Psychological Contracts in Organizations: Understanding Written and Unwritten Agreements

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Denise M. Rousseau

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  • Dedication

    To Edward F. Rousseau, cable splicer, coach and poet

    Copyright

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    Acknowledgments

    Many friends and colleagues provided thought-provoking feedback on various versions of this book: Jean Bartunek, Max Bazerman, Joe Baumann, Art Brief, Martin Greller, Richard Guzzo, Jean Hirsch, Paul Hirsch, Wayne Kriemelmeyer, David Messick, Don Prentiss, Ben Schneider, Cathy Tinsley, and Kim Wade-Benzoni. Katie Schonk, who edited the manuscript, deserves particular recognition for her ability to tease out confounded concepts and errant constructions. Carole McCoy saw it through to final product. Thank you all very much. My family was especially supportive, despite living with this book for several years. My thanks to my husband, Paul, and daughters, Heather and Jessica.

    Introduction

    It is time to reassess our assumptions about contracts. Traditional employment contracts have been challenged by the restructuring of corporations and the decline in organized labor. Promises about the future are the essence of contracts—yet promises are increasingly difficult to make (and keep). The purpose of this book is to offer a behavioral theory of contracts to help scholars and managers address the fundamental roles contracts play in organizations. A behavioral perspective on contracts is critical to understanding and managing change in contemporary organizations.

    The Pervasiveness of Contracts

    Contracts, unwritten and understood, are a pervasive aspect of organizational life:

    • A person taking a job with the government or a family business because of the security it offers
    • Terminated employees with high seniority receiving extensive outplacement and severance packages (typically in contrast to experiences of their more junior coworkers)
    • Customers buying a particular brand of computer for the service the manufacturer provides
    • The “moral tenure” of a nontenure track instructor who continues to teach the same classes year after year
    • A working relationship with a supplier, consultant, or partner in which any formal contract is left in the desk drawer
    • Mission statements saying that “our people are our most important asset”

    The choices people make in taking a job or planning their retirement, purchasing a product, or commissioning a service all involve some understanding of promises made by employers, product makers, and service givers.

    Nonetheless, it's common to think that corporate turmoil and economic competition have made loyalty, trust, and commitment things of the past. Employees are told to “pack their own parachute” (Hirsch, 1987) and corporate attorneys advise their clients to avoid making any statements that might be construed as a promise of long-term employment. Yet the movement toward strong corporate cultures and escalating interdependence belies claims of contract avoidance. Federal Express requires a strong commitment to service and innovation to deliver “by ten the next day,” necessitating both a team culture and an employment relationship that resembles more than a simple transaction. In the past 5 years, Motorola has gone from 5,000 suppliers to 200 in an effort to better manage its relations with vendors. Team cultures and dedicated supplier relations are not managed at arm's length. They involve very different contracts with employees, vendors, and customers than those found in a more bureaucratic or opportunistic organization. Managing more extensive ties to many people requires new commitments—in employment, services, alliances, and communities.

    Paradox and Challenge in Contracts

    New types of contracts are necessary for new and future types of organizations. But there's a paradox in current organizational contracting. Reverberations from the downsized and restructured corporations of the 1980s have led to a “no guarantees” attitude among many organizations and their erstwhile members. The unraveling of many long-standing contracts—internal labor markets of firms such as IBM, Digital, or Xerox—and the move toward more temporary employment—from Accountemps to Manpower—has to do with a “fear of commitment” in many organizations in the United States and abroad. But new organizational forms may foist on many enterprises a 180-degree turn toward more extensive commitments, at least to some (future) workers. Charles Handy, in his provocative book The Age of Unreason (1989), argues that future organizations will be “shamrocks.” Essentially, shamrock organizations are based on a core of essential executives and workers supported by outside contractors and part-time help. They are not a new form (construction work and farming have been shamrocked for generations), but a complex one in terms of creating contracts that people understand and can keep. Future organizations might have it both ways—commitment and flexibility. To make this happen, we must understand the commitments and obligations that make organizations possible.

    People in contemporary society are often uncomfortable with concepts of commitment and obligation—consistent with the negative stance corporate attorneys have toward commitment and open-ended agreements. In contrast, obligations and duties constitute much of social life in traditional societies (tribes, clans, or feudal systems). Tribes people such as the Navaho and aristocrats like the Japanese dai-myo are to their obligations born. In a traditional world, nothing is particularly voluntary about obligations and duties. They are the fabric of social life. But in a modern world, the striking feature of contractual obligations is that their basis is individual freedom of choice.

    Contracts are a product of free societies. Choice underlies the existence and meaning of contracts. Freedom gives new meaning to promises and gives contracts a special significance. Motivationally, having a choice can engender a great personal commitment to carry out a promise. As the trend toward democratization continues worldwide, more countries will wrestle with what it means to make and keep a contract. In the former Soviet Union, for instance, the notion of an implied contract or understanding had virtually no meaning. As stated in an appropriately titled article, “Nobody's Grandfather Was a Merchant,” unless the terms are in writing, they are not honored or binding:

    All contracts between American firms and Soviets are generally governed by Soviet law, which does not recognize oral agreements…. Written contracts then supersede all previous unwritten agreements and implied assumptions … the Soviets insist on writing down …things taken for granted in Western nations such as verbal confirmations of receipt of goods and telephone reorders. (Rajan & Graham, 1991, p. 45)

    Ability to compete effectively may depend on creating contracts consistent with the expectations of customers and the flexibility demanded by both technological changes and the marketplace. Contracts arise when people believe themselves to have choice in their dealings with others. Commitments obtained by coercion are not legally binding—shotgun weddings are readily annulled. When a person voluntarily agrees to be bound to a contract, he or she gives up some measure of freedom. Working for a newspaper can mean reporters and even their spouses may shop only at stores that advertise in that paper. Similarly, corporate consultants may be forbidden to take clients with them if they quit. Contracts are made when we surrender some of our freedom from restrictions in exchange for a similar surrender by another. But by giving up something voluntarily, each gets more than might be possible otherwise.

    Contracts are poorly understood and used in one of the most pervasive areas of modern life—contemporary organizations. Professional managers are often less well prepared for contract making than are other professionals. For years, marriage counselors, organizational development specialists, and therapists have used techniques of contracting to create or renew relationships. To grow and develop in such circumstances involves spelling out mutual obligations to develop trust and commitments with long-term implications. Husbands and wives may renew a troubled marriage by establishing specific commitments that, when kept, restore trust. Therapists encourage overweight teenagers or substance abusers to create contracts with them-selves, including promises that bring rewards when fulfilled and sanctions when broken. Contracting makes possible new models for future behavior, a sense of confidence that these behaviors can and will occur, and the creation or renewal of trust and self-confidence. As William James once wrote: “Our faith in an uncertified result is the only thing that makes that result come true” (as quoted in Bartlett's, 1980, p. 649). Effective organizations have learned how to make and keep the contracts their technology, markets, and strategies prescribe.

    Outline

    This book proposes a behavioral theory of contracts. The following key issues are addressed:

    • Contractual Thinking. We describe ways in which people think contractually and the way commitments are made and understood.
    • Contract Makers. We detail ways in which organizations send messages that are understood as promises, whether they are intended to be or not. Prominent in our understanding of contracts are the role of promises and the many ways they can be communicated (in words, by actions, and by organizational signals).
    • Contemporary Contract Forms. Just as Shakespeare's Hamlet once said, “There are more things in heaven and earth …than are dreamed of in your philosophy” (1.5.166), there are more forms of contracts that organizations are party to than managers and members are fully cognizant of. This book details the workings of each, how they are created, maintained, broken, and changed.
    • How Contracts Are Violated and What Happens Then. Violation is a reality of contracting, although most contracts that are kept involve some forms of breach as well. How violations play out, whether the contract is ultimately broken or endures, are shaped by the relationship's history, interactions between person and organization, and the aftermath of violation.
    • How Contracts Change. Contract change often borders on violation, and poorly implemented changes become contract breach. We describe how the type of change affects the processes needed to effectively redesign a contract.
    • How to Link Strategy to Contracts. Employment contracts and the customer relationships they foster are a product of the link between an organization's strategy and its human resource practices. The chapters describe how broader strategic management concerns affect employment relationships.
    • The Changing Social Contract. Finally, an assessment of societal trends augurs large-scale changes in future employment contracts.
    Starting Point

    Much of our difficulty in understanding how contracts operate in everyday work settings, customer service encounters, and vendor-supplier relations comes from confusing legalistic thinking (how people use the law to think about their behavior) with how people think contractually (how they make, keep, and rely on promises; Macaulay, 1963). Legalistic thinking focuses on the formal and the procedural, what's in writing, what's readily measurable, and what can be reduced to dollars and cents. Such thinking is often demonstrated in traditional economics: “We have a puzzle: much behavior in the labor market seems to be explicable only in terms of long-term labor contracts, and yet such contracts are rare [italics added]” (Bull, 1987, p. 147). The rarity of long-term agreements depends on whether we mean a formal written contract or view beliefs about seniority or keep informal agreements as creating obligations. In contrast, Nobel laureate Herbert Simon (1951) has argued, [Classical economic theory's] way of viewing the employment contract and the management of labor involves a very high order of abstraction—such a high order, in fact, as to leave out the most striking empirical facts of the situation we observe in the real world. (p. 293)

    [Classical economic theory's] way of viewing the employment contract and the management of labor involves a very high order of abstraction–such a high order, in fact, as to leave out the most striking empirical facts of the situation we observe in the real world, (p. 293)

    We begin here by investigating the “facts of the situation” as they play out in the psychological and social processes that underlie making, keeping, breaking, and changing contracts in organizations.

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    About the Author

    Denise M. Rousseau is Professor of Organizational Behavior at Carnegie-Mellon University. She holds degrees in industrial/organizational psychology and anthropology from the University of California at Berkeley. She has been a faculty member at Northwestern University, the University of Michigan, and the Naval Postgraduate School at Monterey, California. Her research addresses the impact of work group processes on performance and the changing psychological contract at work. Her research has appeared in prominent academic journals, such as the Academy of Management Review, Administrative Science Quarterly, Human Relations, Journal of Applied Psychology, and Journal of Organizational Behavior. Her books include the Trends in Organizational Behavior series with Cary Cooper, Developing an Interdisciplinary Science of Organizations with Karlene Roberts and Charles Hulin, and The Boundaryless Career with Michael Arthur. Active in executive training and development, she has taught in executive programs at Northwestern (Kellogg), Cornell, Carnegie-Mellon, and Chulalongkorn University (Thailand). Her writings for managers have appeared in Business Week Advance, Kellogg World, and Human Resource Management. She is a Fellow in the American Psychological Association and the Society for Industrial/Organizational Psychology and serves on the Board of Governors for the Academy of Management. She is Associate Editor of the Journal of Organizational Behavior.


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