According to Rousseau and others, the psychological contract is based on the concept of an exchange of benefits and rewards. Rousseau defines the psychological contract as “an individual’s beliefs, shaped by the organisation regarding terms of an exchange agreement between individuals and their organisation” (Rousseau et al. , 1995:9). The employer benefits from the employee’s labour and co-operation while the employee is rewarded extrinsically and intrinsically.
She argues that it is only when both parties have something to gain that they will work to ensure a successful result. In a balanced psychological contract both parties feel the exchange provides valued outcomes (Davidson, 2001). This is illustrated in the simplified psychological contract, Appendix C. According to Rousseau (2001) the promises that constitutes the psychological contract does not necessarily have to be in a spoken or written form, but can consist of words or actions taken in context.
Thus an employee may perceive a promise as having been made without the employer having issued an explicit verbal statement of such an intention (Shore, date unknown). There are conflicting theories on the nature of the relationships forming the psychological contract. Rousseau (1995) believes that the psychological contract is a one-to-one relationship between the employer and an individual employee existing within the organisation. This contract highlights the emphasis on the individual’s expectations and perceptions.
Coyle-Shapiro & Kessler (2000) reason that, as there are mutuality in the exchange relationship (reciprocal obligation between two parties and expectations), the leader plays a role as representative of the organisation. As employees view the actions of the representative of the organisation as the actions of the organisation itself, it follows that the leader (representative) can hold the psychological contract. Masterson et al (2000:740) believes that, “….
an employee is involved in at least two social exchange relationships at work: one with his or her immediate supervisor and one with his or her organization”. The contract exists on two levels, one that is ‘personal’ with the supervisor (an agent of the organisation) and one that is ‘impersonal’ with the organisation itself. The soundness of the contract on the different levels may differ, an employee might have a well balanced contract with the immediate supervisor and a poor contract with the organisation or vice versa.
The contract on the organisational level may limit the development of the contract on the personal level. In short these levels influence each other and the contract as a whole. Major part of the content of a psychological contract is perceptual, unwritten and relies on the individual’s interpretation of actions and events within the organisation. Violation of obligation could result in a more intense and organisationally detrimental response than unmet expectations.
There is a relationship between employer contract behaviour and outcomes of job satisfaction, organisational commitment, organisational citizenship behaviour (OCB – readiness to contribute beyond literal contractual obligations). As this behaviour is not formally recognised by the organisation’s reward system, employees can exercise discretion in terms of engaging or withholding OCB. This decision is based on the organisation’s treatment of the employee. High levels of perceived organisational support are thought to create the impetus for employees to reciprocate (Coyle-Shapiro & Kessler, 2000).
The psychological contract can be divided broadly into two categories namely transactional and relational elements. The transactional psychological contract is based on the Economy of Exchange Theory and is perceived to be “short term”. This is the specific, monetizable exchange (tangible benefits) over a limited period of time such as rapid advancement, high pay, and high performance in return for performance-based pay, merit pay, overtime, and training. It is narrow duties and is limited to worker involvement in the organisation.
Ultimately if the employee perceives an imbalance between performance and reward, the individual may seek to redress the imbalance “by increasing the perceived entitlements or by decreasing perceived obligations” (Crossman, date unknown). The relational psychological contract refer to where the employee perceives organisational commitment to be a long-term relationship leading to a “relational” psychological contract thereby creating ‘affective’ commitment typified by sharing of goals and ideologies and a mutual intention for continued association (Crossman, date unknown).
It is based on mutual trust and loyalty. This includes aspects such as long term job security, career development and support with personal problems. The employee is obligated to support the firm, manifest loyalty and commitment to support the wellbeing of the organisation’s needs and interests (Rousseau, 2000). This differs with the different relationship between employee and employer e. g. a permanent employee and contract/casual worker as a casual worker may not perceive the employer to provide him with prospects (Coyle-Shapiro & Kessler, 2000).
The relational contract is emotionally based, any perceived violation may result in procedural inequity and the psychological contract may be renegotiated in purely transactional terms (Herriot & Pemberton, 1996). The critical incident will feed back into the commitment form and may cause the individual to alter their commitment type (continuance to affective), which in turn will impact on the expectations of the relationship.
Similarly the critical incident will impact on level of trust the individual places in the organisation or its agent leading to trustworthiness or distrust, which will also influence the level of expectations. The critical incident will also have a direct impact on the psychological contract itself through the individual’s perception of violation or enhancement, resulting in a reconstruction of the contract under the renegotiated terms (Crossman, date unknown). For most employees the psychological contract contains both transactional and relational elements, as they are not mutually exclusive.
The nature of the psychological contract has changed over the last decade. The emphasis changed from length of service and job security to performance based reward and short term employment relationships, from a relational focus to an impersonal transactional/contractual basis. The psychological contract does not exist in an organisational vacuum; each individual constructs and reconstructs their contract according to a variety of internal and external environmental stimuli. As changes occur so the psychological contract is redefined (Crossman, date unknown).
There is causality between the political, economical and labour environments and the PC. Globalisation, transformation, downsizing and privatisation of organisations lead to job insecurity, employees have to be more self-reliant. Experience of previous employment is a key source of information and knowledge for the majority of individuals and might serve as a benchmark for the current expectations of the employer. Observations or knowledge of external employment relationships might act as stimuli for an individual to construct or reconstruct their own psychological contract.
Employment status, opportunities for promotion and the tenure offered also influences the construction of the psychological contract. The nature of the psychological contract varies according to the size of the organisation and the hierarchy of management that exists. Rousseau (1998) observes that the role played by the organisation’s ‘agents’, such as supervisors or managers, in the psychological contract will vary according to whom the employee perceives their psychological contract to be with.
The relationship is likely to be different in smaller, conventional organisations where the parties are psychologically and geographically close, than in the large, faceless corporation (Crossman, date unknown). Individuals compare their own contributions and outcomes with those of others to determine distributive justice. If they perceive unfairness it will negatively impact on the psychological contract. Observed breach or violation may impact on the psychological contracts of other individuals, as they consider their own relationship in the light of these developments.
For example, an individual who previously trusted management and felt secure might revise this after another colleague was laid off or disciplined. The psychological contract is thus a dynamic contract, constantly in a state of re-evaluation and change, consciously or sub-consciously, by the participants as a result of direct and indirect events. The psychological contract is not an objective reflection of the information collected, but rather a personal, subjective interpretation of it; every individual constructs his own organisational ‘reality’ (Rousseau & Tijoriwala, 1998; Sparrow & Cooper, 1998).
Robinson et al (1994) observed that there is a tendency for ‘overestimation of one’s own contributions and an underestimation of other’s contributions’. Two reasons for breach of the psychological contract by the employer are reneging (unwillingness/inability of the employer to fulfil its obligations to the employee) and incongruence (when the employee and employer have different understandings of the promises made) (Morrison & Robinson, 1997; Coyle-Shapiro & Kessler 2000:907).