It is well established that both employers and employees are often acutely aware of the terms of their written or formal employment contracts which generally include respective roles, responsibilities, working hours and salaries, among other conditions. However, what is often overlooked is that there is a second, unwritten and latent contract within the employment relationship. This is known as the “psychological contract”.
In light of a recently reached agreement between the Government of Barbados and the trade unions on salary increases for public sector workers, this conversation on the nature and value of the “contractual” employment relationship, expressed through the experience of the psychological contract between employer and employees, becomes even more relevant for all parties involved.
Against this background, this article will explore the comparison between the formal employment contract and the psychological contract, identify ways to spot breaches in the psychological contract, and provide a few invaluable best practices that employers can implement to improve their psychological contract and meet their employee teams’ unspoken needs.
Comparison between the employment contract and the psychological contractThe workplace is characterised by numerous contracts between an employee and employer that formalise their employment relationship. These include the employment contract and other formal contracts such as non-disclosure agreements.
However, there is an informal agreement known as the psychological contract which is equally pertinent to the employee-employer relationship.
The formal employment contract
This consists of rights and obligations that legally bind the parties within the employment relationship. The basic principles of the employment contract include: (1) the intention to create legal relations, (2) offer and acceptance, (3) consideration between both parties and (4) certainty. Employment contracts also capture other legal nuances such as maternity leave, liability insurance and workplace discrimination, to name a few. However, on its own, the employment contract offers only a limited understanding of the employment relationship, which brings us to the psychological contract.
The psychological contract
Unlike the employment contract, this is distinguishable in the sense that it is unwritten and often implied. It represents the mutual beliefs, perceptions, assumptions, expectations and informal obligations between an employer and employee. At its core, the psychological contract is built on the everyday actions and statements made by one party and how they are perceived and interpreted by the other. Despite its latent nature, it plays a critical and conspicuous role in affecting employees’ job satisfaction, sense of fulfilment and motivation at work.
Breaches of the psychological contract
Both employers and entrepreneurs must be cognisant of identifying key breaches in psychological contracts and the collateral damage to the company’s overall strategy and relationship with its workforce. A breach of the psychological contract is the perception one party has that the other has failed to fulfil these referenced obligations which can result in mistrust, resentment, lower levels of work commitment and diminished productivity. A non-exhaustive list of breaches can include the following notable examples:
• Broken promises resulting from pay cuts, delayed bonuses or available career development opportunities (or not honouring promised pay raises); • Failure to provide safe work environments or cultures. If employers do not make provisions to provide healthy and safe environments, breaches to the psychological contract can lead to feelings of anxiety, stress and even physical harm; • Older employees expecting more due to years of service and experience;
• Failure to provide opportunities for career advancement, leading to feelings of frustration, demotivation and disengagement among employees;
• “Contract drift” (Shields 2007), which is a gradual divergence of what is involved in the exchange contract between the employee and the employer as to what each party believes should be involved. Contract drift can occur due to an organisational change such as restructuring, merger or acquisition.
• Negative online reviews made by present and former employees which can go viral and have serious legal (and moral/social) ramifications, but ultimately damage the company’s brand and image.
Some invaluable best practices for improving and maintaining the psychological contract Adjacent to the breaches of the psychological contract, employers and entrepreneurs can mitigate the referenced breaches and manage expectations to some extent by considering and implementing the following key best practices:
• Transparency and consistent communication – Acknowledge there is a psychological contract between the employer and employee through consistent communication from the inception of the relationship through open discussion.
Be transparent about the expectations and obligations of the psychological contract at the outset. Appreciate that the psychological contract is continually recalibrated and renegotiated during the course of an employment relationship, and parties should be able to freely articulate when there is a breach and set clear expectations moving forward;
• Realistic and robust onboarding – The True Cost Of A Bad Hire (2015) remains a leading empirical research conducted by the pre-eminent research and analyst firm, Brandon Hall Group, which concluded that companies with robust onboarding processes retain new hires and less turnover at an astounding 82 per cent. A realistic and robust onboarding process should not include “glitzy” overpromising and underdelivering by both parties (job candidate and employer) from as early as the interviewing/recruitment process.
A high level of candour between parties should be clearly written and defined on issues such as salaries/bonuses, work performance and company culture, which are all critical to maintaining the psychological contract as well as the employment contract;
• Feedback and recognition – Oftentimes, employers recognise the organisational goals/ vision/targets but often fail to do the same for employees’ contributions. As a result, a breach of the psychological contract is likely to occur. Providing constructive feedback on work deliverables with grace and compassion through weekly check-ins, together with highlighting contributions – whether small or big – can be helpful to the viability of the employer and employee relationship; and
• Follow through on commitments: As far as possible, employers should follow through on commitments (which might not be written or documented) made in the psychological contract.
This may include promised pay raises, offering opportunities for career development, offering promised support and resources, and providing safe and healthy work conditions.
Essentially, there is more to the contract than meets the eye as explained in the foregoing. At the core of our employment relationship not only lives the employment contract but also the psychological contract – comprising our perceptions, expectations and beliefs concerning the exchange agreement that exists between ourselves and our employer.
Regrettably, when balance is not achieved within this exchange, breaches of the contract do occur.
So, the next time at your interviewing/recruitment meeting, job performance meeting or exit meeting and you are evaluating the employment experience, ask yourself the fundamental question: What is the make-up of the contract – as well as its expectations and implications – that is inherent in both the psychological and employment contracts? It will provide a helpful and reflective assessment on your actions as an employer or employee relative to your unspoken needs and expectations. Indeed, the question that remains on the table: did the recent negotiations and outcomes of the salary increases in Barbados meet the expectations of [the larger cross-section of] public sector workers?
