How the Psychological Contract Fuels Workplace Engagement

The working relationship between companies and their employees extends beyond formal contracts and legal obligations. It encompasses unspoken agreements, often referred to as the "psychological contract." This concept, rooted in psychological contract theory, includes the expectations and beliefs that both parties hold regarding their roles and contributions within the organization. Understanding this psychological contract is essential for recognizing how it influences workplace dynamics and shapes organizational culture.

These unspoken agreements significantly impact employee engagement levels. When employees feel that their needs and contributions are valued, their motivation and commitment to their work increase. This heightened engagement fosters a positive workplace culture, driving collaboration and innovation. Conversely, when expectations are unmet or ignored, it can lead to disillusionment and reduced employee engagement, adversely affecting the overall company culture and organizational success. 

Introduction to the Psychological Contract

Understanding the psychological contract and acting to take full advantage of it can lead to happier, more productive employees who are less likely to leave the company. This concept is crucial for enhancing the employee experience and fostering a strong organizational culture.

Yet just what is the psychological contract? It is the unwritten set of beliefs and expectations that exist between workers and the companies that employ them. For example, the psychological contract addresses what employees feel they are entitled to receive from their employer, including full support, flexibility, recognition and rewards, and career growth opportunities. 

This concept is clearly different from what is covered in more formal employee contracts and agreements, since psychological contracts tend to include emotional and relationship-driven components of the working relationship. 

The concept of the psychological contract began in the late 1960s, although it has evolved significantly since then. Where it initially focused on topics such as job security and employee loyalty, it now includes a more comprehensive set of employee expectations. These now include more modern views related to remote work arrangements for better work-life balances, new career development considerations, and support at all levels of the organization.

Key Components of the Psychological Contract

Employee perceptions are a key part of psychological contracts. Each individual interprets their relationship with their organization differently based on their past experiences, core personal values and beliefs, interactions with coworkers, and other variables. Since this is so subjective – and could vary significantly from employee to employee – companies need to do all they can to fully understand and address all of these attributes. 

Diversity is important, too. Incorporating diversity within a psychological contract fosters a culture of inclusion and respect, which can significantly enhance employee engagement and satisfaction. In addition, diversity promotes a sense of belonging, strengthening loyalty and commitment, as employees feel valued for their unique contributions.

From the employee’s perspective, each worker should do all they can to invest the time and effort to attempt to find the ideal company that can provide the best alignment between their core values and the company’s mission.  This alignment is crucial for employee development and professional growth. There’s a lot at risk: When employees don’t feel connected and aligned with their organization's values, they can easily become dissatisfied, disengaged, and maybe even willing to leave the company. That doesn’t work for anyone. 

Unfortunately, many companies may fall into this category, even if they don’t mean to. Survey results from the Society for Human Resources (SHRM) found that 58% of employees reported that their employers had not fulfilled the promises made in their psychological contracts, leading to feelings of disillusionment and disengagement. This situation often results in a psychological contract breach, which can severely impact employee morale and productivity.

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The Impact of the Psychological Contract on Employee Engagement

Yet there’s also the potential for real benefits, too. For example, an effective psychological contract can lead to many positive outcomes, including enhanced employee engagement. It makes sense: when employees feel that their expectations are being met, including fair compensation and opportunities for professional growth,  they are much more likely to be happy, motivated, and productive in their daily roles and responsibilities. 

This sense of engagement contributes to a larger work environment where each employee feels valued, supported, and like they’re part of a team making a difference. They also enjoy more flexibility in their working arrangements and receive recognition and rewards for a job well done, all of which contribute to organizational success.

On the other hand, any failure of the psychological contract can have negative consequences for employee morale and engagement. When employees think that their expectations are not being met, they can feel betrayed, unmotivated, and unhappy enough to leave the company. This psychological contract breach can significantly impact organizational culture and overall performance.

All of this means that companies must do all they can to recognize signs of a broken psychological contract or, better yet, earlier warning signs, before it’s too late, to take proactive steps to address the underlying issues and maintain a positive workplace culture. 

Strategies for Managing the Psychological Contract

What can you do to improve? Trust is the true foundation of the employer-employee psychological contract and is critical to maintaining higher employee engagement levels. When employees trust their company to uphold their end and deliver on their expectations, they are much more likely to be fully committed to their work, including their willingness to go above and beyond to truly make a difference.

a) Establish Trust

So, employers need to start by building trust with all employees. This can consist of improving communication, transparency, and showing a real commitment to the workforce. Encouraging open, two-way dialogue between employees and management can be an important first step toward enhanced communications and a true culture of trust. 

b) Set Clear Expectations

Establishing clear expectations, including specific role definitions, is essential for minimizing the possibility of any misunderstandings. Employees thrive when they know what is expected of them and can balance these feelings with what they expect in return. This clarity is crucial for managing the psychological contract effectively.

c) Encourage Ongoing Feedback

Another best practice is to develop and implement a system where ongoing feedback is welcome. This enables the employer to hear employees’ feedback, adjust their expectations, and take the right steps to address workers’ concerns more proactively. Such a process helps ensure that the psychological contract isn’t a “set-it-and-forget-it” approach. Instead, it is constantly evolving to remain responsive to any changing needs from both the company’s and the employee’s perspective.

d) Implement Employee Recognition Programs

Establishing effective employee recognition programs can significantly contribute to fulfilling the psychological contract. These programs acknowledge employees' efforts and achievements, reinforcing their value to the organization and enhancing their overall employee experience. 

Measuring the Psychological Contract and Its Effect

Yet if the psychological contract really only exists in employees’ minds, how can you measure it?

Measuring the psychological contract can be accomplished through various tools and techniques, including employee surveys, focus groups, and performance reviews. These assessments provide valuable insights into employee perceptions and the effectiveness of the psychological contract.

In addition, you can assess the overall health and effectiveness of psychological contracts through specific metrics, such as:

• Employee engagement scores

• Turnover and retention rates

• Commitment levels

• Job satisfaction ratings

• Feedback from exit interviews

Analyzing employee feedback and engagement metrics allows organizations to gauge the health of the psychological contract. By identifying trends and areas for improvement, companies can make informed decisions to enhance employee satisfaction, engagement, and retention, all of which contribute to organizational success.

Capitalize on the Psychological Contract

In today’s modern work environment and new workplace dynamics, it is vital that companies understand the concept of the psychological contract and the implications it can have on their employees. 

As companies attempt to navigate shifts in employees’ values and expectations, they must do all they can to make sure they’re promoting employee communication, engagement, loyalty, and satisfaction. By recognizing the value of the psychological contract, and taking proactive steps to make sure they’re meeting employees’ expectations, companies can gain a valuable advantage in creating a happier, more productive workforce and a positive organizational culture. 

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FAQs

1. What is the psychological contract in the workplace?

The psychological contract in the workplace is an unwritten set of expectations between employees and employers, covering mutual beliefs, perceptions, and informal obligations. It shapes workplace trust, job satisfaction, and overall engagement, playing a crucial role in organizational culture.

2. How can a broken psychological contract affect employee performance?

A broken psychological contract can lead to reduced trust, motivation, and job satisfaction, often resulting in lower employee performance and higher turnover. When employees feel promises or expectations are unmet, engagement and productivity typically suffer, potentially leading to a psychological contract breach.

3. What are some best practices for communicating expectations to employees?

Clear and consistent communication is key, so you should outline expectations from the start and provide regular updates or feedback to ensure alignment. Encourage open dialogue so employees can ask questions and feel confident in their roles and responsibilities. This approach is essential for effectively managing the psychological contract and maintaining a positive workplace culture.

Author:

This article is written by a marketing team member at HR Cloud. HR Cloud is a leading provider of proven HR solutions, including recruiting, onboarding, employee communications & engagement, and rewards & recognition. Our user-friendly software increases employee productivity, delivers time and cost savings, and minimizes compliance risk.