What is a psychological contract?

The psychological contract is a concept that originated in the 1960s and was later developed by American academic Denise Rousseau. It describes the understandings, beliefs and commitments that exist between an employee and employer. 

Although it is unwritten and intangible, it represents the mutual expectations that are felt. It is distinct from an employment contract, which is a written, rigid and formalised document.

The psychological contract is fundamentally a description of the employment relationship as perceived by each party. It is formed through daily interactions between colleagues, managers and the “company” as an organisation. These interactions can come in the form of conversations, tone of voice and body language, and can even be implied or inferred.

The psychological contract influences how employees behave, according to the underlying relationship they have with the company and other staff. The employee balances what they put into their job with how they feel they are being treated by their employer. If they are inputting more than they feel they are getting back in return, the balance is skewed and the psychological contract is breached. 

Development of the psychological contract

The psychological contract develops and will constantly evolve over the working relationship. It is refined according to the behaviour and communication that goes on between employer and employee. Even things that are not said, or perhaps perceived to be deliberately left unsaid, can contribute to the psychological contract.

The employee inputs things such as effort, ideas and commitment, and may make sacrifices for the company. In return, they receive rewards from the employer, such as job security, recognition, personal development and status. As the employee inputs more, so the company rewards with more.

Conversely, what the employee is putting in can be seen from the employer’s perspective as their expectations. They may expect a certain amount of commitment or dedication in return for the recognition and responsibility that they give.

When the psychological contact is breached

The employment relationship can be adversely affected if it is perceived that there has been a breach in the psychological contract. When the employee believes that the employer has failed to fulfil its obligations, then they feel that the psychological contract is broken.

For example, perhaps it’s always been the unwritten rule that staff can come in a bit late the day after the annual Christmas do. If one time an employee is suddenly reprimanded for this, then this can cause a resentment on the part of the employee as they will feel the psychological contract has been dishonoured. 

Breaches of the psychological contract can lead to an employee becoming disengaged with their job and, if not resolved, can continue to cause disaffection and demotivation that further results in a decline in performance. In more serious cases, the entire relationship can break down and cause the employee to exhibit negative and sometimes deliberately malicious or deviant behaviour.

Related: Motivation theories for your employees

More resilient employees will acknowledge that the contract has been violated, but will adopt coping strategies that allow them to work to hold up their own side of the contract while it undergoes a period of repair.

Maintaining a strong psychological contract

Fairness and equity are important aspects of the psychological contract. They need to be maintained in order to sustain a robust and healthy psychological contract. 

It is the employer’s responsibility to try to maintain the employment relationship and to spot any deterioration. It is easier to maintain the psychological contract than to repair it following a breach.

With companies expecting increasing flexibility and agility from their staff, a key aspect of maintaining relationships is that the psychological contract is upheld. The very need for adaptability may run counter to how things have been done before, and so changes in the needs of the company may be perceived as breaches of the contract. Proactively managing employees’ expectations therefore becomes an ongoing and necessary process.