What is the Psychological Contract and why is it so important?

The psychological contract is a key part of building an attractive employer brand to attract potential recruits and retaining employees. Understanding how this contact is formed, maintained and what elements are vital to individual employees, HR processes, policies, benefits and more can be designed to support, engage and retain employees to the company’s benefit.

Recruiting and retaining business critical employees with unique and difficult to source skill sets is crucial for many businesses. Understanding and considering the psychological contract can play a vital part in doing this.

What is the Psychological Contract?

The term ‘psychological contract’ refers to an unwritten, unnegotiated understanding of how the employment relationship will work. The psychological contract encompasses the perceived expectations, beliefs, ambitions and obligations of both the employee and the organisation. Most frequently, these expectations cover;

  • Training and development
  • Job security
  • Fairness of pay and benefits
  • Organisational culture

As an example, an employee may expect their employer to give them a salary increase within 6 months, but in order to meet this the employer may have the expectation that the employee will hit a certain sales target or show a certain level of loyalty or commitment to the company.

The psychological contract is subjective and is unique in each individual employee. Each employee has their own unique perceptions, motivations and priorities and the employer is responsible for determining what these are.

What are the Benefits of a Balanced Psychological Contract?

A balanced psychological contract is one in which the expectations are fair to both the employee and the employer, where neither is expecting too much of the other. In order for an employment relationship to really thrive, a balanced and fair psychological contract must exist for both parties. Where a balanced psychological contract exists, the employee is more likely to be more committed, go above and beyond, and perform better.

Where a psychological contract becomes imbalanced and the employer is expecting too much for what they are willing to give in return, the employee can quickly start to feel demotivated, undervalued and underappreciated. This imbalance more often than not results in low employee engagement, and a high employee turnover rate.

How is the Psychological Contract Formed?

The formation of the psychological contract begins upon the first engagement a potential employee has with an organisation. This can even happen before that person could be considered a potential employee, and their first engagement might be with the company website, a retail shop, social media or elsewhere. Therefore it is important to portray your organisation and your culture as realistically as possible on your website, social media and through your recruitment process to ensure potential employees are forming realistic, manageable expectations from the outset. Simple conversations with anyone in the organisation (both formal and informal), everyday actions, statements and promises can all contribute to the expectations a person will form, in addition to company processes and policies.

It is important to note that the formation of the psychological contract is an ongoing process. As an individual’s priorities change, or the business or external environment changes, that person’s psychological contract will change and morph, and may end up being completely different to when they first started with the company. This is why is it is important to regularly reassess employee expectations, to ensure HR strategy, processes and policies are amended where necessary to meet the requirements of employees.

Can the Psychological Contract be Broken?

Much like a written employment contract, it is possible for an employer to ‘breach’ a psychological contract. Where breaching an employment contract can have legal consequences, breaching a psychological contract results in more formal, yet still very real consequences.

When an employer does not meet an expectation of an employee, this is known as a psychological contract ‘breach’. The impact of a breach can vary significantly dependent on what expectation wasn’t met, the reason why it wasn’t met, and how important this was to the employee. It is more than likely the more important the expectation was to the employee, the more negative impact will occur as a result of the breach.

What are the Risks of a Psychological Contract Breach?

A psychological contract breach is something which can be difficult to come back from, therefore it is always more effective to aim to prevent a breach from occurring, rather than to try to repair it afterwards. Due to the unwritten and subjective nature of the psychological contract, there is a heavy reliance on trust from both parties to maintain it. Where a breach then occurs, it can be difficult to repair the trust that was broken.

The severity of the breach in the eyes of the employee is really the determining factor for the reaction they may exhibit afterwards. Where an employee has determined a breach has been ‘severe’, it can result in them seeing resigning from the organisation as their only choice. Any breach can result in a loss of trust, feelings of being underappreciated, decreases in performance, commitment and engagement. Though these do not pose the same initial risk as the threat of resignation, they are still equally as importance to tackle as they can lead to retention issues if nothing is actioned.

How Can You Understand and Manage the Psychological Contract?

What shines through as the most important thing throughout forming the psychological contract and addressing any breaches is communication. It is absolutely vital to maintain clear communication to manage employee expectations. Keeping an ongoing open and transparent dialogue with every employee will significantly help to manage expectations, to show empathy and compassion for each other’s situations and to highlight areas where employees may have frustrations or misunderstandings that could turn into a breach of the psychological contract.

It is also vital to listen to employees, understand what motivates them and remember what they tell you as these motivators will be the most effective for encouraging and rewarding the employee, with the additional benefit of having a positive impact on their performance and engagement. However, it cannot be stressed enough that listening alone is not enough, and must always be followed with action.

Whilst we are now in the midst of transitioning into a post COVID-19 working world, it is the perfect time to connect with employees to determine their priorities and expectations going forward into a new and different phase. As many standard practices such as office working are being reconsidered, it is a prime opportunity to take into consideration the wants and needs of employees to honour their psychological contracts in the best way possible.

If you or your organisation could benefit help with employee engagement, communications or retention, please contact our AAB Purpose HR team on info@purposehr.co.uk and one of our HR consultants will be delighted to have a free initial consultation.