Exam (1~2)

How useful is the psychological contract as a framework for understanding the employment relationship? Critically discuss relevant theory and research.

Introduction

Managing employment relationships has become increasingly complex in today’s hastily changing commercial landscape, characterised by globalisation, technological advancements, and demographic shifts (Armstrong & Taylor, 2023). As organisations vie to adapt to such challenges, the psychological contract has emerged as a valuable framework for understanding and managing employee engagement, motivation, and performance (Zhao et al., 2007). A concept initially posited by Chris Argyris in 1960 and further refined by Denise Rousseau in 1989 encompasses the unwritten, implicit expectations and obligations shared between employees and employers (Rousseau, 1989). These factors, influenced by prior experiences, personal values, and organisational culture, form the bedrock of employment relationships and significantly impact job satisfaction, commitment, and performance (Guest, 2007). But how utilitarian is such a framework for understanding the complexities of the employment relationship?

Dynamics

A vital aspect of the psychological contract is the principle of reciprocity, which accentuates the importance of mutual exchange and trust between employees and employers (Rousseau, 1989). Employees and employers are expected to reciprocate the efforts and contributions of the other, fostering a relationship based on trust and fairness. When trust is maintained, the employment relationship will likely remain stable and harmonious toward shared goals (Cullinance & Dundon, 2006). However, when trust is breached, the psychological contract can be damaged, leading to negative consequences such as disengagement, conflict, or turnover (Morrison & Robinson, 1997).

Expectations can vary from job security, developmental opportunities, and fair compensation (Vos et al., 2003). When employees perceive expectations as being met, there is an increased probability of satisfaction, commitment, and motivation to perform (Rousseau, 1996). However, should these expectations go unfulfilled or be violated, employees may feel decreased job satisfaction, reduced commitment, and potentially leave the organisation (Morrison & Robinson, 1997). Employers also have specific expectations of employees, such as productivity, policy compliance, and willingness to embrace organisational change (Guest, 2004). Such expectations are influenced by industry factors, organisational culture, and prevailing management practices (Budd, 2019). If employees meet or exceed these expectations, employers are more likely to reward them with promotions, bonuses, or other manifestations of recognition (Rousseau, 1995). In turn, Human Resource Management (HRM) practitioners can proactively anticipate and mitigate the risk of conflicts or breaches that may lead to adverse outcomes such as disengagement, turnover, or reduced performance (Conway & Briner, 2009).

Strengths

One of the prominent strengths of the psychological contract is its ability to intern the intangible aspects of the employment relationship, such as trust, loyalty, and commitment (Rousseau, 1995). It offers a valuable framework for establishing trust through a shared understanding of obligations (Conway & Briner, 2009). According to Meyer et al., trust is built on employee perception of the employer’s ability, benevolence, and integrity (Meyer et al., 1993). Relatedly, organisational commitment refers to the employee’s emotional attachment, identification, and organisational involvement (Meyer et al., 1993). The psychological contract also influences job satisfaction, as it encompasses the employee’s perception of the fairness and fulfilment of their expectations with the employment relationship (Guest, 2004). When employees perceive employers meeting expectations and obligations, they are more likely to experience higher levels of job satisfaction.

In contrast, breaches in the framework can lead to decreased job satisfaction or diminished motivation to perform (Zhao et al., 2007). By focusing on these elements, the psychological contract offers a holistic understanding of the intricate dynamics within the workplace, thus enabling organisations to better manage employee expectations, enhance job satisfaction, and foster a sense of organisational commitment (Guest, 2004).

Limitations & Alternative Frameworks

Despite its strengths, the psychological contract not without limitations is subject to criticism due to the difficulty in measuring a definite interpretation, which likely affects the reliability and validity of any findings (Rousseau, 1989). First, the framework’s inherent subjectivity poses challenges in measurement and interpretation, as individual perceptions of the psychological contract can significantly vary within the same organisation (Conway & Briner, 2009). By definition, interpretation is highly variable and evolves due to environmental changes, personal circumstances, or organisational policies (Morrison & Robinson, 1997). This ambiguity derives from the framework being not a formal, written agreement but an implicit understanding (Budd, 2019). This subjectively can make it challenging to generalise findings and develop universally applicable HRM strategies (Cullinance & Dundon, 2006).

Second, the psychological contract does not fully account for the power dynamics and industry-specific influences, which can substantially impact the employment relationship (Rosseau, 1995). In many workplaces, employees and managers have multitiered degrees of power, influence, and authority. Such imbalance can often lead to compromises of the psychological contract, wherein employees feel pressured to acquiesce (Cullinance & Dundon, 2006). By integrating these factors, the psychological contract may not comprehensively understand the complex factors shaping the employment relationship (Guest, 2004).

In light of these limitations, alternative frameworks such as organisational justice theory (OJT) may offer a more focused and nuanced approach to understanding the employment relationship. OJT underscores the role of perceived fairness in determining employee behaviour, attitudes, and satisfaction (Greenberg, 1990). It comprises three components: (1) distributive justice, the perceived fairness of outcomes; (2) procedural justice, the fairness of decision-making mechanisms. And (3) interactional justice, the quality of interpersonal treatment of employees (Colquitt et al., 2001). Although OFT may not address all aspects of the employment relationship, it does provide a valuable perspective conducive to organisations in better understanding and managing the complex dynamics within the workplace (Guest, 2007).

Conclusion

The psychological contract is a valuable framework for understanding the intricacies of the employment relationship, offering insight into the intangible aspects that shape employee engagement, motivation, and performance (Rousseau, 1995). However, given its limitations, organisations should adopt a multifaceted approach incorporating complementary frameworks, such as OJT, to understand the employment relationship better. By doing so, HRM practitioners can develop more effective strategies to enhance employee satisfaction, commitment, and overall organisational success (Zhao et al., 2007).