The Concept of Psychological Contract in Business


Nowadays rapidly changing world sets new opportunities and challenges in the field of human resource management. There is a growing number of organizations that tend to change their the job contracts’ nature or structure (John-Brooks, 2014). At this point, the employees are considered as the paramount business drivers that, in turn, require an accurate understanding of their expectations from work. In order to succeed, the organization can apply a psychological contract (PC) aimed at monitoring perceptions and priorities of employees to certain issues. According to Gautier (2015), “the psychological contract helps to clarify the incentives workers can expect to receive for the time and effort they put in to the organization” (p. 151). The PC forms appropriate relationships and emotions that influence the formation of behaviors in the organization. By nature, it is implicit and dynamic and develops over time as experience is acquired (Banfield & Kay, 2012; Guest, Isaksson, & Witte, 2010). The concept of psychological contract implies that there is a permanent non-prescribed set of expectations of each member of the organization including both employees and employers.

Key Issues

The case presents the potential merging of existing three units at UK University. In particular, economics, accounting and finance, and management studies are to be merged. Seeing that each of departments has its own management style and sub-cultures, it is essential to find a decision that would suit better to all of them. The newly created Business School is to have only one Head of Department (HOD) while others need to be appropriately moved to other job positions. This restructuring aims to enhance the overall ranking of the University. Considering the above conditions, it is necessary to assess the extent to which the PC can be implemented to ensure engagement and commitment within the organization as well as to identify ways to avoid the PC complications and violations.

Literature Review

Initially, the term of the psychological contract was suggested by Argyris who investigated the concept of organizational learning. He used the term of psychological work contract to refer to mutual understanding between the factories and the workers for the expression of an implicit agreement between them (Barine & Minja, 2012; Kennedy, 2012). This term is widely used in science when discussing any study of the employees’ behavior in their relationships with the organization and in practice – for the development of effective human resources strategies and policies. The survey provided by the Chartered Institute of Personnel and Development (CIPD) shows that 9 out of 10 HR-managers recognize the usefulness of the methodology of the psychological contract in the human resource management, and more than a third of them use it in their everyday work (Psychological Contract, 2016).

In his work, Shein emphasizes the importance of the psychological contract to understanding and stimulating the behavior of employees in the organization (Shobhana & Sameer, 2015). The author states that the concept of psychological contract implies “an unwritten set of expectations operating at all times between every member of an organization and the various managers and others in that organization” (Elgoibar & Euwema, 2016, p. 140). Under a set of mutual expectations, Shein means aligning of the organization with the actual expectations of the employees. It should be noted that these expectations relate not only to the question of the adequate reward but also include a pattern of rights and obligations. The most comprehensive explanation of this phenomenon is given by Sims who claims that “a balanced psychological contract is necessary for a continuing, harmonious relationship between the employee and the organization” (Bergemann, 2014, p. 29). This point of view emphasizes the fact that the expectations of both the employees and the employer have the form of assumptions that are not always clearly expressed. Frustration by management is inevitable. However, it is possible to specify the psychological contract if management understands that managing expectations are one of the responsibilities of the organization (Oreg, Michel, & By, 2013). It means that it is necessary to explain to the employees what qualifications they should have and what values they are to maintain.

There are two key types of psychological contract, namely, transactional and relational. The transactional contracts contain the terms of exchange. According to Kennedy (2012), they have an impact on the behavior of personnel in the short-term perspective and significantly influence the formation of staff loyalty. The relational contracts concern the conditions that affect relationships between the employee and the organization (Shields et al., 2016). The characteristics of this type of psychological contract focus on the following factors:

  • Stability: the employee agrees to work for the organization performing the required job; the employer is committed to delivering a stable reward and a long-term employment (Elst & Meurs, 2015; Sparrow & Cooper, 2012);
  • Loyalty: the employee agrees to express loyalty and commitment to the organization’s needs and interests; the employer is committed to supporting the welfare and interests of the employees (Promila, 2011; Shields et al., 2016).

In practice, psychological contracts cannot be strictly divided into transactional and relational as they exist in close connection.

According to the research by Conway and Briner (2012), the psychological contract is formed during the first six months of work in the company. In this period, it is especially important to implement this concept. In particular, two factors that affect the formation of the psychological contract were identified. The first one is the difference between expectations and reality (Conway & Briner, 2012). If the employee feels that his or her expectations do not coincide with the reality within this period, it leads to the destruction of confidence in the organization and the employer. Therefore, the human resource manager should control the process of adaptation of the employee, in particular, to closely monitor compliance with the initial conditions. Support from colleagues and a supervisor is the second factor affecting the psychological contract. According to Manxhari (2015), it is essential to provide timely feedback about the results of the employees’ work.

Another significant provision of the psychological contract theory is related to the factors associated with the violation of its implicit assumptions leading to a sense of injustice, frustration, reduction of the employees’ activity, or even the emergence of a cynical attitude to what is happening in the organization (Chiang, Chechen, Jiang, & Klein, 2012; Suazo & Romero, 2011; Zedeck, 2011). If one of the parties does not fulfill its promises, the psychological contract is nullified that inevitably leads to reduction of productivity or collaboration when employees and employers are no longer consider a continuation of their relationships beneficial or promising (Kiazad, 2010; Parzefall, & Coyle‐Shapiro, 2011). There are three major factors that lead to a violation of the psychological contract. The first one is the lack of fairness in distribution, occurring as a result of the implementation of the exchange obligations which are generally reflected in the concrete results (Cohen, 2012; Zaidman & Elisha, 2016). The second one is procedural justice that is perceived as fair procedures by which results are determined. The third one focuses on the assessment of interpersonal relationships in the course of the psychological contract. In case one or several of the mentioned factors occur, the psychological contract is regarded violated.


How to form the psychological contract? In contrast to the employment contract or other official documents, the psychological contract is not usually formulated in such a detail. The psychological contract lacks plenty of features of a formal contract as it is not recorded and has blurred boundaries (Wellin, 2016). First, the employer is to correlate the employee’s indicated expectations with those that the organization can provide. Sometimes, staff can expect monthly wage increase, a separate cabinet, or the latest model of the computer. Therefore, at the very beginning, it is important to try to clarify what a career is seen by the employee and what are the expectations of the company. In addition, it is crucial to try to avoid empty promises or illusions.

Speaking of the psychological contract in the context of organizational changes, it is necessary to point out the fact that in modern conditions the success of the organization depends not only on the extent the staff is ready to submit to its requirements but also on how they perceive the change (Herriot & Strang, 2013; Nelson & Quick, 2013). The employees can perceive change as need or injustice, for example, if the company refuses to bonus payments due to financial difficulties or the need to invest in the renewal of production. Another possible perception refers to opening prospects and obstacles to career development, for instance, learning a second or a new profession in the implementation of new technologies, or infringement of the right to privacy when the execution of a complex and responsible task requires more time and effort.

Expectations vary with time, and therefore are subject to correction and the psychological contract. For instance, a single young person may have to work overtime to make more money or to secure a promotion. That same single man, maturing and later having a family, is likely to appreciate a more precise schedule and his free time for family obligations. An essential aspect of the psychological contract is that it can constantly be reviewed, depending on the shifting expectations of employees, on organizational development and on changing economic and social conditions.

It becomes evident from the above example that to effectively motivate staff and to prevent conflict, a manager should understand the psychological contract in the same way that the employees do. This requires an accurate study of employee expectations. Moreover, both sides should take the opportunity to express their expectations and try to come to an amicable agreement. However, it is not as easy to achieve this as it may seem at first glance. People often do not fully realize their own expectations; they may overestimate, or prove unable to accurately express their expectations over time. Let us consider the violation of the psychological contract in the following example. The head of a large department changed his employee’s position several times, transferring him from one position to another, but still could never get the desired returns; the employee remained dissatisfied, unmotivated, and proved always to be a sub-standard performer. In this regard, after the flagrant violation of one point in the psychological contract, the supervisor suggested that this employee find a new job. This example shows that it is extremely important to recognize the mechanism of the psychological contract to sustain effectiveness in the boss-employee dichotomy.

The tasks solved by the employees can quickly change leading to changes in work and human relations. These changes are difficult to capture in official instructions and legal documents, resulting in the psychological contract between the contractor and the employer that becomes a key factor in human resource management (Gretchen et al., 2012; Chaudhry, Coyle-Shapiro, & Wayne, 2011). The psychological contract includes perceptions of the employees and the employer concerning the responsibility of the first and what he or she can get from the organization in return. For example, the employee can expect that he or she will be given a work in which he or she will be able to realize the potential and to be given opportunities for professional growth. In response, the employer can expect that the employee will share the values of the organization and will support the organization’s reputation when performing his or her work. After six months, the psychological contract becomes more resistant to change. This stability makes sense of order, structure, and logic in the organization which would otherwise be difficult, unpredictable, and overwhelming. At this point, the employee and the employer are likely to be able to accurately predict the behavior of each other, thereby reinforcing their ideas and expectations.


Considering the above literature review as well as its implications, it seems appropriate to identify specific steps that can be useful in merging three academic departments to create a business school. The following are concrete and practical actions aimed at forming the balanced psychological contract:

  • inform the staff of both the favorable and unfavorable aspects of the work;
  • implement adaptation programs for each new job position;
  • explain clearly the rules adopted by the organization, especially personnel policies, generally accepted procedures, core values and all adopted performance standards;
  • develop a clear performance management framework that would help to harmonize expectations of efficiency and regularly review the latter;
  • design and implement personal development plans that clearly lay out the ways an employee might achieve continuous improvement like better efficiency at work which in turn might lead toward professional and career development;
  • develop and implement a reward system created on the basis of equality, justice and stability in all aspects of pay and incentives;
  • provide the employees with timely and complete feedback on the results of their work;
  • monitor regularly the process of adaptation of employees who changed job positions within the organization to assess the level of motivation, job satisfaction and commitment to the organization goals; do this in a timely manner so to take adequate measures in case of reduction of any of such indicators (Shen, 2010).

Thus, the organization familiar with the concept of the psychological contract would be able to more effectively align its work with staff members.


In conclusion, the essential emphasis of this paper was a reflection on the concept of the psychological contract as well as details about violations of it. Focusing on the literature review reveals that the psychological contract refers to a set of mutual attitudes of employees toward their work expectations and the employer toward the employees’ performance. This phenomenon defines employee loyalty and stability of the organization. An appropriate balanced psychological contract promotes healthy relationships in the organization while its violation leads to frustration, disorientation and ultimately a failure to meet the required level of efficiency. In light of the outcome of careful analysis of implications, several steps were suggested to ensure an adequate merging of the organization. Thus, regular monitoring, timely feedback and implementation of adaptation programs are regarded integral components of the formation of a balanced psychological contract.


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