Psychological contract
A psychological contract represents the mutual beliefs, perceptions, and informal obligations between an employer and an employee. It sets the dynamics for the relationship and defines the detailed practicality of the work to be done. It is distinguishable from the formal written contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...

 of employment
Employment is a contract between two parties, one being the employer and the other being the employee. An employee may be defined as:- Employee :...

 which, for the most part, only identifies mutual duties and responsibilities in a generalized form.


As commercial organization
An organization is a social group which distributes tasks for a collective goal. The word itself is derived from the Greek word organon, itself derived from the better-known word ergon - as we know `organ` - and it means a compartment for a particular job.There are a variety of legal types of...

s grew in size and complexity, there was a tendency to standardize rather than individualize the treatment of labor. Trade union
Trade union
A trade union, trades union or labor union is an organization of workers that have banded together to achieve common goals such as better working conditions. The trade union, through its leadership, bargains with the employer on behalf of union members and negotiates labour contracts with...

s emerged to offer protection to ever larger groups of employees. The result was collective bargaining
Collective bargaining
Collective bargaining is a process of negotiations between employers and the representatives of a unit of employees aimed at reaching agreements that regulate working conditions...

 to define pay and conditions
Employment contract
A contract of employment is a category of contract used in labour law to attribute right and responsibilities between parties to a bargain.On the one end stands an "employee" who is "employed" by an "employer". It has arisen out of the old master-servant law, used before the 20th century...

 by reference to grades across industries and trades, and in public service. More recently, unions have lost some of their significance, leaving employees in more direct control. But societies have developed expectations of a better work-life balance
Work-life balance
Work–life balance is a broad concept including proper prioritizing between "work" on the one hand and "life" on the other. Related, though broader, terms include "lifestyle balance" and "life balance".-History:The work-leisure dichotomy was invented in the mid 1800s...

, reinforced by legislation, and employers have found it in their own best interests to develop practices that respect equal opportunities and employment rights through professionalized human resource services because:
  • the workforce has become more feminized;
  • the workforce is better educated, less deferential to authority and less likely to remain loyal;
  • the workforce is required to be more flexible to meet new challenges quickly and effectively, but this need to change can be a source of insecurity;
  • the use of temporary workers as well as outsourcing of projects and whole business functions also changes workers' expectations as to what they want to get out of their psychological contracts (e.g., transferable skills now vs. life-time employment before); and
  • automation
    Automation is the use of control systems and information technologies to reduce the need for human work in the production of goods and services. In the scope of industrialization, automation is a step beyond mechanization...

     has both empowered a greater percentage of the workforce and allowed the emergence of teleworking which fragments the old social orders of a single location workplace and generates greater freedom and flexibility in an ever increasing global workforce.

The formation of the contract

During the recruitment
Recruitment refers to the process of attracting, screening, and selecting qualified people for a job. For some components of the recruitment process, mid- and large-size organizations often retain professional recruiters or outsource some of the process to recruitment agencies.The recruitment...

 process, the employer and interviewee will discuss what they each can offer in the prospective relationship. If agreement is reached, most employers will impose a standard form contract, leaving the detail of the employee's duties to be clarified "on the job". But some of the initial statements, no matter how informal and imprecise, may later be remembered as promise
A promise is a commitment by someone to do or not do something.In the law of contract, an exchange of promises is usually held to be legally enforceable, according to the Latin maxim pacta sunt servanda.- Types :...

s and give rise to expectation
In the case of uncertainty, expectation is what is considered the most likely to happen. An expectation, which is a belief that is centered on the future, may or may not be realistic. A less advantageous result gives rise to the emotion of disappointment. If something happens that is not at all...

s. Whether they are incorporated into the parallel psychological contract will depend on whether both parties believe that they should be treated as part of the relationship. The better organized employers are careful to document offers to reduce the risk of raising false expectations followed by disappointment.

In the Common Law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...

 jurisdictions, the law implies duties requiring the employees to be loyal and trustworthy. These are imprecise in their definition and uncertain in much of their operation. But, in psychological terms, issues as to whether promises and expectations have been kept and met, and whether the resulting arrangements are fair, are fundamental to the trust between the employee and the employer. The first year of employment is critical as actual performance by the employee can be measured against claims and promises made during the interview, and the management has begun to establish a track record in its relationship with the employee at supervisor and manager level. Feldhiem (1999) reflects these two strands by dividing the psychological contract into:
  • transactional: this is the economic or monetary base with clear expectations that the organization will fairly compensate the performance delivered and punish inadequate or inappropriate acts; and
  • relational: this is a socio-emotional base that underlies expectations of shared ideals and values, and respect and support in the interpersonal relationships.

The employment relationship develops

The reality of employment rights and duties emerges through the interpersonal relationships formed in the workplace. How employers, supervisors and managers behave on a day-to-day basis is not determined by the legal contract. Employees slowly negotiate what they must do to satisfy their side of the bargain, and what they can expect in return. This negotiation is sometimes explicit, e.g. in appraisal or performance review sessions, but it more often takes the form of behavioral action and reaction through which the parties explore and draw the boundaries of mutual expectation. Hence, the psychological contract determines what the parties will, or will not do and how it will be done. When the parties' expectations match each other, performance is likely to be good and satisfaction levels will be high. So long as the values and loyalty persist, trust and commitment will be maintained. The map followed by the parties is the development of an individualized career path that makes only reasonable demands on the employee, with adequate support from managers and co-workers, for a level of remuneration that is demonstrably fair for a person of that age, educational background, and experience. Motivation
Motivation is the driving force by which humans achieve their goals. Motivation is said to be intrinsic or extrinsic. The term is generally used for humans but it can also be used to describe the causes for animal behavior as well. This article refers to human motivation...

 and commitment
Commitment may refer to:*Promise, or personal commitment*Contract, a legally binding exchange of promises*Brand commitment*Involuntary commitment, the use of legal means or forms to commit a person to a mental hospital, insane asylum or psychiatric ward...

 will be enhanced if transfers and promotions
Promotion (rank)
A promotion is the advancement of an employee's rank or position in an organizational hierarchy system. Promotion may be an employee's reward for good performance i.e. positive appraisal...

 follow the agreed path in a timely fashion.

If managed effectively, the relationship will foster mutual trust between the parties, matching the objectives and commitments of the organization to those of their employees. But a negative psychological contract can result in employees becoming disenchanted, demotivated and resentful of authoritarianism
Authoritarianism is a form of social organization characterized by submission to authority. It is usually opposed to individualism and democracy...

within the organization. This will result in an increasingly inefficient workforce whose objectives no longer correspond to the organization they work for. The main cause of disappointment tends to be that middle managers are protective of their status and security in the eyes of their superiors, and this can introduce conflicts of interest when they are required to fulfill their obligations to their subordinates.

Breach of the psychological contract

Psychological contract breach may occur if employees perceive that their firm, or its agents, have failed to deliver on what they perceive was promised, or vice versa. Employees or employers who perceive a breach are likely to respond negatively. Responses may occur in the form of reduced loyalty, commitment, and organizational citizenship behaviors. Perceptions that once psychological contract has been breached may arise shortly after the employee joins the company or even after years of satisfactory service. The impact may be localized and contained, but if morale is more generally affected, the performance of the organization may be diminished. Further, if the activities of the organization are perceived as being unjust or immoral, e.g. aggressive downsizing or outsourcing causing significant unemployment, its public reputation and brand image may also be damaged.

Manager–subordinate mismatch may also cause a breach of the psychological contract.
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