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The Psychological Contract


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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.


Argyris, Chris, (1960), Understanding Organizational Behavior, The Dorsey Press Inc.,Homewood, Illinois
Coyle-Shapiro, J. and Kessler, I, (2000), Consequences Of The Psychological Contract For The Employment Relationship, Journal of Management Studies, 37:7 0022-2380
Daft, R., & Lane, P., The Leadership Experience, Australia; Mason, OH: South-Western Cengage Learning, 5th Edition, c2011
Drucker, P., (1954), The Practice of Management, Harper & Row, Publishers New York
Galbraith, J.R. (1973), Designing Complex Organizations, Reading, MA: Addison-Wesley
Hiltrop, J.M., (1996), Managing the Changing Psychological Contract, Retrieved, http://www.accessmylibrary.com/article-1G1-18319297/managing-changing-psychological-contract.html
Levinson, H., Price, C.R, Munden, K., Mandl, H., & Solley, C.M. (1962) Men,
Management, and Mental Health Cambridge, MA: Harvard University Press
Moorhead, G. & Griffin, R. (2004), Organizational Behavior: Managing People and Organizations, Houghton Mifflin College Div, 5th Edition
Pfeiffer, J. (1998), The Human Equation, Boston, MA: Harvard Business School Press
Roehling, M. V. (1997). The origins and early development of the psychological contract construct. Journal of Management History, 3(2), 204-217
Schien, Edgar H., (1965), Organizational Psychology, Engelwood Cliffs, N.J.
Schein, Edgar H., (1992), Organizational Culture and Leadership, John Wiley & Sons
Schein, Edgar H., (1999). The Corporate Culture Survival Guide: Sense and Nonsense
about Cultural Change. San Francisco: Jossey-Bass Publishers
Stogdill, R. M. & Coons, A. E. (1957). Leader Behavior: Its description and measurement. Columbus, OH: Bureau of Business Research, The Ohio State University


  1. Maryan says:

    It is no lie that every year and every century our country and even world changes it’s expectations as far as the work force is. As we all grow and search for jobs, the more qualified candidates the tougher it is to make a decision. Making the work force more competitive than ever. Employee’s must bring something more to the table than just a college bachelors degree. This raises the issue of job security. What employers are looking for now a days has increased so much.

    Leaders and leadership within the workforce is changing itself as well. Businesses seeking well qualified, loyal employees must hire a leader that understands where the employee is coming from, what their needs are and how they can meet their needs. I personally wouldn’t want a leader/boss trying to tell me to do something if they haven’t gone through the experience I am going to go through. It allows the relationship between the employee and the leader to build and grow. If my leader has gone through the same experience, that builds comfort and loyalty. Allowing me to be able to go to my leader if I have any questions or would just like to speak to them and tell them how I feel.

    Employees are ultimately what shapes a company. They are the driving force and they are who customers speak to first. Happy employees can lead to a better business. But if your employees aren’t happy, everything will go downhill. I know we’ve all gone into a retail establishment or even a fast food chain and thought “Wow, they must really be unhappy with their job.” Have we not?

    When we say that a psychological contract is a philosophy, it’s true. There should be an understanding of expectations that an employer should set with the employee as far as what their job is going to be like and what the employee should expect from the company and their employer as well. That does not mean setting a set of expectations but in reality not meeting those expectations. If an employee is putting in their 100% effort, so should their employer.


  2. Kaitlyn Plocharczyk says:

    “The key component of leadership development is an understanding of oneself and the ability to manage personal values during change.” If a leader does not have an understanding of their needs, they will not be able to effectively communicate with an employee. And if a leader seems unstable, I believe employees begin to mirror that behavior. Positive reinforcement and overall positive work environments are possibly the most important aspect of a job. Although some may argue rate of pay is the most important, I believe that if you do not co-exist well in your work environment it takes away from the joys of a good pay rate. I believe the stresses of a job will eventually overcome you, and that is when rate of pay becomes the less important factor.


  3. I feel like positivity is a rarity in corporate America. It’s all about the money in most cases. Employers are quite aware how difficult it can be to find a job, therefore they can get away with lowering wages and maintaining sub-par working conditions. As far as psychological contracts go, I’m all for them. The problem is that they’re bound to be violated, as there’s no legality to it. You can be hired by certain organizations and mislead to think that your’re a candidate for promotion, yet never receive one. That kind of situation would generally cause the employee to work harder with intentions of being promoted, yet never received one. A smart tactic for unethical employers.

    Liked by 1 person

    • Chris,
      I agree with you about it all being about money. Whatever kinds of psychological contracts that existed in the 50s and 60s has fallen way to corporate greed. Like Steve mentioned earlier, outsourcing is a strong example of that. The economic inequality is to great in this country right now that the proverbial “1%” of America’s wealthy are the ones calling all the shots in the business world, and if you’re to be their employee you’d better learn to deal with it. Take Wal-Mart. Notorious for cost-effectiveness and recently touting how it’s “generously” giving employees raises to the media in an effort to deflect the bad press it’s gotten in recent years. But after the fanfare died down, they turn around and cut employees hours and slashed benefits. I know Wal-Mart is just one example but I think it reflects the overall protocol of businesses and corporations doing whatever they please to keep the profits high. In that kind of climate, do people wonder if a psychological contract even exists anymore these days?http://money.cnn.com/2016/01/20/news/companies/walmart-pay-raise-wages/xists


  4. SteveMc says:

    The problem with the psychological contract, or perhaps I should say why it is failing is outsourcing. We as a nation are approaching a McCarthyism work environment. As if the potential movement of your job overseas is not enough, there is this affirmative action movement. Essentially, everyone that is NOT a heterosexual white man is given additional consideration (by law). The idea of a psychological contract is great, but I just don’t think that is how it plays out.


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