Employees have other expectations as an extension of what is usually expressly stated in formal, written or legally binding employment contracts. They (employees) develop perceptions about certain obligations which employers should fulfill in response to their contributions. This informal but normal employee expectation is known as the psychological contract. The effective management of the psychological contract in modern organizations has never been more crucial for managers. This is essentially because of the subjective and fluid nature of this concept, differences in personal values, and an accelerated pace of change in the operating environment of organizations. A good employment relationship creates an enabling environment for employees enhancing performance and productivity. It is also the bedrock of job satisfaction, motivation, commitment, citizenship behaviour, and employee retention. These factors are key determinants of organizational success and sustainability. A perceived breach or violation results in negative attitudinal and behavioral responses, whereas a positive psychological contract boosts employees’ morale. In this article, we explore the concept of the psychological contract, its changing nature, and effective management. Insight is given on managing the psychological contract to enhance the commitment, performance, and productivity of employees as well as continued organizational success in a constantly volatile environment.
The psychological contract concept was first introduced by Agyris (1960) to describe an existing implicit understanding between two contractual parties. It was thereafter developed by other researchers (Levinson, Price, Munden, Mandl, & Solley, 1962; Schein, 1978, 1980; Rousseau, 1989, 1995) to underscore employees’ perceptions regarding the terms and conditions of a reciprocal exchange agreement between that employee and the employing organization. According to Rousseau (1989), a psychological contract is: “an individual’s belief regarding the terms and conditions of a reciprocal exchange agreement between that focal person and another party.”
This definition emphasizes the individual centered nature of the psychological contract. In their own approach, Levinson et al. (1962) described it as: “a series of mutual expectations of which the parties to the relationship may not themselves be dimly aware but which nonetheless govern their relationship to each other.”
The two-way (employer-employee) nature of employment relationship is taken into consideration by the Chartered Institute of Personnel and Development’s (CIPD) (2005) definition of the psychological contract which considers it as the perception of both employer and employee of what their mutual obligations are towards each other (CIPD, 2005). Supporting this view, Rousseau (1989) and Robinson (1996) state that it is an unspoken agreement between exchange partners regarding the terms and conditions of their relationship. It is considered to be expected behaviours (Rousseau & Parks, 1993) that are dependent on “promises, reliance, acceptance, and a perception of mutuality” between employee and employer (Rousseau, 1995). From the foregoing, it is clear that the term psychological contract is specifically used to describe:
The relationship between an employee and an employer;
Framed in the promises and expectations of each party;
The extent to which each party believes these promises have been kept and expectations fulfilled; and
In many cases, such expectations are not stated explicitly by either party and are thus psychological in nature (Kalra, 2005).
Distinguishing between the psychological contract and the formal contract, Guest and Conway (1998) point out that: “The psychological contract lacks many of the characteristics of the formal contract: It is not generally written down, it is somewhat blurred at the edges, and it cannot be enforced in a court of tribunal.”