What Is a Psychological Contract: Types With Examples
The psychological contract significantly affects what keeps employees engaged and motivated. According to a report by Tiny Pulse, lack of trust in managers, no recognition, and low work-life balance all play a significant factor in an employee’s decision to leave a company and can lead to an employee mentally “checking out” from their job long before they hand in their resignation.
One of the most challenging factors of the psychological contract is that it’s unwritten, intangible and sometimes based on unarticulated expectations that employers and employees hold. Yet, it may be one of the most valuable “contracts” an employer has with the employee, particularly given skills shortages and talent mobility challenges. So, let’s explore what a psychological contract is, why it matters, how to create an effective one, and what HR can do to fix a broken one.
Contents
What is the psychological contract?
The importance of a psychological contract in the workplace
Types of psychological contracts
How to create an effective psychological contract
Psychological contract examples
Signs of a breakdown in the psychological contract
What HR can do to fix a broken psychological contract
What is the psychological contract?
The concept of a psychological contract emerged in the 1960s and was rooted in psychological and organizational behavior. It emphasized the human side of the relationship between employee and employer.
A psychological contract encompasses the informal beliefs, ambitions, obligations, and expectations the employee and the employer perceives. Essentially, it’s how both parties understand their relationship outside of the written and signed employment contract and what they expect the other party to provide. It’s typically built on the actions of everyone in the organization, and it strongly influences how employees behave, organizations respond, and how we manage the employee experience.
If both parties feel that the other is meeting their expectations, the stronger the relationship will be, as long as there is a balance in the contribution on both sides. However, if one party starts to feel let down or continually taken advantage of, the relationship can quickly deteriorate leading to a loss of trust and in the worst case, severing the relationship.
The importance of a psychological contract in the workplace
A psychological contract helps establish trust and commitment between the employer and employee. Both clearly understand what is expected from them in the workplace and can focus on delivering. Employees who believe their psychological contract is fair (i.e., they receive as much as they give) are generally more motivated and committed to their work and the company’s wider goals and more likely to go above and beyond to perform.
When the psychological contract is fulfilled, employees are likely to feel more satisfied, engaged, and motivated at work, which can boost productivity and performance and reduce the risk of turnover. On the other hand, when the psychological contract is violated or broken by either party, feelings of betrayal, resentment, and disengagement can occur, negatively impacting productivity and morale.
A strong psychological contract can help retain employees as they commit to the organization and feel they belong.
Types of psychological contracts
| Psychological contract type | Description |
| Transactional psychological contract | Focuses on a transactional relationship between an employee and an organization, emphasizing the exchange of specific tasks and rewards. The contract is usually short-term and task-oriented. Employees expect fair compensation for their efforts and compliance with explicit job requirements. |
| Transitional psychological contract | Occurs during organizational changes or transitions, such as mergers, acquisitions, or restructuring. It reflects the expectations and obligations that employees have during periods of change. Employees may expect security, support, and assistance in adapting to new roles or environments. The contract is often temporary and subject to revision as the transition progresses. |
| Balanced psychological contract | Emphasizes a fair and equitable exchange between employees and organizations. It acknowledges both monetary and non-monetary aspects of the employment relationship, such as work-life balance, professional development, and job security. This contract type aims to foster mutual commitment, trust, and a sense of well-being for both parties. |
| Relational psychological contract | Focuses on building long-term relationships between employees and organizations. It involves implicit expectations, such as job satisfaction, organizational citizenship behaviors, and opportunities for growth and advancement. The contract emphasizes mutual loyalty, trust, and the belief that the organization will fulfill employees’ career aspirations and provide a supportive work environment. |
How the psychological contract is formed
The psychological contract is formed between both parties in the workplace in several ways.
1. Established during first engagement
Before someone even joins a company, they interact with its employer brand through a set of values or a specific mission. These serve as a starting point for potential employees’ expectations from the working relationship.
Candidates will also interact with your employee value proposition, which should demonstrate the unique value you offer employees in return for their skills, experience, and commitment. Your EVP should explain what it’s like to work for your company and why it’s the best place for the employees who thrive there.
Additionally, both parties will have existing expectations. For example, the employee’s expectations are based on previous employers, and the company’s expectations are based on how they currently manage their workforce.
This is one of the first ways an organization can signal and shape the psychological contract with employees and help to recruit and retain employees who align with the company’s core values and expectations.
2. Established during the recruitment process
The psychological contract continues to be formed during the recruitment process as managers go into more detail about the specific role a candidate is interviewing for, along with expectations, progression opportunities, and pay and benefits. Candidates will get a glimpse at the company and team culture here, and the level of trust, autonomy, and respect employees are given, which are all integral to a strong psychological contract.
3. Established during employment
Psychological contracts continue to be developed throughout the employee lifecycle as the employee gains more experience in the job and sees the organization’s culture and values in motion. Factors including manager behavior, support, job security, learning and development opportunities, and fair and inclusive treatment will shape the contract.
How to create an effective psychological contract
There are many ways that HR, managers, and business leaders can work together to create an effective, positive psychological contract between the employer and employee.
1. Ensure that there is open and honest communication
Creating a line of open and honest communication from the start is integral to creating an effective psychological contract between employer and employee. Set clear expectations in job descriptions, and be transparent about pay, benefits, and career progression.
Ensure that feedback is regularly provided to employees from managers, including what they’re doing well and how they can improve, and give employees a chance to voice their thoughts and concerns and what support they expect and need from their manager. This two-way flow of information is really valuable.
2. Be clear about the expectations and obligations of both parties
Job descriptions should contain a clear set of skills required as well as key responsibilities of the role you’re hiring for, and this should match up with the day-to-day responsibilities the employee faces when they start work. These responsibilities should also be listed in the employment contract and any information relating to contracted hours, dress code, privacy and data ethics, and anything else relevant to the role and your company.
Similarly, employers should be clear on what behaviors are encouraged or expected given the organization’s culture and values. These are often not clearly expressed leading to employees acting and behaving in a way that is inconsistent with the expectations of the organization.
If you use certain performance metrics or targets to assess individual employee performance, then make these clear from the start so that the employee knows how they will be assessed and what they need to focus on.
3. Build trust by delivering on promises made in the psychological contract
Only promise something you can deliver to your employees. For example, if you state in an interview or at some point during the period of employment that there will be training opportunities available so the employee can develop their skills, then make sure these are provided and that the employee is made aware.
If a candidate asks about the possibility of flexible working hours during an interview, which you don’t offer employees, be clear about that and explain why you don’t. It’s better to let a candidate down at this stage rather than over-promising and failing to deliver once they join the organization.
4. Foster a positive workplace culture
A positive workplace culture supports the goals and values outlined in the psychological contract. A study by LinkedIn found that 83% of companies agree that an employer’s brand significantly impacts the talent a company can attract and recruit. Your employer brand helps define your culture, values, and mission and share these with the world; therefore, it has immense value.
Ensuring that your work environment matches your employer brand is essential. Focus on creating a supportive and collaborative workplace where you focus on fairness and inclusion, commit to the well-being of all employees, and recognize and reward good performance.
5. Consult with employees to gain insights
Research has found that when employees are engaged, they are happier and more satisfied at work, have lower levels of absenteeism, higher retention, and loyalty, and give better customer service. Therefore, carrying out frequent employee engagement surveys is essential, as it helps you understand how your employees truly feel and what their evolving expectations are so that you can bridge the gap to meet their needs.
According to Forbes, employees who feel heard are 4.6 times more likely to feel empowered to perform their best work. Surveys, informal group feedback sessions, and one-to-ones can all help employees feel valued and gain insights into whether the psychological contract is being upheld or breached.
Psychological contract examples
Example #1
An employee applies for an assistant position in a company, but the employer feels they would be better suited to starting at the trainee level. The company may make an informal agreement that if the employee completes a specific training and completes six months in the trainee role, they will be promoted to assistant level. This is not written into their contract but is verbally agreed upon at the interview. If the employee does not move into that position within six months a psychological contract breach can occur as the employee held the expectation that, once they completed the required training, they would be promoted.
Example #2
Informally, the organization has always granted employees parental leave beyond the legal requirement and allowed employees to return to the workforce in a reduced capacity in the first year. A new manager has been appointed, and when he has an employee requesting additional time-off post parental leave, they refuse based on the policy.
Example #3
There is an unwritten rule in a company that the day after the Christmas party each year, employees are allowed to come in a little later than usual and are not expected to work a full shift. However, a new manager arrives, and that year, they reprimand an employee who comes in late and deducts their pay for working a short shift. This can make the employee feel like the psychological contract has been dishonored.
Signs of a breakdown in the psychological contract
At the organizational level:
- Reduced levels of engagement, job satisfaction, productivity and satisfaction have been linked to breaches in the psychological contract.
- Similarly, increased turnover and loss of performance could also occur.
At the individual level:
- A lack of commitment
- Employees becoming demotivated, unproductive and rising levels of absenteeism. Similarly, we find more tension and even conflict between employees, team members and managers leading toward further breakdown of trust.
What HR can do to fix a broken psychological contract
1. Understand the expectations
A broken psychological contract can be detrimental to the employee and the company’s overall success. As HR professionals, it’s crucial to understand the expectations of both parties to make a positive impact and mend the broken psychological contract. By taking this first step and gaining an understanding, HR can assess the situation and develop a plan to move forward.
It’s essential to display empathy and understanding when approaching this issue, as it’s a sensitive and personal matter. By acknowledging and addressing the expectations of both parties, HR can take strides toward a more beneficial psychological contract for all involved.
2. Conduct an analysis
Conduct a thorough analysis to determine the specific issues that have caused the breakdown. This might involve collecting feedback through surveys, focus groups, or confidential interviews to understand their primary concerns and perspective.
3. Find a solution that aligns with both parties
Once HR has determined the root cause of the issue, the next step is to work towards brainstorming and implementing feasible solutions for both the employee and employer. Communication is key in repairing a broken psychological contract, and HR should facilitate open and honest discussions to ensure mutual understanding and agreement on the way forward. Implementing a transparent and effective solution can help restore employee trust and foster a positive work environment.
4. Involve employees and get feedback
Ask employees for their involvement and feedback as you work to repair the psychological contract. Are they starting to regain trust? Do they feel they are treated fairly? Are they engaged and committed to their work and the organization?
5. Monitor progress and make adjustments
HR should regularly monitor the progress of the efforts to repair the psychological contract. This can be done through ongoing employee surveys, focus groups, or one-on-one conversations. If necessary, adjustments can be made based on feedback to ensure that the organization effectively addresses the concerns and rebuild trust.
To sum up
Although the psychological contract between the employer and employer is an invisible, unwritten one, it’s arguably more important than the formal employment contract every employee signs before their first day at work. This psychological contract is being formed before a candidate even interviews at your company, so it’s imperative that you devote resources to creating an effective psychological contract that helps foster a strong long-term relationship between both parties.
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