Employee engagement

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What is the psychological contract?

What is the psychological contract?

What is the psychological contract?

The psychological contract refers to the unwritten, intangible agreement between an employee and their employer that describes the informal commitments, expectations and understandings that make up their relationship.

The psychological contract shouldn’t be confused with a written employment contract – they are two very separate things. An employment contract sets out the legally-binding agreement between the two parties – but that contract on its own provides a very narrow and reductive view of the employee-employer relationship as a whole.

That relationship is also composed of many other expectations that, whilst not fully formalised, are just as important. While an employment contract is a legal agreement printed on paper, the psychological contract is built from the everyday actions, statements and promises of one side of the relationship and how they are received by the other.

An employment contract deals with the transactional exchange of labour for reward. The psychological contract describes the more informal perception of what each side commits to the relationship and what they might receive in return.

Aspects of a psychological contract could include any of the following:

  • Job security
  • Opportunities for promotion
  • Opportunities to learn and improve
  • The employer’s reputation in society
  • The perception that the employee’s work contributes positively to society
  • A supportive manager
  • A perception of fairness in the company’s internal processes
  • The perceived fairness of pay
  • An expectation to go ‘above and beyond’
  • The perceived fairness of a Perks and Benefits package

Why is the psychological contract important?

When it comes down to it, a written employment contract that a team member has with their company does not have a great deal of influence on their day-to-day experience of work.

In reality, that contract is something you sign on your first day and then probably don’t see much of during the rest of your time at the business. Unless the employee and employer end up in a legal dispute, that contract might well just stay in a filing cabinet at the back of the office.

When it comes to how an employee acts, works, and behaves, what holds far more influence is the perceived fairness of the psychological contract they have with their employer.

Try to think of the psychological contract as a relationship, just like any personal relationship you have in your own life.

If you have a friend that consistently lets you down, demands more of you than they ever give back or often leaves you feeling taken advantage of, then it’s very easy for that relationship to turn sour. While it might suit one person, the other feels like they have a raw deal – and rightly so.

On the other hand, a friendship where that support flows both ways feels worthwhile and valuable to each side.

A psychological contract between an employee and an employer works exactly the same way – for that relationship to flourish in the long term, both sides have to feel that it is balanced and their contribution is fair.

A balanced psychological contract

Team members who feel their psychological contract is fair – in that it is equally balanced and they get out just as much as they put in – generally perform better at work, show more commitment to the company’s objectives and are far more likely to ‘go the extra mile’.

What is important for employers to understand is that what constitutes a balanced psychological contract will vary from employee to employee and that – crucially – it will also change over time.

What seems like a 'fair' relationship will not remain the same over the course of a person's career. Their life will evolve and what they need from their employer will evolve with it.

For example, many young employees often value opportunities for growth over and above job security. At that time in their life, that might well be where their priorities lie. However, that won't stay the same forever – at a different stage of their life, job security could well be their new number one priority.

An imbalanced psychological contract

If an employee is engaged in a psychological contract that they feel is unfair – one that asks them to give more than they receive back in return – then it can be easy for them to feel demotivated, undervalued and under-appreciated.

Much of the time, if a company has an issue with employee churn or low employee engagement, that problem can be directly related back to a psychological contract that seems unfair and out of balance.

For more information about measuring your team's sentiment, you can check out our blog on how to conduct and employee engagement survey.

What is a breach of the psychological contract?

If an employer breaches an employment contract, then there are legal ramifications. While a psychological contract might be much more informal, breaching it still has very real consequences.

Let’s take a look at what a psychological contract breach could look like:

Imagine that a company hires a young graduate called James as a new Account Manager. Now, James is relatively inexperienced and the salary he is offered is slightly lower to reflect that – but the hiring manager explains that the role offers plenty of opportunities to develop and he can reasonably expect to move up the ranks fairly swiftly.

Over the next 18 months, James is a model employee: hitting all his targets and pulling out all the stops for the company. But despite all his hard work, James is regularly passed over for promotion – and when he goes looking for more varied and challenging work to develop his skill sets, his manager quietly encourages to carry on with his own work.

Now, there’s been no breach of James’ employment contract here. He is being paid at the rate that he agreed to and the company has no legal obligation to promote him or offer him more challenging work – but there has certainly been a breach of the psychological contract.

James had been going above and beyond for the company in the expectation that his efforts would be rewarded with the opportunity to progress his career. From his perspective, that agreement hasn’t been fulfilled.

Repairing a breach in the psychological contract

When it comes to the psychological contract, preventing a breach from occurring in the first place is far more effective than trying to repair it afterwards. The informal nature of the psychological contract means that it relies heavily on trust to keep it intact – if it is breached once, then it can be difficult to repair that trust. A breached psychological contract can have bad repercussions on your ability to retain employees.

The key to maintaining a strong psychological contract comes down to clear communication and managing the employee's expectations. It’s important that every employee in your business understands what they can expect from their time there, so make sure you keep an open dialogue with every member of your team. That way, any frustrations or misunderstandings can be picked up and dealt with early, before they turn into anything more serious.

Want to learn more about how to keep your team happy and high performing? Check out these articles:

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