The Role of Psychological Contracts in Employer-Employee Relations
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Table of Contents
Executive Summary…………………………………………………………………….….………3
Introduction………………………………………………………………………………………………..5
Literature review….………………………………………………………………..……..6
Definition of relational contract………….………………..…….……..……6
Methodology……………………………………………….………………………….………..8
Findings/Results……………..………………………………………………………….……..9
Conclusions………………………………………………..…………………………..……….10
- Limitations……………………………………………………………………………………11
- Recommendations………………………………………………………………………..12
References…………………………………………………………………………..13
Appendix……………………………………………………………………………………………………14
The Role of Psychological Contracts in Employer-Employee Relationship
Executive Summary
The report seeks to explain the role played by psychological contract in cementing the employer and employee relationship. Psychological contract refers to the unwritten contract between what the employer expects the employee to achieve and what he/she (employer) is willing and able to offer in return. Psychological contract is based on both security and monetary gains in favor of the employee (Conway and Briner, 2005). The employer expects unrivaled productivity in meeting the organization’s objectives and loyalty on the part of the employee. This provides a model for relational contract and transactional contract between the employer and the employee. The report takes analytical qualitative approach to evaluate the effect of psychological contract in the productivity of employees.
The report found out that the psychological benefits play a key role in the productivity of an individual. From sense of belonging, to loyalty, commitment to follow rules and regulations governing the organizations, to job security are important aspects in enhancing smooth productivity of employees. These are classified as relational contracts. On the other hand salary and training are promises that the employer makes to the employee during the negotiations (Gambetta, 1988). The onus of meeting these goals lies with both the employer and the employee. The employee must feel secure enough not to worry about future in the organization, the company should also feel secure knowing that the employee is not going to move out of the company without prior notice or reveal the secrets of the company to competitors (Conway and Briner, 2005). And by so doing the organization offers both monetary rewards and social benefits.
The organization’s management must observe the terms of the contract in achieving the goals. This should on both monetary benefits and relational areas. Monetary benefits only cannot meet the goals of the company as the report puts it. Both aspects of psychological contacts are related. It is those non-monetary issues like motivation and security that improve the production of employees (Gambetta, 1988). When it is security the psychological contract is said to have relational rewards but when on monetary benefits then it is transactional rewards. The employee is expected to also show, commitment and loyalty to the organization. There are no monetary benefits to this but they are some of the factors that affect productivity of individuals.
The report also found that many organizations do not take issues of relational contract as seriously as transactional contract. The fallacy is informed of the fact that employees are only in employment for the sake of money and provision of the money would eventually meet their goals. However, if there is no job security the employee will not continue to look for a job that will give a combination of both security and remunerations (Rousseau, 1996). This would affect the productivity if there is high staff turnover. Recruitment and induction, if new employees are employed, is costly to the organization. If the cost can be prevented by retaining the employees through things like security and social welfare then employees would be loyal to the organization and will have high sense of belonging.
The report recommends that managers and supervisors should not ignore the contribution of relational contract in favor of transactional benefits. Both play a key role in enhancing the productivity of the organization. The advantage of this recommendation stems from the belief that motivated employees are more productive that those who are not; job security improves the sense of belonging and hence helps in employees’ commitment to the goals of the organization (Gambetta, 1988). No employee would want to move from one job to another when the first is meeting all their expectations. This can only achieved through relational contract.
Introduction
Research shows that employers are not committed to relational contracting as they are committed to transactional contracting. This is due to changing working environment caused by dynamics of life and economics. While employment contract is written, psychological contract is not and identifies the mutual duties and responsibilities in general. Relational and transactional contracts form the basis for psychological contract between the employer and the employee (Griffin and Moorehead, 2010). They define the expectations, promises and demands of the employer and the expectations and the obligations of the employees.
Transactional contracting deals with monetary issues of the contract where there is fair pay and rewards for work done. On the other hand relational contracting refers to the commitment and loyalty of the employees to goals and aspirations of the organization. The difference and relationship between the two shows the level of coherence and unity of purpose between the management and the employees. In some of the sectors of the economy, loyalty and mutual commitment to the organization is necessary. What lacks is how the employer can influence the social identity of the employee by enhancing the relational contract (Griffin and Moorehead, 2010). Loyalty, willingness to accept transfer, sense of belonging and giving advance notice before leaving can be facilitated through enhanced cohesion between the managers and the employees.
The paper seeks to find the role played by relational contract which does not necessarily lead to material rewards but can greatly improve production of an employee. In the financial sector, loyalty and commitment is as important as is the transactional contract. Under normal working environments, employees would be enticed with higher salaries to better working conditions by competitors, but it is the commitment to the organization that hold the employees to their work despite the temptations to leave (Guest, 1998).
The employees expect that the employer would motivate them through promotion, training, salary increases and job security. It is the employees who bear the burden of carrying the organization’s goals. However, if at one point they are not motivated enough to boost the morale then the organization’s objectives may not be achieved. This helps to increase sense of belonging of the employees. When this social satisfaction becomes real the employee claim a stake in the organization and can therefore protect its interests especially against competitors. The research seeks to achieve the following objectives:
- To examine the relationship between the relational and transitional contracts in psychological contract
- To analyze the impact of relational contract on the productivity of employees
Literature Review
Definition of Relational Contract
While transactional rewards are associated with economic exchange, relational contract entails social exchange. This refers to the personal attachment of the employee to the organization, the trust that the organization has on the individual, commitment of the employee in meeting the goals of the organization and the mutual obligation and loyalty (Mowday et al, 1982). The relationship between aspects of relational contract on the employee must also be commensurate as is the transactional contract. For instance if the company pays certain amount of money as salary to an employee, they expect a corresponding level of output. Likewise, in relational contract if the employer shows a lot of trust in an employee, loyalty is expected in return. Although there is recourse in case of violation, it is through mutual understanding that relational benefits are realized for both the employer and the employee (Rousseau and McClean Parks, 1993).
However, it should be noted that both transactional and relational aspects in psychological contract are important. But transactional factors are the determinants of the level of relational attachment an employee will have with the organization. Performance contracting is where the productivity of an employee is not evaluated on basis of loyalty but on results is slowly but surely replacing relational contracting (Mowday et al, 1982). Whether there allegiance or commitment to the welfare of the organization, the employee does not commit herself/himself to such. If it is promotion it is purely on merit and not on loyalty terms. If an employee is not able to achieve the expectations of the organizations the management is likely to treat them as liabilities to the organization.
There is no doubt that relational contract plays a key role in the production of individual employees (Robinson and Rousseau, 1994). But what emphasis does such effort get from the management? Are they ever recognized or they are just ignored when employees are striving to project a positive image of their organization?
Robinson (1996) argues that working extra hours and loyalty to the company should not rewarded the same way. However, he points out that both are important are should be recognized accordingly. This model says that employee’s contribution and reward is not on monetary benefits only but also in enhancing the image of the company. An employee cans not project a positive image of a company if they feel demotivated, disenchanted or feels their efforts are not being recognized (Robinson and Rousseau, 1994). This has no monetary angle but social satisfaction benefits that the company does not ignore sincere effort but rewards it.
Methodology
The report is based on paradigms on how employers and employees relate to each other in psychological contract. The report takes more specific focus on the relational contract and its impact on the production of the organization (Torrance, 2005). Research has shown that managers are slowly replacing relational contract with transactional contract where effort are not rewarded based on loyalty but on performance appraisals. The report achieves its goals using open-ended questions that allow the respondents to freely voice their opinion. Paradigms give a conceptual framework that is used to understand the relationships in the social world (Creswell, 2003). Paradigms influence the way the report was written, how the data was collected and analyzed and how the report would be presented. The report uses qualitative analysis to reach the conclusions. Relational contract is associated with social exchange. This means there are benefits of relational contracts. What non-monetary benefits does a company reap from the loyalty of an employee? What part does commitment of employees play in production? Does the trust that employers have on the employees draw them into closer sense of belonging?
According to French philosopher August Comte (Macdonald et al.’ 2002), epistemological paradigm is applicable in this case to study the behavior of human beings. This paradigm uses observation and reason as a way of understanding human behavior. This report looks at the impact of relational contract on the production of the employee and welfare of the organization. This paradigm argues that human beings interpret actions of other people instead of reacting to them (Creswell, 2003). The relational contract has two parties: the contract maker (employer) and contract taker (employee). The employee loyalty can be interpreted to be a reaction of the employers trust. These two attributes are not based on transactional contract. This implies that the output of an employee could be directly related to the remunerations but also to commitment.
Findings/Results
The report reveals that the productivity of an employee is directly related to the relational contract between employees and the employers. While the level of impact is not quantifiable, it is evident that most trusted employees of the organization are more loyal than the ones who considered being disloyal (Guest, 1998). Those employees more trusted by the management experience more sense of belonging than the ones who are not.
Figure 1. Psychological contract model
When the employees work in a conducive environment they become more productive in achieving organization’s goals. If there greater sense of belonging by an employee the more he/she is likely to project a positive image of the company. The more he/she is also not likely to reveal the secrets of operations of the organization to its competitors.
The diagram below show how employees and employers are connected through relational contract
Figure 2: The Relationship between employees demands and employers expectation on relational contract.
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Managers argue that welfare of an organization is not based on loyalty but on productivity. Though everyone agrees that loyalty to the company’s operations and management improves production, many believe that lack of it would not affect the production.
The impact of willingness and readiness to accept transfers within the organization, giving advance notice before leaving the organizations, loyalty to the company and commitment has not direct returns to the company. However, ack of these attributes would expose the organizations to the risk having the secret information of the company in the competitors’ hands. It behooves the management to consider a balance that will not put the company in a vulnerable state.
Conclusions
The relationship between employees and employers has changed tremendously in the recent times (Griffin and Moorehead, 2010). The change is informed of the changing working environment. The employers have more choices and employees have to prove their worth in the employment sector. Taking pride in an organization reduces stress but not enough to guarantee good working relations. Reasonable workload and less number of working hours also reduces the levels of stress on an employee and hence improves productivity (Robinson and Rousseau, 1994). These are not aspects of pay rise or remunerations, but directly affect productivity. When there is fair distribution of work, the employee has considerable trust in the management and employer’s ability to take care of employee’s interests. This is social security. It is an attribute that enhances creativity and innovativeness. Employees who are likely to go ‘extra mile’ in their work are those who have sense of belonging to the company. The management must allow considerable level of autonomy while controlling the extreme limits that can hurt the organization’s productivity. This level of creativity can be achieved through relational contract of appreciating the employees’ loyalty and commitment to the organization (Mowday et al, 1982).
When there is constrained relationship, the productivity of the organization would be affected. In the wake of acute unemployment employers feel they have many choices and the obligations that are added to the employees are not sometimes rewarded accordingly (Griffin and Moorehead, 2010). This leads to the feeling by the employee that they are being exploited by the company. If the employee offers to stick with the organization, it is out of desperation and not choice (continuance commitment). This affects the allegiance and loyalty to the organization.
Limitations
Due to the dynamic nature of the parties in psychological contract it is therefore impossible to pinpoint the effect of environmental influence and other external factors (Griffin and Moorehead, 2010). Based on responses from people the answers could carry some level of bias. This bias would definitely affect the conclusion drawn on the subject. The effect of influence from co-workers may have tremendously affected the outcome of the research (Rousseau, 1996). Participants interviewed did not come from a specific company meaning that there were relative responses based on motivation, dynamics and terms of engagement of their individual organizations. Expectations of both employers and employees change over time and therefore the responses could only be applicable only specific time during the tenure of an employee.
Recommendations
Though change in work environment is inevitable, it should not be so drastic that the employees are unable to cope with change especially on psychological contract. The report has shown that psychological contract is slowly shifting from employer centered conditions to employee determined terms of engagement. Stability is better business-wise than flexibility that neo-psychological contract seems to emphasize (Conway and Briner, 2005). The benefits of retaining old employees should be greater than the cost of hiring and training new employees. It is on this premise that psychological contract plays a critical role in enhancing the stability of an organization.
Bibliography
Conway, N. and Briner, B. (2005). Understanding Psychological Contracts at Work: A Critical Evaluation of Theory and Research. Oxford, UK: Oxford University Press.
Creswell, W. (2003). Research design: Qualitative, quantitative, and mixed methods approaches. Thousand Oaks: Sage
Gambetta, D. (1988). Trust: Making and Breaking Cooperative Relations. New York: Basil Blackwell.
Griffin, R. and Moorehead, G. (2010). Organizational Behavior: Managing People and Organizations. Mason,OH: Cengage Learning.
Guest, E. (1998). Is the psychological contract worth taking seriously? Journal of Organizational Behavior, 19: 550-564.
Macdonald, D., Kirk, D., Metzler, M., Nigles, M., Schempp, P. and Wright, J. (2002). Theoretical perspectives and their applications in contemporary pedagogical research. QUEST, 54, 120–133.
Mowday, R., Porter, W., & Steers, M. (1982). Employee-organisation Linkages: the Psychology of Commitment, Absenteeism and Turnover. New York: Academic Press.
Robinson, L. (1996). Trust and breach of the psychological contract. Administrative Science Quarterly, 41(4), 550-574.
Robinson, L. and Rousseau, M. (1994). Violating the psychological contract: not the exception but the norm. Journal of Organizational Behavior, 15, 220-245.
Rousseau, M. (1996). Psychological Contracts in Organizations: Understanding Written and Unwritten Agreements. Newbury Park, CA: Sage Publications.
Torrance, H. (2005). Research methods in the social sciences. London: Sage Publications.
Appendix
Sample questionnaire
- What course did you study in college? Are you comfortable with the work you are doing?
- How can you evaluate the relationship with you immediate supervisors? Could you please talk more about it?
- Do you feel you have an obligation to the organization? What motivates you?
- Have you been reprimanded by the management and for doing what?
- How do you rate your relationship when you compare entry behavior and now?
- Would you like to continue working for this organization? Why?
- Are there any factors that contribute to the relationship with your superiors?
- If these factors were withdrawn could you still continue working for the organization?
- How do rate your relationship with your fellow workers?
- How do you rate your loyalty to your superiors?