Psychological Contract

A ‘psychological contract’ represents the mutual beliefs,

perceptions, and informal obligations between an employer and
an employee. It sets the dynamics for the relationship and defines
the detailed practicality of the work to be done. It is distinguishable
from the formal written contract of employment which, for the most
part, only identifies mutual duties and responsibilities in a
generalized form.

As commercial organizations grew in size and complexity, there was

a tendency to standardize rather than individualize the treatment of
labour. Trade unions emerged to offer protection to ever larger
groups of employees. The result was collective bargaining to
define pay and conditions by reference to grades across industries
and trades, and in public service. More recently, unions have lost
some of their significance, leaving employees in more direct control.
But societies have developed expectations of a better work-life
balance, reinforced by legislation, and employers have found it in
their own best interests to develop practices that respect equal
opportunities and employment rights through professionalized
human resource services because:

 The workforce has become more feminized;

 The workforce is better educated, less deferential to authority
and less likely to remain loyal;
 The workforce is required to be more flexible to meet new
challenges quickly and effectively, but this need to change can be
a source of insecurity;
 The use of temporary workers as well as outsourcing of
projects and whole business functions also changes workers'
expectations as to what they want to get out of their
 psychological contracts (e.g., transferable skills now v/s. life-time
employment before); and
 Automation has both empowered a greater percentage of the
workforce and allowed the emergence of tele-working which
fragments the old social orders of a single location workplace and
generates greater freedom and flexibility in an ever increasing
global workforce.

'The Psychological Contract' is an increasingly relevant aspect of

workplace relationships and wider human behaviour. Primarily, the
Psychological Contract refers to the relationship between an
employer and its employees, and specifically concerns mutual
expectations of inputs and outcomes. The Psychological Contract is
usually seen from the standpoint or feelings of employees, although
a full appreciation requires it to be understood from both sides.
Simply, in an employment context, the Psychological Contract is the
fairness or balance (typically as perceived by the employee)
between:
 How the employee is treated by the employer, and
 What the employee puts into the job.

At a deeper level the concept becomes increasingly complex and

significant in work and management - especially in change
management and in large organizations.

Interestingly, the theory and principles of the Psychological Contract

can also be applied beyond the employment situation to human
relationships and wider society. Unlike many traditional theories of
management and behaviour, the Psychological Contract and its
surrounding ideas are still quite fluid; they are yet to be fully defined
and understood, and are far from widely recognised and used in
organizations.
The concept of 'psychological contracting' is even less well
understood in other parts of society where people and organisations
connect, despite its significance and potential usefulness. It is a
hugely fertile and potentially beneficial area of study.

At the heart of the Psychological Contract is a philosophy - not a

process or a tool or a formula. This reflects its deeply significant,
changing and dynamic nature. The way we define and manage the
Psychological Contract, and how we understand and apply its
underpinning principles in our relationships - inside and outside of
work - essentially defines our humanity.

Respect, compassion, trust, empathy, fairness, objectivity - qualities

like these characterize the Psychological Contract, just as they
characterize a civilized outlook to life as a whole.
 The formation of the contract

During the recruitment process, the employer and interviewee will

discuss what they each can offer in the prospective relationship. If
agreement is reached, most employers will impose a standard form
contract, leaving the detail of the employee's duties to be clarified
"on the job". But some of the initial statements, no matter how
informal and imprecise, may later be remembered as promises and
give rise to expectations. Whether they are incorporated into the
parallel psychological contract will depend on whether both parties
believe that they should be treated as part of the relationship. The
better organized employers are careful to document offers to reduce
the risk of raising false expectations followed by disappointment.
In the Common Law jurisdictions, the law implies duties requiring the
employees to be loyal and trustworthy. These are imprecise in their
definition and uncertain in much of their operation. But, in
psychological terms, issues as to whether promises and expectations
have been kept and met, and whether the resulting arrangements
are fair, are fundamental to the trust between the employee and the
employer. The first year of employment is critical as actual
performance by the employee can be measured against claims and
promises made during the interview, and the management has
begun to establish a track record in its relationship with the
employee at supervisor and manager level. Feldhiem reflects these
two strands by dividing the psychological contract into:

 Transactional: this is the economic or monetary base with clear

expectations that the organization will fairly compensate the
performance delivered and punish inadequate or inappropriate
acts; and
 Relational: this is a socio-emotional base that underlies
expectations of shared ideals and values, and respect and support
in the interpersonal relationships.
 Violations

Violations or breaches of the psychological contract occur when an

employee perceives that the organisation has failed to fulfil one or
more of its obligations comprising the psychological contract.

Causes of violations

Although contracts can be breached in innumerable ways, there are

a number of common forms. Recruiters may “over-promise” a job’s
opportunity for challenge, growth, or development. At the same
time, however, eager job seekers may read what they want to hear
into a promise. Managers, co-workers, or executives who say one
thing and do another can all engender breaches. A common cause of
breaches for many employees involves a change in superiors. When
one’s boss or mentor is promoted, terminated or retires, old deals
may be abrogated. Similarly, changes in human resource practices,
even with constructive intent can appear to break old commitments.
Then the different contract makers express divergent intentions. A
mission statement can convey that the organisation rewards
employees based on merit while the compensation system is based
on seniority. Different contract sources may each convey mutually
exclusive promises.
 SUMMARY

Psychological contracts are the beliefs individuals hold regarding

terms and conditions of the exchange agreement between
themselves and their organizations. By filling the gaps between the
formal contract and all that applies to the working relationship it
reduces uncertainty, shapes behaviour and gives people a feeling
about what happens to them in the organization. It can be seen as
the foundation of the relationship originating during the recruitment
phase and further developing the first few months after entry. If the
organization succeeds to meet the beliefs the employees hold
regarding the working relationship, the psychological contract is in a
good state which in turn leads to job satisfaction, higher levels of
commitment and more intentions to remain. If on the other hand
employees perceive that the organization has failed to fulfil one or
more obligations comprising the psychological contract, breaches
occur. A variety of studies reveal the relationships between breaches
and lower job satisfaction, trust, commitment, and OCB, more
emotional exhaustion, higher turnover intentions and turnover
behaviour. The psychological contract has shown its contribution in
civil settings especially in respect to retention of personnel.
Implementing the concept into military settings could be of help in
explaining why recruits leave during initial training, satisfaction and
commitment levels drop, and (intentions to) turnover rise. Additional
research could help attracting (diverse) personnel and in preventing
withdrawal during the recruitment phase.
 Employee Engagement
Employee Engagement, also called “Work Engagement” or “Worker
Engagement”, is a business management concept. An "engaged
employee" is one who is fully involved in, and enthusiastic about, his
or her work, and thus will act in a way that furthers
their organization's interests.

According to Scarlett Surveys, "Employee Engagement is a

measurable degree of an employee's positive or negative emotional
attachment to their job, colleagues and organization which
profoundly influences their willingness to learn & perform at work".
Thus engagement is distinctively different from satisfaction,
motivation, culture, climate and opinion and very difficult to
measure.

Employee Engagement is the extent to which workforce

commitment, both emotional and intellectual, exists relative to
accomplishing the work, mission, and vision of the organization.
Engagement can be seen as a heightened level of ownership where
each employee wants to do whatever they can for the benefit of
their internal and external customers, and for the success of the
organization as a whole.
Employee engagement was described as a modernized version of job
satisfaction. Schmidt et al.'s influential definition of engagement was
"an employee's involvement with, commitment to, and satisfaction
with work." This integrates the classic constructs of job satisfaction
and organizational commitment. Linkage research received
significant attention in the business community because of
correlations between employee engagement and desirable business
outcomes such as retention of talent, customer service, individual
performance, team performance, business unit productivity, and
even enterprise-level financial performance.
Employee engagement is derived from studies of morale or a group's
willingness to accomplish organizational objectives which began in
the 1920s. The value of morale to organizations was matured by US
Army researchers during WWII to predict unity of effort and
attitudinal battle-readiness before combat. In the post-war mass
production society that required unity of effort in execution, (group)
morale scores were used as predictors of speed, quality and
militancy. With the advent of the knowledge worker and emphasis
on individual talent management (stars), a term was needed to
describe an individual's emotional attachment to the organization,
fellow associates and the job. Thus, the birth of the term "employee
engagement" which is an individual emotional phenomenon.
Whereas, morale is a group emotional phenomenon of similar
characteristics.
It has been routinely found that employee engagement scores
account for as much as half of the variance in customer satisfaction
scores. This translates into millions of dollars for companies if they
can improve their scores. Studies have statistically demonstrated
that engaged employees are more productive, more profitable, more
customer-focused, safer, and less likely to leave their employer.
Employees with the highest level of commitment perform 20% better
and are 87% less likely to leave the organization, which indicates that
engagement is linked to organizational performance.

Increasing Employee Engagement

An organization’s productivity is measured not in terms of employee
satisfaction but by employee engagement. Employees are said to be
engaged when they show a positive attitude toward the organization
and express a commitment to remain with the organization.

Organizations that believe in increasing employee engagement levels

focus on: 

1. Culture: It consists of a foundation of leadership, vision, values,

effective communication, a strategic plan, and HR policies that
are focused on the employee.
2. Continuous Reinforcement of People-Focused
Policies: Continuous reinforcement exists when senior
management provides staff with budgets and resources to
accomplish their work, and empowers them.
3. Meaningful Metrics: They measure the factors that are
essential to the organization’s performance. Because so much
of the organization’s performance is dependent on people,
such metrics will naturally drive the people-focus of the
organization and lead to beneficial change.
4. Organizational Performance: It ultimately leads to high levels
of trust, pride, satisfaction, success, and believe it or not, fun.

Categories of Employee Engagement

According to the Gallup the Consulting organization there are there
are different types of people:-

1. Engaged- “Engaged” employees are builders. They want to

know the desired expectations for their role so that they can
meet and exceed them. They're naturally curious about their
company and their place in it. They perform at consistently high
levels. They want to use their talents and strengths at work
every day. They work with passion and they drive innovation
and move their organization forward.

2. Not Engaged- “Not-engaged” employees tend to concentrate

on tasks rather than the goals and outcomes they are expected
to accomplish. They want to be told what to do just so they can
do it and say they have finished. They focus on accomplishing
tasks v/s achieving an outcome. Employees who are not-
engaged tend to feel their contributions are being overlooked,
and their potential is not being tapped. They often feel this way
because they don't have productive relationships with their
managers or with their co-workers.

3. Actively Disengaged- The “actively disengaged” employees are

the "cave dwellers." They're "Consistently against Virtually
Everything." They're not just unhappy at work; they're busy
acting out their unhappiness. They sow seeds of negativity at
every opportunity. Everyday, actively disengaged workers
undermine what their engaged co-workers accomplish. As
workers increasingly rely on each other to generate products
and services, the problems and tensions that are fostered by
actively disengaged workers can cause great damage to an
organization's functioning.

Importance of Engagement
Engagement is important for managers to cultivate given that
disengagement or alienation is central to the problem of workers’
lack of commitment and motivation. Meaningless work is often
associated with apathy and detachment from ones works. In such
conditions, individuals are thought to be estranged from their selves.
Other Research using a different resource of engagement
(involvement and enthusiasm) has linked it to such variables as;
employee turnover, customer satisfaction – loyalty, safety and to a
lesser degree, productivity and profitability criteria.

An organization’s capacity to manage employee engagement is

closely related to its ability to achieve high performance levels and
superior business results. Some of the advantages of Engaged
employees are:-
 Engaged employees will stay with the company, be an advocate
of the company and its products and services, and contribute to
bottom line business success.
 They will normally perform better and are more motivated.
 There is a significant link between employee engagement and
profitability.
 They form an emotional connection with the company. This
impacts their attitude towards the company’s clients, and
thereby improves customer satisfaction and service levels.
 It builds passion, commitment and alignment with the
organization’s strategies and goals.
 Increases employees’ trust in the organization.
 Creates a sense of loyalty in a competitive environment.
 Provides a high-energy working environment.
 Boosts business growth.
 Makes the employees effective brand ambassadors for the
company.
A highly engaged employee will consistently deliver beyond
expectations. In the workplace research on employee engagement
have repeatedly asked employees ‘whether they have the
opportunity to do what they do best everyday’. While one in five
employees strongly agree with this statement. Those work units
scoring higher on this perception have substantially higher
performance. Thus employee engagement is critical to any
organization that seeks to retain valued employees. The Watson
Wyatt consulting companies has been proved that there is an
intrinsic link between employee engagement, customer loyalty, and
profitability. As organizations globalize and become more dependent
on technology in a virtual working environment, there is a greater
need to connect and engage with employees to provide them with
an organizational ‘identity.’

Conclusion
“Employee Engagement” is the buzz word term for employee
communication. It is a positive attitude held by the employees
towards the organization and its values. It is rapidly gaining
popularity, use and importance in the workplace and impacts
organizations in many ways. Employee engagement emphasizes the
importance of employee communication on the success of a
business. An organization should thus, recognize employees more
than any other variable, as powerful contributors to a company's
competitive position. Therefore, employee engagement should be a
continuous process of learning, improvement, measurement and
action. Hence I conclude that raising and maintaining employee
engagement lies in the hands of an organization and requires a
perfect blend of time, effort, commitment and investment to craft a
successful endeavour.