The Psychological Contract – A Study

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There are always some expectations and rules that act between an employee and her company. These expectations and rules are unwritten, but are still maintained by both the parties. Employees expect their employers to be fair to them and provide them good working conditions. Employees expect that the company maintains rules of informing them beforehand, if anything goes wrong. Companies too expect loyalty from their employees. They want their resources to maintain rules of the company and display good attitude. In this article, we will discuss about the idea of psychological contract and how it helps in team management.


The concept of 'psychological contract' was pioneered by a Harvard Business School professor emeritus in 1960s, Chris Argyris. He proved that when employees were treated in a way that went with their expectations their performance level was improved.

Before the recession of 1990s, there existed an employee company relationship in USA. People believed that a good job brings good opportunities in future. When recession occurred, companies realized that understanding psychological contracts and rewarding people was essential to maintain smooth working relationship in critical times. Distrust peeped into the US market when the expectations of the employees were destroyed and employees were being laid off. Employees expected training to develop their expertise, however, when they did not get training because of lack of fund they got angry and showed low productivity.

After that phase went away, companies realized that maintaining good relationship with employees is very essential to satisfy them and get the best out of them. Every generation, employees feel psychological contract between themselves and the company. Not everyone has the same kind of expectations from their employers. Employees also sacrifice a lot for the companies for which they work. There are many employees who prefer change in workplace rather than stability. These various kinds of expectations should be catered to by the organizations.

Psychological Contract

An Idea

These rules and expectations are unwritten, but they emerge from the feeling of 'psychological contract' that exists between an organization and its employees. This contract consists of the expectations that exist on both sides. Expectations based on psychological expectations are not bordered by advantages and wages. Some of the instances are:

  • Since a person is a government employee, she will get a stable job.
  • Since she has a good position in a good company, she will not have to stand in the queue to get her things in the market.
  • Since she is a senior manager in a company, she will get a handsome package when she retires.

When these expectations are met, employees are satisfied and their productivity increases. If expectations are not met, employees become frustrated and their productivity lowers. As a result, they tend to withdraw their commitment to the company.

A psychological contract at times has more impact then a formal contract. Since, it is a result of practical thought process of people involved in a company it tends to have more influence. A psychological contract is not applicable in the court of law, but courts can be moved by underlining the importance of an employee and company relationship.

Reasons for Psychological Contract

  • The relationship created after a professional becomes a company’s employee has been individualized in recent years, especially after the recession of the 1990s.
  • The concept of traditional deal has been disintegrated. Initially employees were paid for a day for the performance they showed that day. Employee loyalty was important to get her a promising career. Moreover, professional autonomy has also reduced in importance.
  • The need to look for innovative ways, so that the interests of both company and employees are met has given rise to psychological contract.
  • Violating organizational norms and changes in the management style have lead to the emergence of psychological contract

Changes in Psychological Contract

According to experts, the changing faces of business have modified the psychological contracts that take place between employees and organizations. The stages of psychological contracts are mentioned below.

# Phase of emergence

This stage occurred in the early period of industrial production and the tentative time is late eighteenth century. This phase was attributed by a workplace at the core with high profile managers who control everything. There are some companies that have survived from that period. Some tea growers in China can be cited as examples.

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# Phase of bureaucracy

This stage came into being in the 1930s and it was attributed by a labor market that was created internally. Other features of this phase are allocation of spare resources for unpredictable times in future and extreme hierarchy in organizations that checked employee attitude. In this phase, organizations followed a psychological contract that was paternal inn nature. Employees were rewarded with lifetime employment because of the loyalty they delivered.

# Phase of adhocracy

After the emergence of internet, many computer manufacturing companies started following this phase. It took place in the 1990s. This style was later adopted by companies with websites as these companies do not have boundaries. These companies give stress on the utility of knowledge and horizontal shift in career is common. These companies follow a variety of psychological contracts for dealing with various categories of employees.

Bureaucratic style is becoming history in light of modern appearance of business. Psychological contracts are going through a continuous change. This is happening because of the constant change in business management strategies.

Many people have realized that the designations they had joined as beginners do not exist anymore. For instance, many clerical posts have been replaced by call centre employees who are ready with information if they are called. These changes have brought about alterations in psychological contracts between organizations and employees. A research has brought forward the fact that now-a-days, employees search for any of the three types of psychological contracts, namely disengaged, traditional and independent. The first is where employees do not want emotional attachment with employers, second one is in which employees seek long term jobs and the third one is preferred by highly qualified employees who seek reward in a short period.


From this article, it can be deduced that psychological contract is more effective than formal contracts. It is however undergoing changes because of the changes taking place in the world of business management and styles of operating.

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