Psychological Contract

The term psychological contract is the term used to describe each employee's understanding of what he or she is to provide the organization (such as hard work, effort, loyalty) and what the organization is to provide in return (such as pay, benefits, job security). Unlike a written or explicit contract, psychological contracts are perceptions or understandings on the part of the individual; each individual has his or her own psychological contract, and the contract may vary greatly from person to person.

Functionally, psychological contracts accomplish three things. First, they reduce uncertainty. Believing one has an agreement with one's employer (whether accurate or not) increases one's feelings of security and assurance. Second, psychological contracts guide behavior at work; the worker will accomplish those things for which he or she feels obligated without having to be constantly monitored by a superior. Last, a psychological contract provides a sense of control in that the individual believes that he or she has “agreed” on its terms.

Despite the idiosyncratic nature of the psychological contract, it is assumed that people form one of two general types of contracts: relational or transactional. Relational psychological contracts are long-term, often very subjective agreements that entail such exchanges as company loyalty on the part of the employee in return for job security provided by the organization. Because of the long-time horizon of the relational psychological contract, the exchanges between organization and employee may not be immediate. For instance, an employee may stay late to accomplish an important company objective, not expecting to be “repaid” for his or her work immediately. By extension, the relational psychological contract is very flexible; employees feel comfortable accomplishing any number of tasks without the expectation of immediate reward or recognition. Because of this flexibility, relational contracts are typically desired by organizations.

Transactional contracts, in contrast, are very short term in nature, observable or objective, and typically based on very extrinsic exchanges. The worker may wish to exchange only the work outlined in his or her job description for a paycheck and benefits. In the transactional contract, then, exchanges are immediate. For instance, one expects to be paid in a reasonable time frame after the work is completed; in most organizations, paychecks are distributed roughly every two weeks. Likewise, workers with transactional contracts often do not put forth effort that is not likely to be immediately or tangibly rewarded. In sum, immediate reciprocity is desired by those holding transactional psychological contracts.

Although they are purely perceptual, it is important that psychological contracts are at least somewhat accurate when compared with the objective contributions expected from the employee and the objective inducements provided by the organization. Psychological contracts operate in similar ways to promises or obligations. If they are fulfilled in the individual's eyes, positive outcomes result. Job satisfaction and “going that extra mile” are associated with contract fulfillment. Likewise, unfulfilled or violated contracts may have negative results. Employees who feel as if the contract has been violated may exhibit negative attitude changes, a reduction in performance, turnover, and other withdrawal behaviors. It becomes important, then, for employers to be aware of, and to some extent manage, the psychological contracts that employees may hold. Helping employees create realistic psychological contracts lessens the likelihood that the individual will perceive the contract to be broken.

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