Psychological

Contract

Table of Contents

1.0. Introduction.........................................................................................................................2
2.0. Reflection of the Study.......................................................................................................12

2 | Page

With the developments in the Industrial Relations, there have been various modifications in the
Human Resource Management. There has been an increased level of interest in the area of
employee relations. This has not affected the level of specialist managers but management
overall has been effected by this. Emphasis is laid on aligning the objectives of the Organization
and interests of employees.
Working conditions are of prime importance to humans. It determines the thinking process of
humans, and the interaction among people. With the passage of time, challenges have increased
and working conditions have complexities in them. Due to all these factors management have
modified their set up to cope with national demands and international influences. Managers are
ought to think in a sophisticated manner to deal effectively with the ongoing changes. Broadly
speaking this could be done in two ways; firstly to introduce new policies and devise them
accordingly. This system has merits and some demerits. Generally, policies are made on
assumptions and are subjective in nature. It leads to the wishful deeds and business. Second
method includes applying of framework drawn from the theoretical frameworks and there are
chances that practitioner may apply it objectively and systematically (Sisson, 2010).
Relations at workplace are often known, as employment relation is associated with the various
features such as Human resource management, industrial psychology, labour law and industrial
economics. In addition, it can differ in different contexts. In the British context, however the
concept of employee relation is applied in a different context and it has a broader context. It
involves the interaction at the broader scale and includes relationship among state, employer and
organizations (Stevenson, 2006). At this level, it includes micro level relations, which exists
between managers and employers. In the British literature concept of Industrial relations have
been used with the reference to the two senses.
Firstly, it is used in unitary concept and elaborates the interaction and activities of human
resource management. It is a sum of functional activities, which are expected to be reflected
from the collaborative interactions among managers and employees in various aspects such as
flexibility, skill, loyalty of employees . This approach sees all the employees of the organization
as a single team. All the employees of the organization share work and gaols on the same level.
Though this is also a possibility that organization may describe itself as interest, goals and work
shared among them might differ. This difference has a great impact on the management style. A
3 | Page

self-proclaimed Unitarist organization can be authoritarian or paternalistic (Fitzner, 2003). In

unitarism organization is considered as a one unit and ne happy family. Its basic assumption is
that everybody in the organization shares same perspective and values. People work together,
share same values, and work in a unified form towards achieving mutual goals (Ndikumana,
2000).
From the perspective of the employee in interest Organization working standards should be
flexible and it is expected from the individuals to work towards improvement and efficiency.
Somehow, if a union is formed its duty should be to provide communication between
management and employee has and settles things down. Employee contributions in the decision
making process are ensured and good relations among employees and good working conditions
are emphasized. Innovation and teamwork are appreciated and employees are motivated to work
towards betterment of the organization This kind of environment ensures employees better
participation in the organization and hidden talents are unleashed. Employers point of view in
the Unitarist approach is somehow related to the latter. Staffing policies are made to ensure the
unity among employees. Furthermore, they are motivated to discuss their ideas. It is made sure
that the objectives of the organization are clear to the employees to ensure loyalty and
commitment reward system is designed (Summers & Jeff, 2000). It is expected from the line
managers to take the responsibility of the staffing. In order to resolve the conflicts among the
staff management it is considered that flow of information must be improved within the
organization and policies of management must be clear enough. The objective should not be
personal and if personal, these integrated with the needs of the organization. Concluding
Unitarist approach, it is an employment relationship based on the integration of tasks with a
common goal. It is cooperation and harmony between employee and employer. There is no
conflict of ownership and everyone works as a team. Unions are not welcomed in this structure
and are considered as intruders as there is already a unified structure available hence no need of a
Union. This approach strongly supports effective leadership to achieve loyalty of employees so it
can be called as a management oriented approach (Bryson, 2005).
Critics of the Unitaist approach claim that it presents a narrow view of the industrial conflict. In
addition, it is silent on the factors like distribution of the business matters, security of occupation,

4 | Page

and labours status with the perspective of factor of production and issue of control in decision
making.
However, employment relations can be successfully maintained by adopting the Unitarist
Approach. Incentives can be provided to the employees by management and shared ownership is
one good way to integrate the interest of both employee and employer. Every employee must be
provided an opportunity in sharing profits and ownership on a shared basis to ensure financial
stake in the company. Participations of employees in the activities on a daily basis must be
ensured through different approaches (Conference, 2006). By this individual will feel that he has
a contribution in the work processes. It will help to increase the morale of the employee and will
increase its level of satisfaction. High level of involvement and participation of employees must
be encouraged. Advanced HR practices in selection, training, designing of job, reward system,
appraisals, and evaluation procedures must be devised to ensure satisfaction and high
performance of the employees (Johnson & George, 2008).
Second approach, which is used, is known as pluralism. It is far from the unified homogeneous
constructed. If we compare it with the unitarist approach, it indicates different interests of the
people and loyalty of employees whereas in the antitrust approach there is only source of power.
Pluralist Approach is of the view that people outside the organization can also have an interest
with the employees. Horizontal links can be created outside the organization in form of unions.
Loyalty and commitment can be made to the leaders of other organizations. Thus main features
of the pluralist approach that the power is diffused among the organization in such a way that no
one is dominated. People have different aims, aspirations and interests. Because employment
relationship is open so there are chances of conflict processes are indeterminate. Management
appreciates open participation and obedience should not be accepted. Conflicts are reconciled to
a reasonable limit. Unions have a major role to play and are considered legitimately responsible
for resolving the conflicts of the employees. Moreover, as there is a variety if interests so
industrial conflict is inevitable (Guest D. E., 2004).
Pluralist framework presents a real picture of industrial relations and it gives a better idea to the
management about their limitations. Trade Union plays a vital role in this aspect as they
represent the interests of the different sections. Pluralist approach is considered important as it
ensures cooperation among the employees by manipulating team spirit. It has contributed a lot in
5 | Page

the academic work in the industrial relations. There is diversification and multiple beliefs,
attitudes and values. Leaderships come from the opposing sources and resultantly conflicts are
unavoidable. Trade Unions have a significant contribution and have a positive role in decisionmaking. With the help of the collective bargaining system, employee relation can have stability.
Negotiations and discussion among employees can add into it (Deakin & Suzanne, 2005).
There are various strengths of the Pluralist concept and these are helpful for the organization in
various aspects. It lays emphasis on the resolving conflicts with the intervention of IR. It is
considered as an alternate way of decision-making. Because conflicts are not avoided rather
effectively resolved through the active participation of the stakeholders. Principles of the conflict
management are used in the Pluralist Perspective to ensure the active participation of different
groups in conflict and decisions is implemented and discussed. Wide ranges of policies related to
employee relation are part of Pluralist perspective. It is very beneficial for the culture of the
organizations having diversity at the national and organizational level. Trade Unions are effective
in such environment for aligning the interest of individuals and organizations. This approach is
also effective for the collective system of IR, as it shows no disregard for the role of the Trade
Unions in resolving conflicts. There are certain demerits of the Pluralist Perspective. It relies on
the rules and regulations that are used for resolving the conflicts. It neglects the fact that states
have commercial interests apart from the public interests (Foster, John, & Ian, 2009).
Psychological contract was the term used first time in the 1960 and became very popular in
1990s. It is defined as the perception of individual and Organization about the employment
relations.
In addition, the promises and obligations due in that relationship. Psychological contract comes
into the contract as soon as the employee signs the employment contract. The obligations are
under psychological contract are not formal and unsigned. There are some expectations for the
employees under the psychological contract such as performing best, dedication towards the
organization, cooperative behaviour towards the employees and fellow colleagues, loyalty to the
job, bringing innovation to the organization, pleasant attitude with the clients and long tenure
(Conway & Rob, 2002).

6 | Page

Psychological contracts refer to the relationship between the employee and employer and it is
concerned with the inputs and outcome. In the context of the workplace, it is concerned with the
questions like how its employer treats an employee and what the employee to the job gives.
These aspects are the critical aspect of the psychological contract.

In depth, concept is more

complex at the management level. This concept is more complex at the high level of
management. Due to the diversified style of this approach, it could be also applied in other
contexts other than employment. Unlike many other approaches and concepts of management,
this theory is yet to be defined and utilized by the management in organizations. It reflects the
highest level of change in the area of management. The literature on the topic has been studied
and explored in the last ten years. Rousseau has influenced it. Earlier literature on the theory
describes that how employment relations are formed by the social exchange. Various authors
have explained it differently and have given their views (Cullinane & Tony, 2006).
Psychological contract can be described as the expectation form the employee other than
performing a better job. There is a lot of significance of the Psychological contract as it presents
a schema and mental model to follow by the employees. It is developed by the experiences. It
can be considered as a belief structure in the context of the employee as how he should behave in
a particular environment and what should be his strategy when something is expected from him.
In a stable environment at workplace, it predicts the relationship of employee and employer. It
helps to boost up the morale of the employees and gives them a feeling that they are a part of the
organization and can play their part well in its development. They have a choice in their actions.
Thus, it helps to reduce the state of uncertainty and generates the feeling of security and control
(Guest D. , 2004).
Research has proven that this constitutes an agreement between an employee and employer in
which it is expected from one party to give in return of what he receives. It is more similar to the
social exchange theory. There is an obligation on the employee towards employer to give his
commitment to the organization in return for what he receives from the organization. For
instance if an employee thinks that he is treated fairly from his employer and his efforts are duly
appreciated he will reciprocate it by working hard and giving his best to the organization.
Psychological Contract depends upon the fact that how an employee feels about the level of
fairness he is treated in his job (Bal, Annet, & Paul, 2008).
7 | Page

If he is appreciated well and is given respect in his working environment; his opinions are
encouraged and heard well he will in return feel secure in the job and will perform a better job in
the organization. Positive attitudes and promises fulfilled in the workplace thus in return yields
better results and high commitment from the employees. Psychological contracts are reinforced
by the repeated performance of the employees. It is perceived that if there will be a greater
degree of mutual obligation it will lead towards stronger social exchange.

Psychological

Contracts change with the passage of time and are dynamic in nature. Organizations face changes
and Psychological Contracts change with it. External factors like change in the organization and
promotion leads to the changes in psychological Contract. For instance if additional; burden is
placed on the employee or his position is changed tends to effect psychological Contract (O'Neill
& Monica, 2007).
The content of Psychological Contract has changed over the years. As compared to the last
decade, the structure of the majority of the organization has changed tremendously. In the past
organization has a bureaucratic structure and employment relations were considered as
Paternalists. The structure of the organization and the future of the employee was clear. In return,
loyalty and commitment were expected from the employee. Moreover, he received benefits like
pay increase and training and development. There was tolerance in employees for bureaucratic
structure and domination of a boss. On the other hand, employers were also confident that their
employees are a big asset for them and they can rely on them for not breaching their trust. The
traditional paradigm of Psychological Contract was straight. An organization with a stable
environment and growth had psychological contract. The change in paradigm occurred in the late
1908 and then it modified the paradigm (Sharkie, 2005).
Changes at macro level like competition in the market and demands of the customers, slow
growth, innovation, globalization, changing global trends and information technology are the
contributing factors in the change of paradigm. Companies have been in a continuous process of
attrition and have been downsized employees. To increase the productivity downsizing has been
introduced. New strategies have been developed to with an aim to increase responsiveness to
cope up with the market conditions. Demand for labours keeps on fluctuating and to deal the
matter employees are now hired on contracts and on a temporary basis. Employees with special
skills are hired for short term. Demands have increased for the capital deployment, activities
8 | Page

being outsourced, less layers of management and performance based jobs. All these factors add
to the changes in the Paradigm of Psychological contract. All these factors changed the nature of
the psychological contract. The situation has changed the conditions for the employers and
employees both. In an effort to Increase the productivity and to deal with the ongoing challenges,
companies now have become less concerned about the employees (Johnstone, Wilkinson, &
Ackers, 2004).
Significant change for the employee due to workplace changes have occurred in the form of job
loss. Downsizing has effected position at all levels especially white-collar level positions. These
are the positions, which were considered safe during the recession time. During 1990s senior
workforce was replaced compared with earlier times. These organizational changes have laid an
impact on the structure of the organization and the career of the employees.
In a workplace, setting Psychological contract by the employee is that he promises to work hard
for the company. He puts in his all effort to do his job in the best manner thus gives his best to
the organization. He owns the company and always stays loyal with the organization. This
reduces the turnover rate in the organization. Whenever it is required for him to give extra time
to his job employee never hesitates thus his commitment increases. According to the changes and
advancement in the job employee keep himself updated and learn new skills. Learning is evident
in his attitude as he keeps updating himself. Innovative ideas are generated from the side of the
employees (Sutherland, 2008).
Psychological Contract is related to the employee commitment. It influences the commitment
and behaviour of the employee. As the changes, occur in the organization related to careers,
rewards and employee behaviour employees respond to these changes. If psychological contract
exists in the organization, employee will willingly accept his tasks and roles and will happily do
his job. He will be more committed to perform the job. It ensures the readiness to perform for the
organization. He evaluates his readiness to accept the changes in the organization. If an
employee has a favourable perception about the organization, he will readily accept the changes
and will be more committed with his job. This will lead to accepting extra work, perform in a
better way and avoid negative behaviours from employees' side. On the other hand if an
employee feels that organization is not being favourable to his demand and has avoided it
demands he will be less motivated to engage himself in the extra activities
9 | Page

With the above discussion, it is quite clear that Psychological Contract determines the level of
dedication of employee with its organization. If an employee feels secure in his working
environment and all his expectation with the job and the employer has been duly fulfilled he will
feel associated with the organization. This leads to his long-term commitment to the organization
and will be loyal to his employer. Loyalty is determined by the factor that how much effort he
puts in a job. Employees tend to increase their efficiency and become more determined when
Psychological contract exists. Employment relations strengthen with the existence of
psychological contract. With the ongoing change in the working environment, it is evident that if
an employee is helped in the making, their jobs secure and making them feel comfortable at the
workplace will increase their dedication towards the job. This makes employees more proactive
and their behaviour changes.
There are certain factors which will determine the Psychological contract in an effective way
such as if reward system is fair in the organization and employees are provided with the
satisfactory appraisal it will increase their productivity. They will bring out innovative ideas and
it will lead to the innovation in the organization. With the changing demands at the workplace, it
has been noticed by the employers that there is a bundle of talent available. The right person for
the right job must be chosen to ensure effectiveness in the job performance; it will not only yield
good results but will also increase the productivity of the employee. If a person is rightly placed
according to his skills at his workplace it will give, psychological satisfaction and he will
perform in a better manner. His productivity will increase and he will more commit to the
organization (Budd & Devasheesh, 2008).
To increase the commitment in an organization is a tricky job to perform. Employers must act
smartly and think about multi lines to cope up with the situation. Employees must be given
challenges to perform and should be rewarded accordingly. Old reward does not help anymore as
employee now days have their own specialities and they perform their jobs accordingly to their
specific talents. Employers must be able to retain their employees here comes the concept of
talent management. The question arises that whether employers have been successful to harness
the uprising talent of the employee or it has been wasted by allocation of wrong job. If an
employee has been successful in harnessing the talent if the employee in an effective way it will
not only leads towards better results but also will increase the talent pool of the organization.
10 | P a g e

Interests must be taken in employee well being his occupational health is a factor which also
determines the level of the commitment of the employee. The work expected form the employee
must be reasonable and doable. Taking care of the interests of the employees well being will
determine the effectiveness of the job performed by him. Moreover, the benefits provided by the
company must be attractive enough so that employee must feel privileged working for the
organization. There is an intense competition in the market and it leads to modifications in the
pay structure. Organization change their strategies to retain their good employees swiftly so
reward system should be well balanced and must be good enough in comparison with the
competitors. Leadership plays a vital role in creating and balancing the psychological contract. If
leadership is effective it will inspire the workforce to stay focused and the level of commitment
increase with it. Leadership determines the smart rules to prevent unfair distribution of work,
unjust reward system and flawless promotions of the employees. Therefore, leadership has a
significant role in making the workforce perform better (Ridley-Duff, 2007).
Improvement in employment relation is only possible if psychological contract will be
maintained. It requires an equal participation form the both sides employer and employee.
Effective communication between employee and employer will make the situation more
favourable. If both sides fulfil their promised made at the time of the job contract will maintain
psychological contract. There must be a healthy environment with high level of trust among
employees and the effective communication will result in elimination of misunderstandings. The
trustworthy environment is more effective for creating long-term commitment in the employees.
Big organization shall work more on this aspect as in smaller organizations trust can be easily
developed as they have small workforce and people know each other well personally. If there is
repeated violation, of the psychological contract, it leads to mistrust and dissatisfaction in the
employees and they begin to stop trusting their management. It in turn leads to the
misconceptions and increase in the turnover. The role of Unions is vital here as they can maintain
trust and effective communication with employees. They can restore back the trust of the
employees of the employer.
Psychological contract plays a vital role in the success and failure of the organization. If
employee trust their organization and they have committed to stay with the organization; they
perform better and stay loyal with the organization. It increases their efficiency and dedication to
11 | P a g e

their work. Organizations with employee having psychological contract have a long term job
satisfaction and they are satisfied with their jobs. Job satisfaction increases the output of the
employee. Employees tend to perform better, devise new ideas, and bring innovation in the
presence of the psychological contract. Effective communication strategy with the employee
increases the trust of the employees. Management gets to know about the problems of the
employees and they are provided with the solutions (Wilton, 2003).
In this changing Human Capital is of extreme importance. Organizations success and failure rely
on the performance of their employees. If there is efficient workforce available in the
organization, it will increase its productivity and will bring in innovative ideas, which is of
extreme importance in this competitive era. Global changes demand expertise in every field in
every organization to deal with the demands of the customer. The working environment has
become dynamic and changes are necessary to be introduced. In such hard time it is crucial to
lose human capital as a talent shift from one organization can be very risky. Therefore, it is
essential that employees must be given space and should be taken care off to retain them.
Absence of Psychological contract will not only result in the loss of workforce but will also
affect the success of the organization. Bill Gates once said take ten employees for Microsoft and
I will lose my strength. The goals of the organization can be easily achieved if there is a level of
trust among employees and employers. Both should work in one direction and interests should be
same. Outsourcing of employees has made the situation more complex. Organization need to be
more focus and careful in devising their strategies and policies. Employees should be taken care
of as they are the asset of the company and contribute significantly to the success or failure of the
company in the end. Organization's success is dependent on their commitment (The Nestl
Employee Relation Policy, 2010).

12 | P a g e

Reflection on the study

Working conditions in the recent era have changed tremendously since last decade. Employees
are more aware of their rights and have a better sense of judgement about their roles. Growing
competition and external and internal pressures on the organizations have changed the working
condition dramatically. Job security is s biggest issue these days as the recruitment methods have
been modified. In the past people were hired on a permanent basis but now due to outsourcing
and job specialization now employees are hired on the contracts and on an ad hoc basis. It
increases the intensity of the situation and demands on both sides increases. Employers demand
more dedication and quality work. In this dynamic era, there are various opportunities for the
employees and they shift swiftly from one job to another. This increase in job switch has an
impact on the performance of the organization. As human capital has a significant importance in
the success or failure of the Organization.
Organizations have certain approaches implemented to their structures such as Unatarist and
Pluralist Approach. In the interest approach there is a single command of line and unified
interests. This approach has less chances of conflicts as everybody in the organization is working
towards the same goals and objectives and have a mutual interest. Employment relation in
Unatrist approach is more reliable and there are fewer chances of conflicts in the organization
due to mutual interests of the employees and employers. Moreover, there is unified decision
making and unions are not welcomed in this setup, as there is no need of them. In such scenario,
it is easy to maintain psychological contract between employees.
In a Pluralist approach organization, have multiple interests. There is no one direction of
commands. Diversification is present in the organization and there are more chances of conflicts
as people do not mutual interests. In this Union can play a beneficial role in providing effective
communication source between employer and employees. Their role is aimed to resolve the
conflicts in the organizations. In this context Psychological contract can aid the organization as it
will make the employee stay for longer period and will increase their commitment.
Psychological contract is not in writing and not functional in nature but it determines the
intentions of the employees and their commitment to the job. If the employee's breach
13 | P a g e

psychological contract repeatedly it leads to the negative effect on the behaviour of the
employee. Effective strategies and successful implementation can increase the job satisfaction
and reduces the employee turnover. The employee feels more secure in their job and their job
tenure increase. They feel owned by the organization and try to give their best to the
organization. Effective communication is also one key to retain an employment commitment.
There must no communication barriers between employer and employees and organizations must
work to improve their policies regarding human resource. Effective policies and Psychological
Contract have a positive impact on the performance of the employee and it affects the success or
failure of the organization.

14 | P a g e

References
Bal, P. M., Annet, H. D., & Paul, G. W. (2008). Psychological contract breach and job
attitudes;A meta-analysis of age as a moderator. Journal of Vocational
Behavior, 143-158.
Bryson, A. (2005). Union effects on employee relations in Britain. Sage Publications,
1111-1139.
Budd, J. W., & Devasheesh, B. (2008). The Employment Relationship. In The
Employment Relationship (pp. 1-41). Minneapolis,.
Conference, I. L. (2006). The employment relationship. International Labour Office,
Geneva.
Conway, N., & Rob, B. B. (2002). Full-Time versus Part-Time Employees:
Understanding the Links between Work Status, the Psychological Contract,
and Attitudes. Journal of Vocational Behavior, 279-301.
Cullinane, N., & Tony, D. (2006). The psychological contract: a critical review.
International Journal of Management Reviews, 113-129.
Deakin, S., & Suzanne, J. K. (2005). Anglo-American Corporate Governance and the
Employment Relationship. ITEC Research Paper Series, 1-24.
Fitzner, G. (2003). Employee voice and training at work. Employment Market
Analysis and Research, 1-157.
Foster, B., John, M., & Ian, L. (2009). It takes two to tango: evidence of a decline in
institutional industrial relations in New Zealand. Employee Relations, 35(9),
503-514.
Guest, D. (2004). Flexible Employement contractand Social Contract and Employee
Outcomes. International Journal of Management Reviews, 1-16.
Guest, D. E. (2004). The Psychology of the Employment Relationship:An Analysis
Based on the Psychological Contract. Applied Psychology: An Interantional
Review, 541-555.
Johnson, H. I., & George, S. H. (2008). Employee Relations; Creating Workable
Arbitration Agreements in the Post- Gentry Era. Law Journal, 34(3), 2-13.
Johnstone, S., Wilkinson, ,. A., & Ackers, P. (2004). Partnership paradoxes : a case
study of an energy company. Emerald Group Publishing Limited, 353-376.
Ndikumana, E. D. (2000). Is HRM a new approach in the employment scene?

15 | P a g e

O'Neill, B., & Monica, A. (2007). Knowledge Sharing and the Psychological Contract:
Managing Knowledge Workers across Different Stages of Employment.
Management Faculty Research and Publications.
Ridley-Duff, R. (2007). Communitarian perspectives on social enterprise. Sheffield
Hallam University Research Archive.
Sharkie, R. (2005). Precariousness under the new psychological contract: the effect
on trust and the willingness to converse and share knowledge. Knowledge
Management Research & Practice, 3, 37-44.
Sisson, K. (2010). Employment Relations Matters. Cornell University ILR School.
Stevenson, J. (2006). Collectivisation to Individualisation: Factors Contributing to this
Recent Change in Employment Relations . Otago Management Graduate
Review , 4, 103 -115.
Summers, J., & Jeff, H. (2000). Employee participation and company performance.
Joseph Rowntree Foundation.
Sutherland, J. (2008). Do Employee Perspectives Of Employee Relations Vary Across
The Regions Of Great Britain? A Research Note. Centre For Public Policy for
Regions.
The Nestl Employee Relation Policy. (2010). Business Principles, Compliance and
Employee Relations, 1-5.
Wilton, N. (2003). Diversity in the Management of Employee Relations in the Hotel
Sector in South West England. ESRU Working Paper.

16 | P a g e