By Veronica Emilia Nuzzolo, MBA, MAOP

With today’s turbulent economy and without reassurance of long-term job security, is the psychological contract still a relevant aspect of organizational culture and workplace relationships?

Argyris (1960)  described the employer-employee relationship as a “psychological contract,” and referred to the employer-employee expectation of the employment relationship as a mutual obligation. These obligations consisted of vcontractalues and commitments that extended beyond a formal employment contract. Schein (1965) concluded that psychological contracts are the foundation for employment arrangements in which mutual expectations of objectives and outcomes are understood between both parties. Levinson, Price, Munden, and Solley (1962) used the concept of a psychological contract to describe the expectations and obligations that employees discussed when speaking about work experiences. These expectations were identified by Levinson et al. as job performance, security, and financial benefits. In today’s ever changing business environment it is likely that there will be a breach in contract. Leaders need to understand the implications and impact this breach in contact can have on the psychological and social dynamics of organizational culture.

Hiltrop (1996) indicated that the psychological contract has changed dramatically in recent years. Research showed that the biggest change is the organizations inability to promote, offer benefits, and job security to workers. For many years, the greater percentage of people did not consider job security as part of his or her psychological contract. Employees were on-the-job for 30 or 40 years, it was the cultural norm for employees to retire with a full pension. Information presented by De Meuse and Tornow (1990) also concluded that during the 1950s and 1960s people were afforded job security in organizations. During this era organizational structure was clear as was the employees’ current and future place within the organization. This role clarity created mutual respect and loyalty within the organization. In turn a stable workforce was acquired and employers were confident that employee investments would produce long-term profitability. De Meuse and Tornow also indicated that in recent years these employee-employer relationships have become strained and are creating major breakdowns in the psychological contract.

Organizations are currently striving to find an organizational design strategy that will enable the organization to survive and potentially grow. Schein (1965) brought to life the importance of the psychological contract when he declared that managing organizational behaviors could not be written into a formal contract or agreement, the psychological contract is an understanding of personal wants and needs. Psychological contracts form by various sources during the recruitment process. These perceptions are contingent upon the accuracy of the information provided and communicated by both parties during this process. These perceptions if not accurate can affect the motivation, commitment, turnover, and job performance of the employee. The creation of a psychological contract begins the moment the prospective employee reads the job requisition. The job description needs to be accurate so the appropriate candidates will be attracted to the job. If the job description is over-stated the prospective employee could consider this to be a misrepresentation of the job, and this perception will create a breach in the contract.

According to Moorhead and Griffin (2004) a leadership process is the person’s ability to influence, inspire, and motivate employees. The leader directs the workforce to achieve group or organizational goals and objectives. Effective leadership increases organizational success and gives the organization the ability to complete in today’s market conditions. Effective leadership fosters a positive and productive environment and manages the workforce fairly and equitably.  The 21st century is creating a demand for leaders who understand the external and internal challenges of today’s organizations. It is imperative that one understands the social dynamics of the modern workforce. The key component of leadership development is an understanding of oneself and the ability to manage personal values during change. These values allow one a sense of purpose and commitment and an awareness of self-actualization as a driving force in leadership. Schein (1992) states “leaders create and change cultures” (Schein, 1992, p. 5).

To ensure the survival of an organization, leaders must understand how to create positive change in a rapidly changing environment. Old traditional methods of managing and directing the workforce are not longer a valuable resource. Job security and organizational loyalty is diminishing in today’s workforce. Secured benefits and lifetime employment are no longer viable options in today’s organizations. These are no longer the driving factors for job satisfaction and employee productivity. New leadership styles, such as transformational leadership will foster autonomy and challenge employees. This new style of leadership is imperative to ensure an appropriate psychological contract and to increase employee job satisfaction. The new psychological contract can be applied beyond employment and can be applied to human relationships and social environments.

A psychological contract is not a process or tool, it is a philosophy. It is an understanding of expectations; this contract defines ones work ethic, principles, and values. There are those leaders who have not grasped this new concept, these leaders need to be educated on the benefits of employee ownership and representational leadership. Historically leaders were trained to retain customers. Today leaders need to be trained on how to retain productive employees. Unlike the employees Schein describes during the 1950s and 1960s today’s employees seek challenges and job satisfaction versus traditional long-term job security. With all of these social changes it is necessary to teach leadership how to develop trusting relationships that will lead to employee satisfaction and organizational success.

According to Daft (2008) “Maslow’s theory and hierarchy of needs indicates that self-actualization is the highest need that represents the need for self fulfillment by developing ones full potential, increasing ones competence, and becoming a better person. Self-actualization needs can be met in the organization by providing people with opportunities to grow be empowered and create, and acquire training for challenging assignments and advancement” (p. 229). Positive reinforcement, positive attitudes, and moods are all psychological tools that can turn negative perceptions regarding the psychological contract into hopeful realities.

If these positive aspects of organizational culture appear to be non-existent in today’s high turnover workforce what will the future employee endure without this unwritten understanding?  Even if we cannot build healthier organizations during these turbulent economic times, the psychological contract is the surviving relevant aspect of the workplace that can ensure healthy working relationship continue to exist.  Organizations and Leaders that ignore the psychological contract during turbulent times are doing so at their own peril.  Ultimately they will not retain their best talent and will not be able to weather the storm.


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