The psychological contract (TPC) was first coined by Argyris (1960), who observed an unwritten agreement existed between employer and employee, summarising that staff performed to a higher level if they received fair wages and had a degree of autonomy in the manner in which they worked. TPC consists of expectations, beliefs and implied obligations; none of which are written in the tangible contract between the employer and employee (Schein, 1985). Rousseau (1995, P.9) developed this idea and defined TPC as ‘individual beliefs, shaped by the organisation, regarding the terms of an exchange agreement between the individual and their organisation’.
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This essay will proceed to discuss the importance for organisations of managing the psychological contract (TPC) and the implications of a breach. The essay will move on to critically analyse the difficulties organisations face in managing TPC, with particular reference to those resultant of the shift from the traditional to the contemporary employment relationship. This essay concludes with a brief summary of the importance of managing TPC and the key challenges which arise when attempting to do so.
The importance of managing the psychological contract
Fulfilment of TPC from employers has been proven to result in reciprocation from employees, leading to positive organisational attitudes, affective commitment (Tekleab & Taylor, 2000) and reduced turnover intention (Montes & Zweig, 2009), which lowers an organisations recruitment and training costs, therefore it increases its efficiency (Wilton, 2013). A balanced PC is linked with organisational citizenship behaviour (Decktop, Mangel and Cirka, 1999) and high employee engagement – meaning the employee has a high level of commitment to the organisation and its values, and exhibits willingness to help their colleagues (CIPD, 2009).
Due to TPC consisting of unarticulated beliefs, expectations and perceived obligations breaches are not uncommon (Wilton, 2013) as neither party can ever fully know what the other expects of them (Cullinane and Dundon, 2006). Social Exchange theory undergirds TPC postulating that employees and employers engage in exchanges with each reciprocating the contribution of the other (Blau, 1964). In line with the theory of reciprocity (Gouldner, 1960), when employers do not fulfil their implied or understood obligations a breach of TPC can occur, resulting in the employee reciprocating by withholding their effort from work (Bal, Chiaburu, & Jansen, 2010), negative organisational attitudes (Piccoli and De Witte, 2015), reduced performance (Restubog, Bordia, & Bordia, 2011) and workplace deviance (Bordia, Restubog, & Tang, 2008). Many organisations attempt to manage TPC in order to mitigate these potentially harmful effects.
A breach of TPC can occur for reasons such as implementation of large scale organisational change often without employee consultation (Gerber et al, 2012). Resistance to change can be extremely problematic for organisations, and the adjustment period to such change can cause vast decreases in efficiency leading to loss of competitive advantage (Dawson and Andriopoulos, 2014). Heuvel, Schalk and Assen (2015) found organisations which communicated their full intentions of change with employees implemented large scale organisational change with lower levels of resistance, due to perceived fulfilment of TPC. This suggests balancing TPC can reduce the resistance to change many employees experience and help to mitigate the potential for loss of competitive advantage.
A study by Atkinson (2007) discovered the expectations within TPC widely vary between individuals and organisations, Restubog et al, (2015) found that an aggressive and competitive culture within an organisation exacerbated any breach of TPC and increased the likelihood of employees actively seeking revenge. This suggests that organisations requiring their employees to behave in a highly competitive manner are at greater risk of negative effects from TPC breach and should take necessary measures to minimise the likelihood of this occurrence (Bankins, 2015), as the effects on the organisation will likely be more damaging than if the employee were to simply withhold their effort or decide to leave the firm.
Rousseau (1995) implied that within TPC the employer was the independent variable and the employee the dependant variable, believing the employment relationship to be dependant on the actions of the employer and their ability to recognise and meet the expectations of the employee, however this proved contentious. Theorists such as Guest and Conway (2002) advance that TPC is subject to both parties meeting the others expectations rather than just the employer meeting the employee’s, and concluded that the state of TPC is dependent on mutual trust, fairness and delivery of the deal. The following section will discuss the ways in which organisations can attempt to manage TPC and the difficulties that arise in doing so, with particular reference to the contemporary employment relationship.
The challenges of managing the psychological contract
The dynamics of the labour market have constantly changed and evolved over time (Wilton, 2013), in particular the rise in organisational demand for flexibility has resulted in a paradigm shift from an exchange of job security in return for organisational loyalty to one in which experience is offered to the individual in exchange for temporary service to improve their future employability (Adamson, Dochetry and Viney 1998). Resultantly the contemporary employment relationship can be seen as much more individualised, with Rousseau (2004) terming this as a shift from a relational to a transactional employment relationship. The new PC consists of employee assurances to work hard and be flexible and employer’s obligation to provide adequate pay, opportunities for skill development and interesting work (CIPD, 2009).
A prevalent issue in managing TPC is known as “multiple agency” (Hui, Lee and Wang, 2015). This refers to employees receiving different messages from the different managers they come into contact with within the organisation. It is therefore imperative for an organisation to ensure that they manage to maintain congruency in their messages throughout their organisation (Lapalme, Simard and Tremblay, 2011). Wilton (2013) suggests that an organisation must utilise a mechanism through which clear communication can be ensured between employer and employee in order to explain managerial decisions and give a platform for employees to voice their opinions. This is in line with Guest and Conway’s (2002) findings that employee voice in relation to managerial decisions positively influenced TPC. Internal social media is an increasingly popular method for firms to improve internal communications within their organisation and promote the brand internally in order to positively influence TPC (Mazzei, 2010). Ironically the implementation of internal social media is exactly the type of large scale organisational change which, without the correct communications could encounter significant resistance to change (Dawson and Andriopoulos, 2014) and result in a PC breach. Critics of social media note that it is impossible to regulate (Jones, 2015), as such employees could use this platform to exact revenge for a perceived breach of TPC in a more public and far reaching way than before, so organisations should exact caution when implementing this as a strategy for managing TPC. Organisational policies which are adopted in the favour of the workforce will likely positively effect TPC and result in improved workforce efficiency. This systematic adaption of a corporation’s policies to improve their attractiveness as an employer is known as employer branding (Taylor, 2005), however while this can positively affect TPC, organisations perusing this strategy must be aware that those with stronger employer branding must work harder to maintain TPC due to raised employee expectations (Bains, 2015). Bowen (2015) cites generational differences in comfortability utilising social media platforms, and so using internal social media to give employees a voice could potentially alienate some of the workforce, which if not addressed, could result in a breach of TPC. In order to mitigate this risk, training could be provided on the platform, which will likely have a positive impact on TPC as it is in line with the new psychological contract which emphasises the employer providing training and new skills for employees (CIPD, 2009).
A challenge for organisations attempting to manage TPC within this contemporary relationship is the generational diversity of the workforce. (Lyons,and Kuron, 2014). Lub et al (2015) found that different generations held very different expectations of their employer’s obligation and their own personal contribution to that organisation, suggesting that a multi-generational cohort solution offers the most effective way to maintain a positive psychological contract with the workforce. In countries with an aging workforce like the United Kingdom the generational diversity is likely to be extremely high (Hertel and Zacher, 2015), making it costly and time consuming for management to implement policies to balance the psychological contract for all. This could therefore constitute an area for further research, in order to realise the most efficient way to collectively manage the expectations of such a diverse workforce.
It is not only generation diversity which has increased within the modern employment relationship, there has also been rapid growth of a cultural diversity within the global workforce due to the phenomena of globalisation – resulting in what is known as the global workforce (Ryan and Wessel, 2015). Some commentators argue that many of the theoretical frameworks within HRM are underpinned by western cultural values, and that perspective which much of the HRM discourse is written from does not hold a universally applicable view of employment attitudes to authority or risk (Yi et al, 2015). Westwood, Sparrow and Leung (2001) found the dynamics of TPC of junior and senior management from Hong Kong proved, from a western perspective, to be extremely one sided. It seemed the underlying sense of duty and respect which is deep-seated in Chinese culture is reflected in the attitude of the employee, who believes they are more obligated to their employer than their employer is to them. This is in direct contradiction of the western findings of Rousseau (2004) who stated that the employer was the dependant variable and the employee the independent, highlighting the cultural disparity in how TPC is viewed. Not only is the holistic view of TPC likely to be different depending on the cultural context, there are likely to be international differences in the extent to which employees respond to a breach of TPC (Lucas, Lupton and Mathison, 2006), not only making it harder for managers to balance the psychological contract within the confines of foreign cultures, but also making it more difficult for management to predict what retaliation, if any, is likely to occur. A huge challenge facing managers can occur when they are of a different cultural profile to the employees they are managing, due to the commonality of difference in both motivation and interpretation of the parties (Thomas, Au and Ravlin, 2003). As a result it is recommended that organisations with cross cultural management practices give time to understanding the complexities of TPC within their workforce, and work hard to ensure that it can remain balanced.
The importance of an organisation managing the psychological contract within a western cultural context is well documented within HRM discourse, allowing organisations to reap the rewards of improved employee relations (Tekleab & Taylor, 2000), and mitigate the risks associated with PC breach (Piccoli and De Witte, 2015). If an organisation does not manage TPC negative work behaviours such as withholding effort or employee deviance could become typical for the organisations workforce (Bankins, 2015) causing loss of competitive advantage.
The main challenges with managing TPC in the contemporary employment relationship stem from the widening generational and cultural diversity experienced in many workforces due to the global aging population and globalisation.
HRM discourse is primarily based on western cultural assumptions, many of which do not hold true in other cultural contexts (Wilton, 2013). This presents challenges for managers working outside of their own culture or working within a multicultural society. Due to the unwritten and unspoken nature of TPC any organisation would be advised to adequately research the expectations of employees in any foreign context in which they plan to engage, in order to avoid discrepancy. It can be argued that HRM practices developed within the western culture offer ineffective ways to manage labour in divergent cultural settings, constituting a possible area for further research.
The growing generational diversity of the global workforce presents difficulty for organisations seeking to implement policies to manage TPC (Cogin, 2012), due to differing generational expectations. Thus to effectively manage such a diverse workforce time must be taken to individualise TPC (Lub et al, 2015).
Managing TPC in the individualised manner required of a culturally and generationally diverse global workforce has the potential to be both financially and time intensive. Organisations should therefore analyse the potential implications of non-effective management of TPC before adopting this policy. Consideration should be given to the individual organisational culture, as in organisations with a more competitive and aggressive culture the implications for not managing TPC can be extremely serious, with heightened likelihood of employee revenge (Restubog et al, 2015). Such an organisation would therefore be ill advised to not pursue a policy of PC management.
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