HRM Essay: Psychological Contract and Employment Relationship

This essay critically examines the extent to which the 'psychological contract' represents an account of the employment relationship. It delves into the concept of psychological contracts, which encompass the unwritten expectations between employers and employees, and how these contracts shape the dynamics of the workplace. The essay explores the traits and characteristics of psychological contracts, differentiating between transactional, relational, transitional, and balanced contracts. It highlights the benefits of establishing such contracts, including increased employee satisfaction, commitment, and mitigation of uncertainty. Furthermore, it addresses the challenges associated with psychological contracts, such as the impact of changing work environments and the difficulty in unifying diverse employee expectations. The essay also discusses the application of psychological contracts in organizational and management theory, emphasizing their influence on employee attitudes and performance. The essay concludes by underscoring the importance of a balanced and fair psychological contract for fostering positive organizational outcomes.

The extent to which the ‘psychological contract’ represents an account of the
employment relationship
Introduction
The contemporary organisations, organisational environment and individuals who
work within them have significantly changed in the way they were just a decade ago. The
rapid growth of “knowledge economy” has notably directed the focus of the researchers
towards the contemporary issues on human capital as a vital source of development of
competitive advantage. According to Manxhari (2015), “the promises of the changes in the
basic work relationships attendant in turn on change in the organisational environment has
provoked increased interest in the psychological contract and its meaning for the
employees”. In near about every industry, organisations ask the potential new employees for
signing at least one or the other forms. However, there is one contract that is not signed and
that is that of the “psychological contract”.
In current years, due to the movement in the type of organisation from manufacturing
to the service based economy, the employees and their organisation are facing huge
challenges of continuous development of strategy for them to keep a track with the fast
changing and complicated environment. In opinion of Baruch and Rousseau (2019) the
current employment landscape and the economy continues to pressurize the companies on the
way their organisations are structured, the employees are motivated and the key staffs are
retained as the new markets, products, technologies and competitors are rolled out. This is
why, there needs to be an increased need for the organisations and the employees to have
good working relationship and mutual understanding of each other at every level of the
company and gaining an insight into what the individuals desire for thei0r employment
relationship as this is very critical for the success of all the efforts.
This paper shall elaborate on critically discussing about the extent to which the
‘psychological contract’ represents an account of the employment relationship. It shall
highlight what different scholars have opined on the notion of psychological contract and the
way it represented employer-employee relationship and that of employment.
Psychological Contract
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On the basis of the study by Tomprou, Rousseau and Hansen (2015), the term
“psychological contracts” can be referred to as the mental models of a suited professional
relationship. It is concerned with the unwritten expectations and emotions among the
employee and the employer. According to Eilam-Shamir and Yaakobi (2014), when taken
together, the employment contract and psychological contract demonstrate the relationship in
between the employer and employee. Developed by Denise Rousseau, a well-known
organisational scholar, the psychological contract comprises of some informal arrangements,
common perceptions and ground and mutual benefits between both the parties. Festing and
Schafer (2014) have defined psychological contract as the mutual unwritten expectations that
prevail among the employee and his employer about the practices and policies in the
company. Lub et al. (2015) first penned psychological contract as the relationship between
employer and employee. On the other hand, Aldossari and Robertson (2015), defined it as
“unwritten contract, the sum of the mutual expectations between the organization and
employees”. It is to mention that psychological contracts are the mental models that are
developed through the experiences and interactions of individual.
Traits and Characteristics of psychological contract
According to Aldossari and Robertson (2015), in terms of performance requirements
(specified or non-specified) and the time-frame (short or long), there are four types of
psychological contracts. They are- a) transactional contracts, b) relational contracts, c)
transitional contracts and d) Balanced contracts. The transactional contracts are of limited
time-frame with well specified terms of performance. It is basically present when the
arrangement of employment is for short-term and is primarily focused on the exchange of
work in lieu of money. The relational contracts on the other hand are about open-minded
membership but with ambiguous performance needs that are attached to the continued
membership. They are the result of long-term arrangements of employment that are based on
the mutual loyalty and trust (Solinger et al. 2015). Thirdly, the transactional contracts are
basically the breakdown in the contracts and they reflect on the absence of commitments on
future employment. Lastly, the balanced contracts demonstrate a relationship-oriented and
open-ended employment with well-specific terms of performance that are subject to gradual
change.
Ramirez, Madero and Velez-Zapata (2015) have claimed that the psychological
contracts are dynamic in nature and they are constantly evolving through the different

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organisational experiences. According to But and Atif (2014), psychological contracts
provide a sense of control and at the same time, can influence the future of the employees in
the organisation as the employees are a party for the contract and they can choose to carry out
their obligations. Jha, Pandey and Varkkey (2019) too have opined in this contact that
psychological contract increases the level of certainty by means of creating a sense of
predictability, control and job security in the employees. They have also identified in his
study that- “psychological contract revolved around the equity perception of the effort-
reward relationship, thus focusing on reciprocity.”
It is to mention that the psychological contract is the responsibility of both the
employer and the employee. However, they have different responsibilities for guiding against
the key breaches. In terms of the employer, it is mainly about ensuring not to give vague
perception to an employee and to ensure that the promises are upheld (Gloss, McGregor and
Brown 2016). On the other hand, for the employees it is mainly about managing their
expectations in order to ensure that the adverse personal situations are not seen as negatively
influencing the productivity and are not considered to be a worker “acting out”. Taking this
details and information into consideration would assist in preventing a breach and would also
lead to a balanced contract among the two sides.
Benefits and Importance
There are several reasons for why it is advantageous for the businesses to establish
psychological contracts with their employees. In majority of the modern organisations,
managers have no power to control the business “top down” and therefore, they need to adopt
a more “bottom up” style. The important details and information are known by the employees
sooner because of the regular interactions with the suppliers and customers (Bain and Taylor
2017). Along with sharing the information, the employees also want to know whether their
interest would be taken into consideration while taking important business discussions and
that they would be treated with due respect. This is likely to make them satisfied with the
jobs. Employers must not underestimate the influence of individual differences. Development
of a psychological contract on the basis of the individual differences could have a good
benefit for both the employer and the employees as this would highlight the role and value of
the employees within the business while considering their aims and goals.
It is to note that as per Eilam-Shamir and Yaakobi (2014), the main strength of
psychological contract lies on the way how fair individuals believe their company is in

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fulfilling his or her perceived obligations above and beyond the formal written contract of
employment. This is something that determines the commitment of the individual towards the
organisation as well as his or her motivation; level of feeling secured and job satisfaction in
the job. This has the potential of leading to positive attitudes and high commitment.
According to Jha, Pandey and Varkkey (2019), psychological contract helps in the
explanation of the reason behind why the recruits leave during the initial training period and
why commitment and satisfaction levels drop and why the rate of turnover increase. It is very
useful in the evaluation of the response of people to the continuous changing context of the
careers. Furthermore psychological context helps in the mitigation of uncertainty in the
organisation while giving a good understanding of the situations taking place in the
organisation (Adamska, Jurek and Rozycka-Tran 2015).
Challenges
The nature, level and complexity of psychological contract are determined by the
nature, level and complexity of the needs of employees (Adamska, Jurek and Rozycka-Tran
2015). work needs are significantly impacted by the external factors and the ones that we
naturally imagine to be arising inside the work. The lives of people today are richer and more
varied and at the same time, far better connected and informed than ever before. The work
itself has become way more strongly diverse and complicated too. According to Subramanian
(2017), these changes have started to take form since 1980s. Before this, there were several
modern dimensions of work like mobile working, speed of change and globalisation.
However, these dimensions were unusual at that time but now they have become very
common. Technology and globalisation in the late 20th century have shifted everything that
people knew about organised work onto a wholly different level, particularly in terms of
connectivity, mobility, change rate, complexity and activities. With the same, there are also
some notable changes under way that particularly involves the attitudes towards the
traditional corporations, governance and markets. Many examples of highly potential
community driven companies are emerging. Technological empowerment and social
connectivity pose a real threat to the old-style corporate models. Complexity and significance
of psychological contract have significant rise as a response to all the affects and have given
that the working environment would continuously change in every big ways and this will
further lead to a complexity and high significance of the psychological contract in the coming
future (Ramirez, Madero and Velez-Zapata 2015).

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It is to mention that there is no agreement on psychological contract as it is not written
and therefore, it is very doubtful whether it can be regarded as a contract at all (Bedarkar and
Pandita 2014). In this globalised business environment, organisations encourage workplace
diversity. As a result, the modern organisations comprise of many different individuals with
different expectations on his or her rights and obligations. Therefor it is quite hard to unite
those expectations. Furthermore, according to Galea, Houkes and De Rijk (2014), violation of
the psychological contract carries a clear view about the broken promise. It is still unclear
whether the contract explains the working behaviour of the people any way better than the
other more simpler and neutral concepts.
According to Frey and Osborne (2017), changes in terms of demand for labour and
increase in workforce flexibility have changed the strength of the contract and thus affect the
employer and employee relationship. Significant changes in the way companies design their
strategies and structures have also directly influenced the careers of the employees.
“Challenge in the relationship of employer and employee would be to harness and the
leverage the full potential of the employees in a business climate that does not guarantee job
security and career progression” (Adamska, Jurek and Rozycka-Tran 2015). The modern
organisations are de-layered into the lean structures in order to remain competitive in the
current highly competitive market (Gloss, McGregor and Brown 2015). However, this change
does not ensure a sequence of career progression for the modern employees.
Application
In the organisational and management theory, there are many employee attitudes like
faith, enthusiasm, satisfaction and trust that highly depend on a balanced and fair
psychological contract (But and Atif 2014). Whether the contract is perceived as broken or
unfair by the employees, these important and tangible ingredients of good organisational
performance could easily evaporate and that too, very quickly. When the psychological
contract is perceived as right and fair by the employees, positive attitudes are bound to thrive
there. According to Ramirez, Madero and Velez-Zapata (2015), there are many factors within
the psychological contract such as flexibility, well-being, employee satisfaction and tolerance
that are both the effects and causes. They have opined that the attitudes and feelings of the
employees act on two different levels- firstly, the attitudes and feelings of employees are
greatly influenced by their workplace treatment and secondly, their feelings and attitudes are

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greatly influenced by how they perceive themselves and their relationships with the employer
along with their behaviour towards the employer (Jha, Pandey and Varkkey 2019).
According to Wang and Kaarst-Brown (2014), problems about motivation, choice of
work location, assistance in the relocation, involvement in the process of decision making,
options of flexible time, pay-performance relationship, trust, fair pay and fair treatment,
commitment and loyalty, job variety and opportunity for advancement in the company are
critical factors that affect the commitment and the relationship of the employees in the
organisations. For sustaining a healthy and productive psychological contract, the
organisational managers must focus on the importance of and investment in the job security,
learning opportunities, fair system of remuneration, comprehensive process of
communication, personal development and promotion opportunities for the employees. These
practices are likely to motivate the employees and at the same time, increase their
organisational commitment. Furthermore, Mehta (2014) have opined that for avoiding the
reaches of contracts, the organisational managers must gain a good understanding of their
employees’ expectations. It would be of a great advantage to recruit the employees who are
receptive to the relational contract, therefore becoming more engaged to the company.
Conclusion
Hence, from the above analysis it is to conclude that psychological contract represents
the account of the employment relationship to a great extent. The notion of psychological
contract is focused on “soft issues”, which have very strong implications for the modern
organisations. It is also focused on some key shifts that the companies are facing in their
relation with the staffs. The potential of the organisation for getting the best out of their
employees (creativity, innovation, knowledge and energies) and controlling them for gaining
a competitive edge over the other competitors in the market depends in the power of the
psychological contract. Therefore, understanding and strengthening the psychological
contract is of a great vitality for the major market player- the IT industry. However, it is to
mention that changes in terms of demand for labour and increase in workforce flexibility
have changed the strength of the contract and thus affect the employer and employee
relationship. Significant changes in the way companies design their strategies and structures
has also directly influenced the careers of the employees. The modern organisations are de-
layered into the lean structures in order to remain competitive in the current highly
competitive. In this context it is also to mention that the contribution of the employees can no

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longer be extracted by the coercion. Problems about motivation, choice of work location,
assistance in the relocation, involvement in the process of decision making, options of
flexible time, pay-performance relationship, trust, fair pay and fair treatment, commitment
and loyalty, job variety and opportunity for advancement in the company are critical factors
that affect the commitment and the relationship of the employees in the organisations.
However, it is to mention that further studies must be carried out for discovering different
reasons behind why employees complain for low intentions to resign from their job, despite
of the perception of breaching the psychological contract.
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