Employee Relations: Psychological Contracts

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Carry A Critical Review Of An Academic Paper Drawing Out The Main Themes And Issues Discussed

The article is about psychological contracts. They are defined as the rental contract that an employee engages with his employer. It affects the way he relates to the company/employer. The effect of psychological contracts is different among different people because human beings are persuaded differently; however, it has a general effect on the company (Guest, 1998: 649-689). It is affected and molded by a combination of a company’s human resource practices, individual preferences, and social factors. In turn, it influences employee’s satisfaction, commitment, and guide their behavior. This in turn affects the general performance of the company.

The second thing that the article analyzes is the effect of psychological contracts on employees’ performance. The paper is based on times of transition to a market economy (Boody, 2010). To attain these two objectives it analyses two Slovenian companies; company A of which 153 employees and company B of which 83 employees were interviewed, in their late transition period. In the analyses, the paper aims to figure out the factors that shape these contracts. The consequences of a breach of contract are also looked into.

Psychological Contracts

In psychological contracts, it assumes that employees and their employer are in a contract of satisfaction. For effective work to be done by an employee, then the employer must satisfy him/her. On the other hand, for an employer to be able to pay his/her employee, then they must satisfy him/her. They must meet the set goals and targets. This gives the need for understanding expectations. In an ideal situation, the employer must understand what his employees expect from him/her and the employees must understand what their employer expects from them. The contract that exists is an exchange contract that an employer exchanges money (pay), benefits, and employment security for employee’s loyalty, commitment, and productivity (Lester & Kickul, 2001).

Elements That Shape Employees’ Psychological Contracts

Elements that shape employees’ psychological contracts can broadly be divided into individual and company factors. Individual factors are with the employees. We interpolate situations differently; they are influenced by our personalities. Motivational measures should be put in place; motivated employees are highly productive and loyal to the organization. However, the motivation method to be used is different for different people. This is because different people have different motivational triggers. Motivation ranges from attractive salaries and benefits to developing a good working environment. Other factors (on a personal level) are career motivations, previous work experiences, and current work expectations, and availability of job alternatives.

Regarding the company some policies are set to ensure that employees are satisfied at work; this is the work of the human resources department. Policies may affect the contracts either negatively or positively. When the policies are clear and well-implemented then employees are more likely to be satisfied with their employers. Their performance will be enhanced. The policies determine monetary and nonmonetary gains that employees derive from the employer. Decisions and the management styles adopted by a company influences organizational culture and on its part, organizational culture affects the organization’s perception (Feldheim, 1999)

The third factor that shapes psychological contracts is the environment that an employee is working in. By environment, we are including the third parties like the government, societal perception, and the general expectation and beliefs. For example, if it is generally believed that a certain employer is good, then an employee getting into that organization is more likely to work hard to satisfy the employer.

Types of Psychological Contracts

There are two types of psychological contracts; transactional and relational.


They are based on economic terms. The approach here is seen as a closed-minded approach. Each party of contact in a transitional contract aims to fulfill his or her financial gain. They are not interested in the other party. For example, the employee works because he is going to be paid, and the employer aims to exploit the employee for his own gain Rousseau (Denise, 1996).


The focus is on socio-emotionally (non-economic returns). It is a dynamic approach and nothing is seen as static. It is an open-minded approach. In this approach, it is a complex one where the interests of both parties are put into consideration (Feldheim, 1999: 6-9). The employee works to satisfy his employer and the employer understands the employee as a business partner who needs to be well compensated and satisfied with his job. Here the employees work hard to meet targets set by the employer and the employer compensates them appropriately. Both parties look into the present and the future. The employee demands employee’s loyalty and employees demand a continued improvement of their status.

Critically Discuss the Factors Shaping the Psychological Contract in the Two Companies Investigated and Identify the Implications of This

Company A and Company B are two companies in the same line of business. Although they have employed customers in the same country who have similar characteristics, one is situated in the town center while the other is in a rural area.

Company A is a metal production company that has about six hundred employees of whom one-third of them are low-skilled employees. It has been having a reduced production since 1990 and is currently employing casuals. Company B on the other side is a relatively small company with about 230 employees. Half of the employees have college qualifications and are professionals. It is an engineering company. It has been having a constant positive growth for the past years.

The company pays higher than company A and has a performance program, whereby an employee is compensated for his performance. Both the companies encourage employees’ anticipation in design making but in company B this is more enhanced, the company employs a freelance organizational culture where the views of an employee are considered when making decisions.

From the study, it has come out that company A had a Transactional contract form. The data showed that the employees and the employers thought of their selves more than they thought of the good of the general company. They were interested in how they will satisfy their personal needs. The employees were working for their gains and could do anything on their reach to satisfy their greed. The employer was seen to be guided by the profit in all contexts.

This may explain why he did not employ permanent employees since he wanted to reduce his wage budget (Rousseau, 1996) in company B, the approach adopted is a transitional type. The employees showed a future with the company and aimed to live longer with the company. There was a general feeling that they are out for a mission to satisfy their employer who in-turn will pay them for their efforts. The company embraces promotion and creates an interesting work environment. It also realizes that its employees need to develop in a career and thus has a career development program.

The greatest number of employees suggested that they had undergone training in a particular area in the near past. In both companies, there is a percentage of ownership that is given to employees; in company B more and more employees are interested in having a percentage of ownership in the company. This is not the case in company A. The reason that employees are more willing to own their company in company B is because of the expectation that they have on the gains. It is expected that more gains will accrue from the company.

From the discussion above, it is evident that the way a company is structured affects the performance of the same. If the company is made in such a way that there are open relations and interactions, then its performance is more enhanced and higher. In company A there is an individualistic approach that resulted in a reduced income. In company B there is a rational approach and this has affected the company’s performance positively (Kase, & Zupan, 2007).


A company with properly shaped psychological contracts embraces a system that allows employees to air their views to the higher leadership. A company requires both physical and human resources for its operations. Human resources are the greatest asset that an organization can have; without them, no business transaction can take place. It ensures that the business is run in the right way, and thus determines the current as well as the future state of the business. Great leaders or managers are those that can combine available strengths and weaknesses for the good of the organization. How well the human resources are sourced, developed, and retained in the organization is the work of the management (Boddy, 2010)

The perception that employees have on their jobs affects how well an organization performs. One of the ways to shape employees’ psychological contract is the policies that are set by top management and the operating atmosphere. When making decisions, all employees should be listened to but there are decisions that managers must decide alone. Decisions are the driving force in an organization. The quality of the decision that managers make give their organization direction and focus. The growth and competitiveness of an organization are influenced by the quality as well as the acceptability of decisions made by managers at all levels.

Juniors are weighed equally and no one is supposed to be seen as the sole holder of wisdom (Axelrod, 2006). Though decisions in this type of organization take a long period, in most cases they make informed decisions. Those organizations that use rational psychological contracts embrace change and keep changing gradually. Innovations in the organizations are seen as the order of the day and entrants are highly encouraged to be innovative.

The management has to define the destination of the organization and it is the employee to drive the entire firm to that destination. When conflict arises this is the organization that embraces dialogue (Cullinane & Dundon, 2006: 113-126). Employees here are highly motivated as well as can make the decision, however, controlled by the management. When an issue arises, some go directly to the higher management, and those that employees are not supposed to escalate to the management. They are supposed to be held in full by the junior staff. Many are the times that the customers may feel not satisfied by the decision of the junior, and go to the higher leadership upon the issue; in most cases, a leader reinforces the decision of the junior.

The reward is given according to individual performance. The organizations are highly competitive and seen to emerge with time. In a transitional approach, both the employee and the employer set their individual economic goals (Conway & Briner, 2005). It is like they are competing with each other. Here targets are not met and employees are not motivated.

Reference List

Axelrod, Robert. 2006, The Evolution of Cooperation. Revised edition. New York: Basic Books.

Boddy, John. 2010, Negotiating the ‘psychological contract. Training Journal, 2000: 10.Jenna Pickup.

Conway, Neil & Briner, Rob B. 2005, Understanding Psychological Contracts at Work: A Critical Evaluation of Theory and Research. Oxford, UK: Oxford University Press.

Cullinane, Niall, and Dundon, Tony. 2006, The psychological contract: a critical review, International Journal of Management Reviews, 8(2): 113-129.

Feldheim, Mary.1999, Downsizing: Paper presented at the Southeastern Conference of Public Administration, St. Petersburg, FL.

Guest, David E., 1998, Is the psychological contract worth taking seriously? Journal of Organizational Behavior, 19: 649-664.

Kase, R. & Zupan, N., 2007, Psychological contracts and employee outcomes in transition to market economy: a comparison of two Slovenian companies, Problems and Perspectives in Management. 5(4): 16-27.

Lester, Scott W; Kickul, Jill., 2001, Psychological contracts in the 21st century: What employees’ value most and how well organizations are responding to these expectations. Human Resource Planning, 24(1): 10.

Rousseau, Denise M. 1996, Psychological Contracts in Organizations: Understanding Written and Unwritten Agreements. Newbury Park, CA: Sage.

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