Outline and Critically Evaluate the Concept of the ‘Psychological Contract’. Why Is an Understanding of the Psychological Contract Considered to Be Important to the Management of the Contemporary Employment Relationship?

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Outline and critically evaluate the concept of the ‘psychological contract’. Why is an understanding of the psychological contract considered to be important to the management of the contemporary employment relationship?

This essay will outline and critically evaluate the theory of the “psychological contract” and its role between the employee and employer. Through looking at the positive and negative aspects of this contract by using relevant information, figures and evaluating case studies, it shall explain why the understanding of this “psychological contract” is considered to be so vital to the management the contemporary employment relationship. The “psychological contract” of employment can briefly be defined as ‘a set of unwritten reciprocal expectations between an individual employee and the organisation’ (Schein, 1976). Such as the employee being promised certain policies or benefits and the employer expecting the employee to perform at a certain level or be of a specific age etc. Guest and Conway (2002) defined it as “the perceptions of the two parties, employee and employer, of what their mutual obligations are towards each other”. Therefore, an agreement that is beyond what is written or implied in the contract or other explicit manifestations of the employment relationship. The concept of the psychological contract is commonly traced back to the early work of Argyris (1960) and to social exchange theory (Blau, 1964). However, the crucial developments leading to its current use as an analytic framework were provided mainly by Rousseau (1995). The psychological contract therefore provides an opportunity to explore the processes and content of the employment relationship through a focus on more or less explicit deals. These deals are likely to be re-negotiated or modified over time, to be influenced by a range of contextual factors, and to have a variety of consequences. Thus the primary focus of the psychological contract is the employment relationship at the individual level between the employer and employee. The role of HRM is the management of expectations; ensuring that employees are aware of the expectations upon them ensuring that what employees can expect of the organisation is clearly transmitted. The psychological contract begins to take shape even before the explicit employment contract is established; e.g. recruitment claims in job advertising; the selection process, individuals form associations which lead to assumptions about working for the firm and what they expect from such a relationship. The importance of the psychological contract is very diverse. CIPD (2008) suggests that as employees are increasingly recognised as a key organisational asset, management of the psychological contract becomes important in monitoring and managing employee attitudes and expectations. In particular, the significance of the psychological contract is as the mediating factor which translates HRM policies and practices into individual performance. It is the state of the psychological contract that informs the actions of the employee on a day-to-day basis, particularly whether to work to their potential or withhold effort. For example, if the state of the contract is poor, then the employee wouldn’t work to their optimum capacity. Therefore, it’s important for the psychological contract to be well understood by both the employer and employee as it can have a positive outcome for the company due to happy employees working harder, which in turn brings better results for the employer. However, if the psychological contract is not understood properly it can lead to a very negative effect on the company, due to unsatisfied employees not working to their best, being unmotivated and wanting to quit. Thus, a positive psychological contract is generally strongly associated with behavioural and performance outcomes such as job satisfaction, employee commitment, motivation and lowered intention to quit.

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