Understanding the Relationship between an Organization and its Employees

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Defining the psychological contract
The exchange relationship between organisation and employee ranges the entire contract spectrum from strictly legal to purely psychological (Spindler 1994). Many aspects of this relationship are shaped by legislation, enterprise agreements and/or an employment contract signed by the employee detailing issues such as hours, salary and benefit plans. However, other aspects of the employment relationship are likely to be confined to the subconscious (Spindler 1994).

The term psychological contract
(Argyris 1960; Schein 1980; Rousseau 1989) refers to a commonly used exchange concept providing a framework for understanding the ‘hidden’ aspects of the relationship between organisations and their employees (Shore & Tetrick 1994).

The common theme underlying these definitions is that the psychological contract refers to an employee’s unexpressed beliefs, expectations, promises and responsibilities with respect to what constitutes a fair exchange within the boundaries of the employment relationship.

Psychological contracts differ from other types of contracts not only because of the innumerable elements they may contain but also because the employee (the contract taker) and the employer (the contract maker) may have differing expectations with respect to the employment relationship. Few of these elements are likely to have been specifically discussed; most are inferred only, and are subject to change as both individual and organisational expectations change (Goddard 1984; Rousseau 1990; Sims 1990, 1991, 1992).

Psychological contracts differ from legal contracts with respect to procedures followed in the event of breach of contract. Breach of a legal contract allows the aggrieved party to seek enforcement in court. Breach of a psychological contract, however, offers no such recourse, and the aggrieved party may choose only to withhold contributions or to withdraw from the relationship (Spindler 1994).

The psychological contract is a complex phenomenon. Considerable debate has taken place during the past decade over the validity of the concept in the new ‘lean and mean’ organisation. Assessing its validity requires an understanding of the role played by the psychological contract in the organisational context.

The primary function:
Psychological contracts help to accomplish two tasks — i.e. they help to predict the kinds of outputs employers will get from employees, and they help to predict what kind of reward the employee will get from investing time and effort in the organisation (Sparrow & Hiltrop 1997).

Predictability, as suggested by Sparrow and Hiltrop, contributes significantly to the employment relationship created by psychological contracts. Predictability is a critical underpinning to motivation. To be motivated, an employee should be able to predict that performance will result in desired outcomes (Vroom 1964). Predictability, understanding and a sense of control are also key factors in preventing stress (Sutton & Kahn 1986) and in developing trust (Morrison 1994). Morrison argues that predictability, reliability, credibility, loyalty and trust all reinforce one another. These factors are essential for a continued harmonious relationship between the employee and the organisation.

The need for predictability may in fact underlie the development of psychological contracts. It has been suggested (Shore & Tetrick 1994) that psychological contracts give employees the feeling that they are able to influence their destiny in the organisation, since they are party to the contract and can choose whether to carry out their obligations.

It is commonly proposed that the psychological contract affects employee satisfaction, attitudes and behaviour through constant review of the exchange relationship between employer and employee (Anderson & Schalk 1998). The idea of this exchange relationship is derived from models arising out of social psychology — for...
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