The psychological contract has strategic implications to both employers and employees. From an employee’s point of view, they want to know that their interests will be taken into account when important decisions are made; they would like to be treated with respect; they are more likely to be satisfied with their job if they are consulted about change. From an employer’s perspective, organizations need to let new employees know what they can expect from the job. Managing expectations, particularly when bad news is anticipated, will “increase the chances of establishing a realistic psychological contract.” (Wellin 2007, pp.46) They should also monitor employee attitudes on a regular basis as a means of identifying where action may be needed in order to improve performance. Additionally, data and information are created by employees from their interactions with customers and suppliers. In today’s rapidly changing business environment, few companies manage their business using top-down model; they have to “adopt a more 'bottom up' style.”(Cooper 2002, pp.359) Last but not the least, an effective communication channel between employers and employees should be established and maintained.
The Psychological Contract: The Changing Employment Relationship
Traditionally, psychological contracts worked out between employees and employers in a stable and predictable commercial environment. From an employer perspective, organizations took their employees as permanent and tried to build commitment and loyalty among them. Organizations achieved these business objectives by providing guaranteed long-term employment and by providing continuous training. (1980, pp.77) From an employee’s point of view, they showed their loyalty to the organization and expected steady career development path with the growth of the organization. They also expect good company benefits and generous retirement plans. In return, they uphold the company’s reputation, show their commitment and loyalty to the organization, work hard and longer hours if expected, maintain high levels of attendance and punctuality and provide high quality work. (Conway and Briner 2005, pp.72)
Organisations are usually considered as good employers when they have a strong identifiable image and display commitments toward their employees in the marketplace. To achieve this goal, large organisations, usually establish “an employer brand” - a corporate personality or identity with a set of corporate values or a stated mission which employees as well as customers will recognise and relate to. (Cullinane and Dundon 2006, pp.114) Therefore, an employer brand represents the core values of the organization. For example, Fedex builds its core philosophy as 'people - service - profit'. Marriott Hotels assert that "Take care of the associates, and they'll take good care of the guests, and the guests will come back." Building such an employer brand requires a lot of introspection by the company, and answering the questions, "what kind of company we are, and want to become?" and "how do we live up to the expectations of our stakeholders?" (Coyle-Shapiro and Shore 2007, pp.168)
However, in the new economy, the business environment has changed tremendously and employment is challenged by constant change and uncertainty. Company reconstructing and reengineering, mergers and acquisitions, as well as downsizing and layoffs are more frequent than ever before. Flexibility and agility are valued in this volatile business environment. Employees are recruited, hired and retained for their particular skills for the short run as organizations focus less and less on long-term performance. Employees come to realize that they need to constantly update their professional knowledge, skills and abilities. They are taking responsibility for their own careers. Lifelong learning becomes “crucial to avoid obsolescence.” (Cooper C.L 2002, pp.388) As this flexibility demands the higher adaptability to change in the rapidly changing business environment, it seriously threatens job security and steady career path promised in the traditional psychological contract.
Because the nature of employment is now “changing from lifelong to short-term”, the psychological contract has also moved “from relational to transactional.”(Cooper C.L 2002, pp.388) Relational contracts occur “where the development of company-specific skills is traded for long-term career development, training and development, and job security.” (Cooper C.L 2002, pp.388) Relational contracts are characterized by high degrees of mutual interdependence. In contrast, transactional contracts are characterized by “short-term tenures” and “a narrow emphasis on financial exchange, in terms of both performance output by the employee and the financial reward given in exchange by the employer.” (Cooper C.L 2002, pp.389) Since the employment relationship today is only short-term, training and development becomes the employees’ own responsibility, more employees are concerned in acquiring portable skills and training. They are trying to acquire “knowledge, skills and expertise that will make them marketable in case their relationship with the organization ends.” (Wellin 2007, pp. 87)
In a sense, the new market and organizational conditions have broken down “the traditional model of job security, secure pay and career development in return for loyalty, commitment and contribution.” (Wellin 2007, pp. 89) Instead, workers are being offered a new deal involving less security but the chance to make themselves more employable in the future. Most organizations are now talking “not of opportunities for advancement and progression but of opportunities to improve marketability and employability.” (Wellin 2007, pp.56) Today, organizations not only provide training and development to help their employees perform their current jobs, but also deal with increasing the employees’ knowledge, skills, and abilities to make them more employable.
Outcomes Associated With a Breach of a Psychological Contract
The breach of psychological contract occurs when “one’s organization has failed to fulfill one or more obligation comprising the psychological contract.” (Bal, Dan and Jansen 2010, pp.255） When psychological contract breaches occur, it will generally lead to serious damages to the employment relationship. There are a number of impacts if the psychological contract is broken: It can cause the employee to “have intense attitudinal and behavioral reactions” toward the employer; a variety of unfulfilled promises can “deprive the employee of desired outcomes and benefits.” (Bal, Dan and Jansen 2010, pp.257)
It will also decrease employees’ job satisfaction, and thus, their commitment towards the company. It is managers’ job to take responsibility for maintaining them. It is not always possible to avoid a breach but damage is less likely if managers are open with employees about the issues that need to be addressed. “Preventing breach in the first place” is better than “trying to repair the damage afterwards.” (Clutterbuck 2005, pp. 362)
The new economy is characterized by globalization, restructuring, and downsizing and psychological contracts are playing “an increasingly important role in contemporary employment relationships.” (Bal, Chiaburu, and Jansen 2010, pp.253) Organizations, under pressure to make rapid and constant changes, have had to “alter employment relationships and the psychological contracts that underlie them.” (Bal, Chiaburu, and Jansen 2010, pp.255) More importantly, these changes have increased the likelihood of psychological contract breach. Organizations must now “repeatedly manage, renegotiate, and alter” the terms of the employment agreement continually to fit changing circumstances. (Clutterbuck 2005, pp. 362) And thus, organizations may be less able to fulfill all of their promises. In addition, constant contract change means increased opportunities for employees and employers to misunderstand the agreement and to perceive a contract breach even when an actual breach did not occur. Therefore, it should not be surprising that the majority of employees currently believe their employer has breached some aspect of their employment agreement. (Bal, Chiaburu, and Jansen 2010, pp.258)
Conclusion
In a conclusion, psychological contracts refer to employees' perceptions of what they owe to their employers and what their employers owe to them. Employers expect commitment and loyalty from their employees. The employees on the other hand expect the employers to provide opportunities for training, development and learning. The psychological contract does not provide a detailed model of employee relations but it offers important clues about how to maintain employee commitment. In the new economy, the traditional contract of long-term job security in return for hard work and loyalty has become obsolete, and employees and employers are now considering their mutual obligations. Because the nature of employment is now changing from lifelong to short-term, the psychological contract has also moved from relational to transactional. The new psychological contract between the employee and the employer is increased employability in return for hard work and commitment. Because of the changes in the business environment, the likelihood of breach of psychological contract has increased. Regardless of traditional or new models of psychological contracts, the breach of the psychological contract will lead to serious damages to the employment relationship, and thus, the organization as a whole.
References
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