Psychological Contracts

by Bob MacKenzie

Benefits of healthy psychological contracts

Despite resource implications, there’s a significant positive Return on Investment (ROI) from paying close attention to the psychological contracts of your principal stakeholders. Not only does this enhance the performance and retention of key staff and colleagues, but it also helps them to feel valued and acknowledged. There is a clear link between healthy psychological contracts and high performance.

Attention to psychological contracts helps people to work smarter, especially when organisations are reducing inputs and increasing their demands for outputs.

Too often this [psychological] contract is implicit and left to chance, resulting in misunderstanding, stress, lower commitment and (diminished) performance ... the psychological contract can be used to raise the business game and increase personal fulfilment.

Michael Wellin

Particularly in times of belt-tightening and change, you will want to achieve your business goals as cost-effectively as possible. This requires a significant investment of time end energy in maintaining harmonious relationships within your workforce.

Forming good quality manager-employee relationships, which recognise the person behind the function, is a challenge. Work environments tend to be very busy, with heavy email usage, text messaging and limited protracted loyalty from either the manager or the employee. However, managers fail to connect with employees at their peril. Studies suggest that quality of the manager-employee relationship is the factor most highly related to performance... Management practices that increase employee satisfaction have positive effects on customer satisfaction, productivity, profit, employee turnover and accidents...

Robert Marsh, Feb 2008, Organisations & People

Working to restore or maintain healthy psychological contracts helps to maintain or increase performance, to attract and retain talent, and to minimise resistance to, or sabotage of, necessary changes.

If you don’t take appropriate action to restore violated psychological contracts to a healthy state, then the consequences for your business can be serious, as the following example illustrates.

Case study

Fusion Control Inc ignored important psychological contracts and lost a major business contract.

Fusion Control is an engineering company that supplies and maintains control systems for nuclear power stations. Until recently, most of its work had been in the UK. In its written employment contract, its engineers undertook to work away from home ‘for short periods of time’. Such assignments had never before lasted longer than four or five days.

Then the company brought off a major business coup by winning a lucrative contract in the Middle East. Because of this, it began asking its engineers to work away from home for up to three weeks at a time.

This sudden change of practice caused a great deal of trouble, as discrepancies between the expectations of employees and employers soon became apparent. On the one hand, the engineers were disgruntled, arguing that three weeks was more than ‘a short period of time’ by quite some margin. The company executives, on the other hand, felt that it was not too much to ask engineers to be away from home for up to three weeks. In the executives’ view, three weeks was still ‘a short period of time’.

As a result of these differing interpretations, several engineers resigned from the company. This alarmed the Board: good control systems engineers are a relatively rare breed and replacing them could be time-consuming and expensive.

The situation became so serious that the company felt the need unilaterally to rewrite all formal employment contracts. Among other things, they removed the phrase ‘short periods of time’ and replaced it with ‘for up to four weeks at a time’.

This attempt to alter the psychological contract in the light of changing circumstances was counter-productive, because the managers handled the process clumsily, without consulting or otherwise involving their engineers. As a result, several engineers refused to sign the new contract, and several others left the company. Fusion Control Inc found it impossible to recruit suitable replacements at such short notice, so their Middle East customer withdrew the contract and threatened to file for breach.