What is the psychological contract and why is it so important?

As we move towards a post-COVID-19 busines world, what’s commonly known as ‘the psychological contract’ between employee and employer is of utmost importance. Arguably, it’s as important as your contract of employment, if not as tangible. The bedrock of the employment relationship, in both directions, is built on the psychological contract in the workplace.

In this article we’ll explore different types of psychological contract, how to improve the psychological contract, and many other areas of insight that attempt to analyze and unlock the importance of one of the trickier areas of modern business.

You can feel when your employer is upholding their side of the psychological contract – but could you describe it? In this day and age, trust and employee communication are where these unspoken bonds and unwritten rules live and die. So let’s dive in.

What is the psychological contract?

The psychological contract is the unspoken expectation of conduct between employee and employer. That might mean good employment communication, and it most likely also means an assumed opportunity for career progression, which would manifest itself in the physical form of a career development plan.

It can also mean managerial support, communicating professionally in a timely manner between different business units, or fair and balanced treatment of employees regardless of their race, gender identity, sexuality or religious beliefs.

As we will cover later, the pandemic and its secondary effects have dramatically re-written certain fundamental elements of the psychological contract (for both better and worse), including attitudes towards presenteeism, employee wellbeing, office culture, and to finish on an abstract: PURPOSE.

Examples of psychological contracts

• Job security. When you join a company you assume that it will offer you a satisfactory level of security in your position, and that this status won’t ever be destabilized by bad faith actions such as constructive dismissal or personal vendettas. Regrettably it doesn’t always pan out like that, but when you start your career with an organization the psychological contract of security in your position can be assumed.
• Learning and development opportunities. It’s very rare to be able to progress your career without learning new skills, and while much of learning happens on the job, most employees trust that their employer will actively invest time in them, the way they invest their time in the business to help it grow.
• Expectation to go ‘above and beyond’. This is a psychological contract example that sits with the employer rather than the employee. Rather than doing the bare contractually obliged minimum, businesses (particularly start-up and growth stage ones) will assume their employees understand the need to wear ‘many hats’ and help out across different areas of the business, sometimes outside of working hours too. This expectation often brushes up against the concept of presenteeism, a modern phenomenon which all too often leads to burnout.
• ESG goals. Environmental, Social and Governance goals are the new Corporate Social Responsibility policies. New employees in a business will assume that their employee has an implied standpoint on the big issues of our time (diversity, climate change, and inequality are the most obvious examples), if not a written document laying it all out in black and white.

What is the importance of the psychological contract?

It’s probably easiest to make a case for this by imagining it didn’t exist. Without the implied expectations of conduct and trust between employer and employee, a business would struggle to function at all.

As many a ‘sage on the stage’ would tell you at future of work events, ‘culture eats strategy for breakfast’. Without the psychological contract you have no culture. Without culture, or worse, in the existence of a toxic culture, you have no trust or loyalty. No vision. No empathy from your leadership.

With any significant psychological contract violation, you run the risk of compromising trust in your whole organization. Word of mouth is the most powerful means of employee communication, and in an era of increased workforce power, employees are voting with their feet more and more often.

The physical employment contract may be the legally binding document of the two, but the psychological contract is no less important when it comes how an employee sees their future within a business.

Making a fair and balanced psychological contract

As with any agreement between two entities there must be some give and take, and even though the psychological contract exists only as a set of assumptions based on societal and professional norms, it is a two-way street and requires understanding from both parties.

It’s also important to note that just as each employee’s values are individual, so is their relationship to their employer and so, therefore, is their psychological contract. Moreover, the relationship with their employer will also likely change over time.

At the start of their career, younger employees may be focused on salary as they look to make best use of a larger disposable income, whereas financial compensation may take a ‘relative’ back seat as they get older. Perks and benefits play a bigger part as employees mange their working lives around family commitments, for example.

These changes will be articulated in a written contract of employment, which the employee agrees to adhere to legally by signing. But the psychological contract is an ongoing agreement that the employee is mindful of almost every day they go to work. It’s a system of checks, balances and agreements that if violated by either party can be quite damaging.

What is a breach of the psychological contract?

There are, sadly, too many ways in which this can happen. As purpose and values come to the fore for many employees and their expectations of the businesses they look to work for, an ethics minefield has opened up before us.

As an example: A young employee has just joined a growth-stage ethical clothing start-up with a strong ethos in sustainable business practices. Their CEO is also very vocal on social media about the environment. News of a majority buyout by a petrochemicals giant is met with mixed feelings by the staff. Some staff are making noises about protesting the decision, and could be pushed to quitting entirely, while also encouraging colleagues to do the same. This is a fairly typical example of a psychological contract breach, whether the employee labels it as such or not. Ethics have been questioned and trust has been destroyed.

Regardless of whether or not a legal breach of contract has been committed, the damage is done. So – it’s important to keep your values consistent and your workforce happy, and it will help to preserve your culture.

Conclusion

Be honest, be trustworthy – both employees and employers alike. That way, the psychological contract doesn’t become the minefield that it could.