Psychological Contract and its Importance

Introduction to Human
Resource Management and
Learning and Talent
Development Assessment

Essay 1: Psychological Contract and its importance
A psychological contract can simply be termed as the set of unwritten expectations between
an employee and an employer. Increasing nature of competitive business environment has made
it imperative for business managers to constantly develop and enhance the skills and productivity
of its human resource to maintain industrial position and profitability. In the following essay, an
attempt is being made to determine the differences between psychological contract and
employment contract. The essay also aims to identify and evaluate the importance of
psychological contract in the context of today’s business organisations.
A psychological contract simply defines the relation which exists between the management
and the workforce at a workplace and is primarily concerned with the mutual set of expectations
of inputs and outcomes (Arnold, 1996). It determines the trust, mutual respect or belief that may
exist between one or more than one employee and the management. Unlike psychological
contracts, an employment contract is a written and legal agreement between the management and
an employee that specifies the roles and responsibilities of employee and clearly describes the
other important terms and conditions of employment that have been mutually agreed to. Primary
difference between employment contracts and psychological contracts is based on the manner in
which they are formed or drafted. An employment contract is a well-documented written set of
job expectations and responsibilities whereas psychological contract is not written and is
concerned with perceived obligations by the employer and the employee (Vettori, 2016). A
psychological contract is subjective in nature and tends to create confusion and disparity between
the understanding of contract promises and elements by both the parties. On the contrary, an
employment contract clearly establishes the expectations and is more objective is nature. In the
case of psychological contracts, disputes and conflicts can’t be resolved in a very effective
manner due to lack of evidence on terms of agreement of the contract. On the contrary,
employment contracts present a clear and legally binding document which makes resolution of
conflicts very effective. Psychological contracts are formed or established in an informal manner
without an explicit definition of the duty of both the parties (Saunders and Thornhill, 2006). On
the other hand, employment contracts are drafted formally and in a legal manner explicitly
outlining the duties and expectations. In case of psychological contracts, breach of agreement
can take place due to a failure to perform the duties by any part which gives rise to conflicts and
disputes that can’t be resolved since the magnitude of breach can’t be quantified due to lack of
1

written agreement. It adversely affects the emotional and mental state of the aggrieved party
(Morrison and Robinson, 1997). In case of employment contracts, breach of contract can easily
be quantified and the procedure for remedy is also mentioned explicitly in the contract itself
which has legal capacity.
In the context of today’s rapid changing and competitive business environment,
psychological contracts have become more crucial and significant for business organisations than
ever in the past. It can be observed that every organisation is making use of psychological
contracts to a rather significant extent for improving productivity and attaining desired results in
different areas of business operations. The relevance and importance of psychological contracts
in today’s business organisation can be understood by comprehending the following points:
Employee performance and productivity: Existence of psychological contracts in an
organisation presents an opportunity for employees to benefits and incentives that extend beyond
the details and conditions of employment contracts for increased performance and productivity
levels. Hence, an organisation which remains determined to satisfy the agreements under
psychological contracts is able to motivate and encourage employees for increasing their
productivity in a desire to earn rewards and appraisals and it results into tangible and significant
benefits for the employer such as improvement in operational productivity (Rayton and Yalabik,
2014). Efficiency in execution of tasks by the employees largely determines the long-term
success and extent of optimisation in the resource utilisation system of a business organisation
that can be enhanced effectively with the help of satisfying psychological contracts.
Managing diversity: Over the past few years, importance of promoting diversity at the
workplace with an objective of generating more innovative and creative business ideas has
gained acceptability. Business organisations aim to building and fostering a diverse workforce to
obtain a competitive edge in the industrial environment. Psychological contracts are individually-
focused which is one of its biggest advantage since it helps the management to monitor and
manage employees with diverse and different backgrounds, beliefs and expectations. Unlike
employment contracts, psychological contracts can be established in variance with the unique
and distinct requirements of each employee to manage and increase the productivity of a diverse
workforce in the organisation (Wellin, 2016).
Innovation and creativity: Psychological contracts in an organisation helps to motivate the
employees to increase productivity and performance level and gain rewards which leads to
2