The Psychological Contract

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CIPD Factsheet
The psychological contract
Revised July 2011

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What is the psychological contract?
The term 'psychological contract' was first used in the early 1960s but became more popular following the economic downturn in the early 1990s. It has been defined as '…the perceptions of the two parties, employee and employer, of what their mutual obligations are towards each other'1. These obligations will often be informal and imprecise: they may be inferred from actions or from what has happened in the past, as well as from statements made by the employer, for example during the recruitment process or in performance appraisals. Some obligations may be seen as 'promises' and others as 'expectations'. The important thing is that they are believed by the employee to be part of the relationship with the employer.

The psychological contract can be distinguished from the legal contract of employment. The latter will, in many cases, offer only a limited and uncertain representation of the reality of the employment relationship. The employee may have contributed little to its terms beyond accepting them. The psychological contract on the other hand looks at the reality of the situation as perceived by the parties, and may be more influential than the formal contract in affecting how employees behave from day to day. It is the psychological contract that effectively tells employees what they are required to do in order to meet their side of the bargain and what they can expect from their job. It may not - indeed in general it will not - be strictly enforceable, though courts may be influenced by a view of the underlying relationship between employer and employee, for example in interpreting the common law duty to show mutual trust and confidence. Guest1 identifies the following key points:

* the extent to which employers adopt people management practices will influence the state of the psychological contract * the contract is based on employees' sense of fairness and trust and their belief that the employer is honouring the 'deal' between them * where the psychological contract is positive, increased employee commitment and satisfaction will have a positive impact on business performance. -------------------------------------------------

What happens if the contract is broken?
If the psychological contract is broken there are a number of impacts: * a negative impact on job satisfaction
* a negative impact on the commitment of the employee
* a negative impact on employee engagement.
Managers need to remember:
* Employment relationships may deteriorate despite management’s best efforts: nevertheless it is managers’ job to take responsibility for maintaining them. * Preventing breach in the first place is better than trying to repair the damage afterwards. * Where breach cannot be avoided it may be better to spend time negotiating or renegotiating the deal, rather than focusing too much on delivery. -------------------------------------------------

What has persuaded people to take the psychological contract seriously? Changes currently affecting the workplace include:
* more employees on part-time and flexible work.
* organisations downsizing and delayering, meaning remaining employees have to do more. * markets, technology and products constantly changing.
* technology and finance becoming less important than human resources as sources of competitive advantage. * traditional organisational structures becoming more fluid. The effect of these changes is that employees are increasingly recognised as the key business drivers. The ability of the business to add value rests on its front-line employees or 'human capital'. Organisations that wish to succeed have to get the most out of this resource. In order to do this employers have to know what employees expect from their work. The psychological contract offers a framework...
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