In recent years, there exist many new types of economy in globalisation, and then it results in varying new types of job in which different job descriptions depending on different industries. More importantly, the role of employees is day by day appreciated as a core component in the development and the success of any organisational productivity and any company respectively. That is the reason why psychological contract needs to be invented in a new economy whilst loss of trade unions. Subsequently, this essay will not only clarify how the psychological contract is defined and how it is evaluated and applied in organisations in reality but also answer the question why a psychological contract is considered as so important in the management of the contemporary employment relationship.

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By definition, psychological contract has been stated as “a set of unwritten reciprocal expectations between an individual employee and the organisation” (Schein, 1978:48) and “… the perceptions of the two parties, employee and employer, of what their mutual obligations are towards each other” (Guest and Conway, 2002:1). Also, another perspective has been defined as “The psychological contract, unlike expectations, entails a belief in what the employer is obliged to provide, based on perceived promises of reciprocal exchange” (Robinson and Rousseau, 1994, p.246). On the other hand, as for the nature of the employment relationship, Wilton (2011) referred this concept to “what is written or implied in contract of employment or the other explicit manifestations of the employment relationship” or subjected to “constant change”.

Hence, psychological contract is considered as a meaningful concept and initial understanding need to be established at the beginning between employers and employees. Broadly, the psychological contract is shaped by both individual factors (include age, gender, level of education and prior employment experience) and organisational factors (such as sector and competitive strategies) (Guest and Conway, 2004).

These cause to impact on individual perceptions of “sense of fairness, degree of trust and deliver on the implicit deal” (Guest and Conway, 1997) and even determine the state of psychological contract. As a consequence, positive (e.g. job satisfaction, motivation, loyalty,

Page 2 Psychological contract Essay

lowered intention to quit, employee engagement or commitment,…) or negative (e.g. stress, intention to quit, disappointed,…) behavioural and attitudinal outcomes are recognised, which mediated by not only organisational influences of human resource policy and practise, job alternatives, the behaviours and the actions of managers but also the individual perceptions of employees.

Obviously, psychological contract is a reciprocal exchange has been established among employer and employee with implicit expectations, obligations and promises. Therefore, an individual employee could implicitly understand and believe that their hard-working and their contribution will be recognised and rewarded by employers’ perception although almost these things have not belonged to any employment contract before. After all, if not as expected, employees may feel that the psychological contract fails to breaches, and then resulting in dissatisfaction and loss of trust with their employers. In particular, employees having a positive psychological contract with their employers is when they have “positive employment relations, employee commitment, motivation, job satisfaction” (Preston, 2011) and they perceive other expectations have been done, so it is more likely to stay in the company.

For example, employees have a “voice” in decision-making or problem-solving, a stability of job or job security, or job satisfaction, those of employees expressed by interesting job assignments, days-off or holidays, flexible working hours, good working conditions, challenging job tasks, given chances to gather employees together as well as other benefits of pay and allowances . What is more, they could be built a career or offered to involve in free training courses for extra qualifications and so forth. Likewise, when the demands of employees have been provided, they are treated with all respects, their efforts are rewarded, so actually they perceive what their employers have delivered on the deals and they feel motivated, engaged and committed to their employers.

As a result, certainly they will be inspired to work harder and harder to reciprocate their employer’s offers. In brief, Guest (2001) argued that “employees having a positive psychological contract is the existence of a larger number of fair and effective human resource management practises in the business”. In contrast to a positive psychological contract, the problems come up with a negative psychological contract, leading to leave the business due to negative potential behaviours and attitudes.

Accordingly, the implications of “the instability of the psychological contract and the considerable scope for misinterpretation” (Robinson and Rousseau, 1994) go along with multiple expectations from different parts of organisations will have “a cumulative impact on the employment relationship which, ultimately, may result in either employee resignation or dismissal” (Wilton, 2011) as well. Importantly, all of that reach closely to a lowered effort, degraded enthusiasm and motivation, reduced goodwill, more stressful, partly caused by over working hours without any incremental wage, the working condition is worse or unsafe and so on; thus, it brings in lowered productivity and lowered outputs accompany with lowered loyalty to carry on working at all.

In addition, the conflicts have been increasing gradually and the management becomes more difficult and harder for employers to get along with occurring disputes because of the fact that employees having a negative psychological contract may feel that they did not receive whatever from their employer throughout mutual adaption, reciprocal promises or even the most basic expectations, all of these seem not to be provided and they are stimulated to “fight for their right” any way. In short, Zhao et al. (2007) led to the conclusions that violation mediates relations between breach and such attitudes as job satisfaction, organizational commitment, and turnover intentions, and that these attitudes are related negatively to such behaviours as in-role performance, and organizational citizenship behaviour (Emerald).

However, issues of psychological contract management are not easy to handle in progress. Wilton (2011) addressed one of key of conflicts of those concerned with ensuring consistent messages and a clear communication across the organisation for “all employees receive the message and absorb the sense of organisational purpose” (Mason, 1995, p.22) or how to solve “multiple agency”-related disputes. Obviously, there are many organisations in which many different agents at a varying levels of management in a company; as a consequence, this will affect on the quality of delivery towards the missions, goals and strategies from the top management to the end-employees through line managers and other supervisor levels. Otherwise, for this reason, Wilton (2011) also suggested that it should set up an organisational culture in the entire company for the purposes of avoiding from misunderstanding or misinterpretation.

Besides, managers also deal with the age-related issues regard to psychological contract. Specifically, in any organisation, it has no doubt regards to different levels of age work together with perception, thinking and the actions due to different experiences and generations. By which, based on the developmental theories, Kupperschmidt (2000) and several authors in subsequent years (Beck, 2001; Smola and Sutton, 2002; Westerman and Yamamura, 2007) demonstrated that “it is these conditions that tend to distinguish one generation from the next, so that each generational group has a unique pattern of behaviour based on their shared experiences” (Emerald).

Furthermore, it is important to note that the expectations are not fully known and understood between parties. Nobody can understand the thinking or expectations of each other in full without explicitly expressing because of the fact that individuals come from the different classes and statuses in society and they are not under a same qualification, environment and level; especially, the psychological contract is an implicit contract, so fully mutual understanding is not easy for both parties.

From this perspective, it comes up with another problem given an account of how to manage cross-cultural employment relationship; that is, either employers or employees are from different background profiles, it makes the management and the matters of interpreting or motivating or getting mutual expectations are quite tougher as a consequence. It is said that “A successful cross-cultural relationship benefits the individuals concerned by developing understanding and tolerance. If the cross-cultural relationship fails, the reserve happens: stereotypes are reinforced, attitudes narrow, misunderstandings proliferate, and instead of gaining from the cultural variety, the organisation is in danger of flying apart as members seek to protect their own interests.” (Mead, 1994). In fact, although the communication between different cultures is likely to be complicated, everything certainly has the solution after all. Apart from those perspectives, employment relationship is more or less affected by globalisation and technical advances in recent days.

This is why psychological contract is affected by competition among companies and a dynamically changing labour market because most of companies demand to maximise efficiency, effectiveness and responsiveness in operations and human resource management policies. Consequently, it heavily impacts on psychological contract between parties, especially job security is decreased by increases in part-time or temporary employees and employees are required highly in skills, knowledge and experience.

Also, it emphasises on arising of “new” psychological contracts (Rousseau and Parks, 1993), namely relational contracts “characterised by company-specific skills, long-term career development and extensive training” and transactional contracts “which focus on short-term financial relationships and involve low emotional commitment by employees” (Emerald). On the other aspect, employees address higher expectations in psychological contracts to their employers including development opportunities in career, higher motivation, higher paid salary, more flexible working hours or more challenging works, etc.

Nowadays, there would seem to be complicated and sophisticated in managing human resource that many companies appreciate and develop complex set of human resource management policies and practises owing to its essential role. As mentioned above, managers need to impose relevant and appropriate regulations and policies to motivate employees and maintain a positive psychological contract in the way they can work with their best; commonly, it is strongly associated with employees’ needs. Some specialists demonstrated through three motivation’s theories that managers should reply on such types of people (McGregor), the content of motivation (Maslow) and the process of motivation (Vroom). Firstly, Douglas McGregor’s (1960) introduced Theory X and Y, which are all about perception, in order to reveal what kind of people are and what managers need to do to keep them working. Secondly, Abraham Maslow’s (1943) suggested psychological need-based motivation in which people will behave in ways that satisfy their different levels of need when they are motivated.

Based on Maslow’s hierarchy, many companies set out human resource management policies to meet employees’ needs. For instance, psychological (good working conditions, attractive wage or salary, subsidised housing and free or subsidised catering), safety (private health insurance cover, attractive pension provisions, safe working conditions, “no redundancy” policy), social-relationships ( company sports and social clubs, office parties, barbeques, outings, permission for informal activities and encouraging open communications), esteem (regular positive feedback, prestige job titles, photographs in company news sheet, promotions), self-actualisation (challenging job assignments, discretion over core work activities, promotion opportunities and encouraging creativity) (Buchanan and Huczynski, 1991, p. 61).

Undoubtedly, those characteristics bring employees in a positive outcome of psychological contract that employers should note, especially in a dynamic labour market and a competitive economy these days. Finally, Victor Vroom’s (1964) stated that an individual’s expectations that certain behaviours would lead to a particular outcome in terms of “subjective probability”. This theory suggests that an individual’s effort “inputs” affected by given reward and a good manager are advised to have a clear understanding the relationship between effort, performance and reward so as to apply in practises because this matter also regards to trade-off of work-life balance. As can be seen clearly, employees wish to work overtime because of incremental wage to support for their family; they could work harder but lack of time to take care of their family.

So far, understanding psychological contract is viewed as a vital part in management, employers could “eliminate false assumptions about job duties, extra-role behaviours, and relational expectations” (Emerald) and then gain some usefulness like “increases in job performance, lower staff turnover and higher job satisfaction for both employee and supervisor” (Emerald). Apart from this view, most of companies have seen the major role of psychological contract management and have applied successfully in human resource management policies to maximise efficiency. Recently, temporary employees and flexible time are popular strategies used in many large companies due to its potential advantages in general and in psychological contract in particular.

A research has been taken by IDS in 2012 also confirmed that “Flexible working continues to gain in popularity as employees place more value on their work-life balance. Many larger companies now offer a wide range of alternative working patterns and extend the right to request flexible working to all employees. They recognise that in doing so they can strengthen their employer brand, improve staff retention and increase employee engagement.” (www.ids.thomsonreuters.com). In some large companies, there is a connection of human resource management in the way which people are managed as “enhancing the skills, knowledge, learning and innovative capacity of people at every level, the organisation as well as the individual can prosper” (Harrison, 1997, p.7) with gaining competitive advantage, which is considered so important in recent global economy.

So, it directly results in psychological contract as well with the actions and strategies related to how people perceive the relationship between performance, motivation and reward in the way of such actions like “…the communication of business directions, problems and plans; rewarding employees for customer service/quality; the identification of high-potential employees early; the reward of employees for innovation/creativity and the reward of employees for business/productivity gains…” (Poole and Jenkins, 1996). In conclusion, as can be seen clearly, psychological contract plays a major role in employment relationship and it is also a strong association between employees and organisations. It is said that a company’s success is partly based on psychological contract-related mutual understanding of both parties.

Nowadays, in a changing and dynamic environment, any company also wants to seek to maximise effectiveness and efficiency and then they know they need to make strategic decisions which are all about the progresses of recruitment, selection, what kind of contract suitable to sign for every type of employees or how job tasks are designed and assigned to employees, etc. Importantly, to manage people at work successfully, it requires effective, creative and responsive human resource policies so that all of these characteristics contribute to the development of company.

Additionally, in my opinion, managers should deploy such policies like empowering much more for employees in order that employees feel engaged to more responsibility due to autonomy and they feel raised creditability. Besides, managers not only can give feedback to employees owing to care-taking expression through work-based recognition of themselves but also “upgrade” a level of trust by the way in which employees have a right to join in decision-making or problem-solving. Finally, I want to mention the role of governmental policies regards to pay and other basic benefits that employees must be received from their employers whether these things belong to psychological contract or any other contracts or not since people are core component in the success of a company in particular and in the prosperity of a country in general.

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