proves that the opposite is actually the case. International teams can demonstrate high dissatisfaction and underperformance without being able to identify the underlying reasons for this. That is why it is essential to consider the implications of the PC even more when working with different cultures. As the PC is unwritten, there is no such ‘common ground’ which was officially agreed upon.

For more information on the importance of the psychological contract, click here.

Managing the Psychological Contract

In many cases, issues in the workplace reflect a violation of the PC, as opposed to a violation of the employment contract recorded in writing. Because of this, the PC offers one of the most insightful approaches of understanding and influencing behavior at work. It is important to understand the nature of this contract in order to maintain a positive relationship between employers and employees. The solution for avoiding and resolving violations is communicating the mutual expectations of both parties involved.

One practical solution is putting mutual expectations in writing at the beginning of an employment or performance reviews and openly discussing the ‘terms of the business relationship’. This could entail sections as ‘What we expect from the employee’ and ‘What employees can expect from us as a company in return’. Similarly, employees could articulate their thoughts in sections like ‘What I expect from my employer’ and ‘What I am willing to put in’. Be as specific as possible and give specific examples and incentives (monetary and also non-monetary!), as this increases the likelihood of fulfilment of the contract on both sides. The PC should also be in line with the organization’s values and philosophy as this demonstrates cohesiveness and integrity, and carries out a positive organizational culture.

This ‘written agreement’ could become part of your internal talent management. Performance reviews offer the appropriate time and format to discuss the PC. It also enables new employees to achieve desired performance standards much faster as everyone knows what do to, in order to be rewarded. But keep in mind: this contract changes constantly, is always potentially unstable, and needs to be redefined on a regular basis.

When the PC is applied in an appropriate manner, organizations are more likely to increase their overall performance and reduce turnover rate of their staff. This makes the contract an effective tool for the management of your organization. Try it out and keep in mind: What you put in is what you get out!