The term “psychological contract” was first used in the 1960s.

It means the set of expectations and obligations that employees regard as part of their work experience.

It is different (and sometimes very different) from the details included in a formal job description.

An employee’s expectations can include :

• Security
• Financial rewards
• Informal recognition from the manager or employer
• Promotion opportunities
• A flexible approach to the “work-life” balance giving sufficient priority to personal or family needs (eg time off for family illnesses).

Obligations can include :

• Working to a certain level of performance
• Being seen to agree with the company “ethos”
• Loyalty to the business and colleagues
• Real commitment to achieving business aims.

This package of obligations and expectations has a very powerful effect on productivity and staff retention.

When the contract works well...

If the managers in a business have a clear and accurate understanding of the issues affecting each person’s contract then the effect on the business can be very positive.

See The Safeway story as an example of the way the psychological contract can be used to good effect.

The contract will  change over time. Managers also need to be alert to this and take steps to regularly review or understand the current contract as viewed by the staff in the business.

When the contract goes wrong...

If managers think they understand the contract as viewed by their staff, but actually misjudge it, then things can go badly wrong.

All staff will have their own individual psychological contract. If this is, in their view, violated then staff can feel a sense of injustice, deception or betrayal.

Staff can become sullen or leave the business. Or they might tolerate the ‘discomfort’ they feel in the business but loose all enthusiasm. They’ll say to friends, family and themselves - “it’s just a job”. They are more likely to leave promptly as soon as as the working day finishes.

What’s the contract in your business ?

Determining the way the contract is seen by each staff member is easier said than done.

Staff can be reluctant to divulge their views and “lay their cards on the table”. Managers need to be both open and act with total integrity.

It can sometimes be easier to use an external team to determine the current views and psychological contracts of staff. Adelphi Associates specialists use a range of interview techniques and a structured approach to analysis of the business. Please contact us if you’d like and informal discussion of this option.

Some suggestions for business managers

All the evidence points to significant benefits that can be achieved when managers take care to :

• understand the psychological contracts as perceived by their staff and...
• use this understanding to influence management decisions.

More specifically managers can :

• Take care when recruiting - many expectations have their origin in discussions during recruitment and shortly after a new employee starts.
• Take account of real employee perceptions in deciding work-life policies and practices.
• Ensure fairness throughout your business. Staff can be very demotivated if they see that comparable work does not result in similar pay & conditions.
• Managers need to be clear on their expectations and the employee’s obligations.
• Ensure existing psychological contracts are honoured or at least taken into account when a business goes through major changes

The Safeway Story

The benefits achieved at Safeway in taking account of the psychological contract have been widely reported in the UK press. Whilst Adelphi Associates were in no way involved, their experiences underline the benefits to be gained.

As at December 2003, Safeway, a UK food retailer, are the subject of a takeover battle. Staff, on hearing this news, could easily have been very troubled by the future of the business with many of them heading to the exit door.

However by taking a number of measures the expected exodus of staff did not materialise. One of the issues they paid careful attention to was management of the psychological contract in the business. They kept a lot of focus on the expectations between the business and the staff.

Through this approach they were able to avoid a breakdown in the psychological contract by maintaining an open dialogue and a continuing contract that staff could understand and relate to.

The result of all the initiatives has been better than expected staff retention and increased morale.