The Psychological Contract and its Impact on the Organization

image courtesy of mikkeco via sxc.hu

The psychological contract is a complex, and often vague, set of beliefs, obligations, and mutual expectations between an employer and employee. This concept was first developed by Denise Rousseau, an organizational scholar and professor at Carnegie Mellon University. It is vastly different from the formal written employment contract, which typically states only the salary, allowances, benefits, and leaves an employee will receive in exchange for performing a defined set of duties and responsibilities.

What does it mean?

Before an employee is hired, an interview process takes place to determine whether a particular person is qualified for a certain position within the company. During the session, the interviewer may mention career development options like training or any other additional benefits, which may not appear on the final written contract. At this stage, the employee will take a leap of faith, thinking that even if it is not written, the company will fulfill the things they mentioned as long as the employee performs his/her job well.

Why is it important?

What happened during the interview process is that the employer has created an expectation in the employee, whether advertently or inadvertently. When these expectations are not met, it will create a negative impact on the employee, which will directly affect the productivity and loyalty to the company. An employee will feel cheated and will become disengaged from his/her work, which often manifests as low morale, absenteeism, or witholding effort. It has been estimated that employee disengagement accounts for approximately $350 billion a year in lost productivity (Gallup Business Journal).

How can this be avoided?

The psychological contract is an integral component between the relationship of an employer and employee, and is sometimes a stronger force than the formal writtten contract. It will be there whether an employer likes it or not, but a smart employer will know how to harness its power and its influence among the workforce.

To avoid the ill effects of a broken psychological contract and prevent employee disengagement, a smart employer should do the following:

1. Clarity
Always be clear about what you or your company representative says. Words are powerful and you may not always be aware how much they affect other people.

2. Integrity
When you have said something, do your best to follow through. Sometimes it may not be easy, but the cost of an unfulfilled promise or obligation to an employee may be bigger than you know.

3. Open and honest communication
As soon as you detect signs of employee disengagement, put your best effort to find its cause and initiate honest action to solve it. Do NOT just placate your employees. Do what it takes to correct the situation.

Have you experienced this? What other ways can you suggest to avoid this?