What is a psychological contract?

A psychological contract refers to the unspoken assumptions and expectations that exist between an employer and an employee.
Psychological contracts, at least in theory, facilitate a positive employer-employee relationship based on a set of mutually agreed upon ground rules, informal arrangements, or mutual beliefs.
The vast majority of employees follow a set of uncodified rules in the workplace based on personal morals, common sense, industry expectations, or formal etiquette. Individual and collective understanding of these rules facilitates more productive employee-employer relationships and promotes an inclusive workplace culture.

Aspect	Explanation
Definition	The Psychological Contract is an unwritten, implicit agreement or understanding between an employer and an employee regarding the expectations, perceptions, and obligations each party has towards the other in the workplace. It encompasses the non-tangible aspects of the employment relationship, such as trust, loyalty, and mutual expectations, in addition to the formal employment contract. It plays a crucial role in shaping employee attitudes, behaviors, and job satisfaction.
Key Concepts	– Mutual Expectations: Both employers and employees have specific expectations of each other, such as job security, fair compensation, career development, and a positive work environment. – Trust: A fundamental element of the psychological contract, trust is essential for maintaining a healthy employment relationship. – Perceptions: The psychological contract is often based on individual perceptions of what is expected and what is provided in the workplace. – Dynamic Nature: It can change over time as circumstances and individual needs evolve. – Implied Obligations: The psychological contract includes unwritten obligations and commitments beyond the formal employment agreement.
Characteristics	– Implicit: The psychological contract is typically not written down but is understood by both parties. – Subjective: It is based on individual perceptions and interpretations of the employment relationship. – Flexible: The contract can adapt to changing circumstances and needs of both parties. – Influence on Behavior: It can significantly influence an employee’s behavior, job satisfaction, and performance.
Importance	The psychological contract is important because it: – Influences employee motivation and engagement. – Impacts job satisfaction and organizational commitment. – Affects employee retention and turnover rates. – Shapes organizational culture and reputation. – Can impact productivity and performance.
Challenges	– Misalignment: Mismatched expectations between employers and employees can lead to dissatisfaction and conflicts. – Changing Expectations: As circumstances change, the psychological contract may need to be renegotiated. – Communication: Lack of clear communication about expectations and obligations can lead to misunderstandings. – Breach: When one party perceives that the other has not fulfilled their obligations, it can lead to feelings of breach and violation of trust.
Strategies	– Clear Communication: Regular and transparent communication between employers and employees about expectations and changes in the work environment. – Mutual Flexibility: Recognizing that the psychological contract is dynamic and may need adjustments over time. – Trust-Building: Fostering trust through fair treatment, open communication, and fulfilling promises. – Performance Management: Aligning performance management with the psychological contract to ensure that employee contributions are recognized and rewarded.
Benefits	– Enhanced Job Satisfaction: A positive psychological contract can lead to higher job satisfaction and overall well-being for employees. – Increased Commitment: Employees with a strong psychological contract are often more committed to their organizations. – Reduced Turnover: Organizations with fulfilled psychological contracts are likely to experience lower turnover rates. – Improved Productivity: Engaged employees tend to be more productive and contribute positively to the organization.
Breach and Repair	When the psychological contract is perceived as breached, it can result in negative outcomes. However, efforts can be made to repair it through open communication, addressing concerns, and reestablishing trust between the parties.
Research and Application	Academics and HR professionals have extensively studied the psychological contract to better understand its dynamics and implications for organizations. Many HR practices and policies are designed to align with and support the psychological contract to create a positive work environment.
Legal Implications	While the psychological contract is not a legally binding agreement, it can have legal implications if certain expectations, such as job security or promotions, are not met, leading to potential disputes and legal actions.

Table of Contents

The early history of psychological contracts

A psychological contract refers to the unspoken assumptions and expectations that exist between an employer and an employee.

American business theorist and professor emeritus at Harvard Business School Chris Argyris popularized the psychological contract in 1960.

In his book Understanding Organizational Behavior, Argyris defined the psychological contract in the context of an implicit understanding that existed between a foreman and their team of employees.

The theorist posited that a relationship could be developed where team members would be more productive and report fewer grievances in exchange for job security and an acceptable wage.

Argyris also believed that employees would increase their performance if the company did not interfere with their norms.

In exchange for less interference, the employees would respect the organization’s right to evolve and change.

In what would prove to be the first conceptualization of the concept, Argyris saw psychological contracts as the exchange of tangible, specific, and predominantly economic resources between two parties that would enable both to fulfill their needs.

Later conceptualizations of psychological contracts

In 1962, Levinson and other researchers expanded on Argyris’s ideas to include the exchange of intangible resources.

They also argued that for the relationship to be sustainable, the exchange between the two parties must be mutually beneficial.

After interviewing 874 employees about these relationships, they drew some important conclusions.

Some employees spoke of expectations that had an obligatory quality, and since many of these expectations arose from subconscious motives, each party may not be aware of their own desires let alone the desires of the other party.

Levinson’s work later contributed to the idea that despite covering some complex or intangible factors, psychological contracts were a reciprocal arrangement where employees would only do x if the company did y.

Far from being adversaries, however, many scholars believed that reciprocity meant the employee and employer had strong expectations of one another and were more likely to continue the relationship.

Modern definitions of a psychological contract

Psychological contracts, at least in theory, facilitate a positive employer-employee relationship based on a set of mutually agreed upon ground rules, informal arrangements, or mutual beliefs.

Note that these contracts pertain more to the human aspect of workplace relationships and less to their commercial or transactional side.

While there cannot possibly be a definitive list of the rules that influence psychological contracts, most will cover common aspects of employment relationships such as:

Future career prospects.
The perceived level of fairness around pay and benefits.
Training and development.
Manager support, and
Job security.

Nevertheless, psychological contracts are a somewhat nebulous idea.

With this in mind, think of them as the encapsulation of all statements and actions made in the workplace and how they are perceived.

In other words, psychological contracts represent intangible promises derived from repeated workplace interactions.

The evolution of psychological contracts

Perhaps intuitively, psychological contracts evolve and adapt over time as workplace cultures evolve and adapt.

In some cases, however, these contracts can be resistant to change if employees or organizations are not willing to embrace the new status quo.

Psychological contracts also develop and evolve in response to communication (or a lack thereof).

In addition to workplace conversations, communication includes body language, tone of voice, and even inferences or implications that exist between both parties.

When two-way communication does not exist, the contract becomes unbalanced since one party perceives the other to be unable to fulfill its promises.

Typical promises broken in the workplace include those related to raises, promotions, training, performance reviews, or a misrepresentation of the type of work involved.

These broken promises are referred to as “breaches” and result in a loss of trust and respect. Employees tend also to become unmotivated and unproductive and may seek employment elsewhere.

While many breaches are simply unavoidable, organizations can avoid many of them by demonstrating fairness when attempting to repair or deal with the situation.

The importance of psychological contracts in the workplace

Like it or not, the vast majority of employees follow a set of uncodified rules in the workplace based on personal morals, common sense, industry expectations, or formal etiquette.

When employees take the time to understand these rules, the relationships between superiors and their subordinates is more robust.

When these expectations are understood and embodied by a team of individuals, psychological contracts can also foster workplace equality.

Each individual feels they act according to the same intangible elements which encourages team solidarity, cohesion, and performance.

Lastly, psychological contracts can also be used in situational judgment tests (SJTs) during the recruitment process. Interview candidates may be quizzed on situations that have no importance to an official employment contract but are far more relevant to a psychological contract.

Key Highlights

Introduction and Definition: A psychological contract refers to the implicit assumptions and expectations that exist between an employer and an employee. It’s an unspoken understanding that goes beyond the formal employment contract and influences the relationship and interactions between both parties.
Facilitating Positive Relationships: Psychological contracts are theorized to create a foundation for a positive employer-employee relationship. These contracts are based on a set of mutually agreed-upon norms, expectations, and informal arrangements that guide behavior and interactions within the workplace.
Unwritten Workplace Rules: Employees often follow a set of uncodified rules in the workplace, influenced by personal values, industry norms, and informal guidelines. These unwritten rules contribute to a more productive and inclusive work environment.
Early History and Chris Argyris: American business theorist Chris Argyris introduced the concept of psychological contracts in 1960. He believed that a positive relationship could be established between a foreman and employees if there was an implicit understanding that offered job security and a decent wage in exchange for increased productivity and fewer grievances.
Evolution of the Concept: The concept of psychological contracts evolved over time. Researchers like Levinson expanded the notion to include the exchange of intangible resources, highlighting the reciprocal nature of these contracts for a sustainable relationship.
Modern Definitions: Psychological contracts underpin a positive employer-employee relationship and are based on mutually agreed-upon ground rules, informal arrangements, and shared beliefs. They emphasize the human aspect of the workplace relationship rather than just transactional agreements.
Components of Psychological Contracts: Psychological contracts encompass various aspects of employment relationships, including future career prospects, fairness of compensation, training and development opportunities, managerial support, and job security.
Nebulous Nature of Psychological Contracts: Psychological contracts are intangible and represent the culmination of workplace interactions, statements, and actions. They encapsulate the promises inferred from these interactions.
Evolution and Adaptation: Psychological contracts evolve over time as workplace cultures change. However, they can also become resistant to change if parties are unwilling to adapt to new circumstances. Communication plays a significant role in shaping and evolving psychological contracts.
Broken Promises and Breaches: Broken promises within psychological contracts, also known as “breaches,” erode trust and respect. These breaches can result from misaligned expectations related to raises, promotions, training, or other aspects of the employment relationship.
Importance in the Workplace: Understanding and embodying the expectations of psychological contracts can strengthen relationships between superiors and subordinates. It also promotes workplace equality, team cohesion, and performance. Organizations can also incorporate psychological contracts into situational judgment tests during the recruitment process to assess candidates’ alignment with these implicit expectations.

Related Frameworks, Concepts, Models	Description	When to Apply
Psychological Contract	– The unwritten set of expectations between employer and employee regarding mutual obligations. – Includes both transactional (short-term) and relational (long-term) aspects.	– Apply to manage and align expectations between employees and the organization. – Useful for enhancing job satisfaction and employee engagement.
Transactional Contract	– A type of psychological contract focused on monetary exchanges and specific, short-term benefits.	– Use in temporary or project-based employment situations. – Useful for clearly defined, short-term roles.
Relational Contract	– A type of psychological contract based on emotional and social exchanges, long-term relationships, and mutual loyalty.	– Apply to foster long-term commitment and employee loyalty. – Essential for roles requiring long-term engagement and development.
Equity Theory	– Suggests that employees seek to maintain equity between the inputs they bring to a job and the outcomes they receive.	– Use to ensure fair treatment and compensation practices. – Useful for addressing issues of perceived inequity.
Social Exchange Theory	– Proposes that relationships are built on reciprocal exchanges of resources and benefits.	– Apply to enhance workplace relationships through mutual support and resource exchange. – Useful for building strong, cooperative teams.
Expectancy Theory	– Suggests that employees are motivated when they believe their efforts will lead to desired performance and rewards. – Includes expectancy, instrumentality, and valence.	– Use to design effective reward systems and motivate employees by aligning rewards with performance. – Essential for performance management.
Motivation-Hygiene Theory (Herzberg’s Two-Factor Theory)	– Differentiates between motivators (factors that increase job satisfaction) and hygiene factors (factors that prevent dissatisfaction).	– Apply to enhance job satisfaction and reduce job dissatisfaction by addressing both sets of factors. – Useful for workplace improvements.
Organizational Citizenship Behavior (OCB)	– Refers to voluntary, extra-role behaviors that contribute to organizational effectiveness.	– Use to encourage and recognize behaviors that go beyond formal job requirements. – Essential for creating a positive organizational culture.
Employee Engagement	– The level of an employee’s emotional and cognitive investment in their work. – Includes vigor, dedication, and absorption.	– Apply to enhance productivity, retention, and overall job satisfaction. – Useful for developing engagement strategies.
Job Satisfaction	– A measure of an employee’s contentment with their job, including various factors such as work environment, pay, and work-life balance.	– Use to assess and improve overall employee well-being and retention. – Essential for developing human resource strategies.