Definition of a Psychological Contract
Psychological Contract Violation
The “New Deal”

The Changing Nature of the Psychological Contract and Its Implications for Developing a “New Deal”

By Patricia A. Baccili

“The reality of today’s world is that the long term association (with the company) is gone. My roots are grounded in a system that rewards long term commitment. I’m not sure I can go through the rejection of no longer being valued.”

Quote from a downsizing support group session (Baccili, 1992)

Organizations have gone through tremendous changes in the past decade. Trends such as restructuring, reengineering, downsizing, and mergers and acquisitions as a result of global competition and technological advances are greatly influencing the changing nature of work and the relationships between employees and employers. These new change strategies have been a catalyst for social and organizational transformation and the formation of a new type of employment relationship (Herriot, 1998). This new relationship abolishes past career expectations and realities and presents a challenge to the values associated with the employee – employer relationship of the past that was characterized by a “one-life, one-career” expectation. As such, the exchange behavior in employment relationships has recently received increased attention as employers alter their traditional employment obligations and the psychological contract between employer and employee.

Definition of a Psychological Contract

In general, psychological contracts between employers and employees are composed of unwritten reciprocal expectations regarding what organizations owe employees in exchange for the services that employees provide to the organization. The concept of the psychological contract first surfaced during the 1970’s and was influenced by early social exchange theory and concepts of reciprocity. According to early as well as contemporary theorists, psychological contracts were described as operating “powerfully as determinants of behavior” in organizations (Schein, 1965), forming the foundation of employment relations. Psychological contracts represent the social and emotional aspects of exchange between two parties. In fact, researchers regard these as deep drivers of motivational theories that significantly influence employee attitudes and behaviors such as job commitment, job satisfaction, and organizational citizenship behaviors.

Today’s employees are faced with an increasing level of unpredictability in the exchange relationship driven by the repeal of the traditional, job secure, psychological contract. The traditional contract of long-term security in exchange for hard work may no longer be valid. Robert B. Reich, former U.S. Secretary of Labor, asserts that

a long-honored social contract has been breached, one that presumed that if a firm was profitable, a good worker could count on keeping his or her job. In its place is an anxious class, the millions who can no longer count on having their jobs next year or next month.

In response to this new anxiety, employees struggle to make sense of their new work relationship and their new roles as they rethink their assumptions about their organization, work in general, and their psychological contract with their employer.  A change in the nature of work such as the one described by Reich results in a significant imbalance in the exchange relationship and can represent a violation of the psychological contract.

Psychological Contract Violation

A number of specific consequences associated with psychological contract violation include: reduced trust, deep, long lasting feelings of betrayal and resentment, anger and frustration, decreased employee motivation and job dissatisfaction,   increased levels of job insecurity, reduced employee commitment, employee turnover, increased unionization efforts and reduced levels of extra role and citizenship behaviors. In extreme cases of violation, employees may seek revenge or retaliation, engaging in sabotage, theft, or aggressive behavior. Violations may also lead to damaging an organization’s external reputation.

No doubt, contract violations will continue to have profound effects on the development and maintenance of mutually beneficial employment relationships and on each party’s ability to change obligations without sacrificing loyalty and trust. Understanding the implications of changing the traditional psychological contract to a new, contemporary psychological contract is critical to building trustworthy employment relations under conditions of radical change. The new psychological contract is necessary to create a compatible working relationship between employers and employees. Researchers and practitioners believe that the development of a new psychological contract will build trust, commitment, and reduce ambiguity. They contend that a new psychological contract which focuses on new career strategies, skills improvement and short-term incentives such as pay bonuses will replace the old contract which features traditional incentives such as job security, upward mobility, and post-retirement benefits. In fact, this shift in employment relations can be characterized as moving from a “paternalistic” relationship to one of “free agency” and personal power.

The “New Deal”

Other researchers and practitioners believe that talk of developing a new psychological contract is “simply rhetoric” and that the psychological contract is a construct that has been abused. In the throes of reengineering, downsizing, restructuring and flattening which results in increased numbers of job insecure Americans, the notion of a new psychological contract, characterized by opportunities for traditional career development goals, personal growth and job enrichment, is a “joke” . Furthermore, the changing nature of work as driven by organizational transformation makes it difficult to develop and uphold psychological contracts in today’s dynamic work environment. However, both groups of researchers agree that the era of the stable psychological contract and career is over and is being replaced by an era that is dynamic and changes regularly, due to pressures from the organization, society, and the individuals themselves. Organizations and employees must learn to effectively manage their respective sides of the psychological contract by clarifying expectations and obligations and committing to uphold agreements.

A greater understanding of the changing nature of the psychological contract is fundamental to the notion of creating a “new deal” that reduces dependency on the organization, maintains commitment and loyalty and rebuilds trust. Although the psychological contract has typically been operationalized in terms of descriptive dimensions, for many policy-makers and practitioners it is the changing content of the psychological contract that is of particular interest. In fact, a new contemporary restructuring of the meaning of career is underway and gaining momentum in the psychological contract literature. Careers are now being depicted as a flexible, adaptable process of life-long learning experiences that may span many organizations as opposed to the traditional career characterized by upward mobility for life in one organization. Authors boast that career security is the new job security and that “employability” is the key to maintaining a steady income.

Despite recent attention to the psychological contract, it is evident that changing the traditional contract to this “new deal” and the dynamics underlying it needs deeper analysis. Changes in the obligations between employees and employers point to a central theme that indicates that it is no longer wise to expect one’s organization to be the “great provider” of the past. Moreover, employees must adapt to changing psychological contracts by being career resilient and self-reliant. Employees will need to understand the implications associated with changes in the psychological contract and understand how to become masters of their own career.

Despite the abundance of popular literature and management jargon regarding the psychological contract, there is a question as to whether the organization and the employee actually accept the new contract and are willing to support it financially and emotionally. There is a fundamental question haunting American workers today. What is the status of the traditional psychological contract and how do changes to it affect employees’ careers and their lives? There are two general areas which are important in addressing this question in order to advance our understanding of the dynamic nature of psychological contracts: 1) How do psychological contracts develop and change over time? 2) What are the implications of changes in the traditional psychological contract for developing a contemporary, career-secure, new psychological contract?

Practitioners and academicians alike grapple with how to answer these questions. However, the difficulty in doing so stems from the organization’s reluctance to acknowledge that there is an imbalance in employment relations and who are unwilling to probe deeper into answering these questions. On the other hand, employees are not sure they can trust the organization but may not be taking the appropriate action to ensure their independence and employability in today’s market. As both researchers and practitioners, we must assist organizations in renewing employee commitment and trust, and in understanding the WIN/WIN opportunities in clarifying expectations of a new deal.


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