MGMT433:

Introduction

Lesson 1 is designed to familiarize you with the psychological contract, an implicit agreement based upon trust, which forms the basis for relationships between employers and employees, between leaders and followers, and among teammates. Understanding the significance of the psychological contract in relationships will provide you with a framework as you begin to explore different leadership styles and will help you gain an understanding of your own style of leadership.

 

Learning Objectives

At the conclusion of this lesson, you should be able to do the following things:

• Define key terms, including psychological contract, transactional contract, relational contract, and contract breach.
• Clarify the role trust plays in each type of psychological contract.

 

Lesson Readings & Activities

By the end of this lesson, make sure you have completed the readings and activities found in the Lesson 1 Course Schedule.

Psychological Contracts

The psychological contract is, in essence, a mental balance sheet of costs and rewards (Eddleston, Kidder, & Litzky, 2003). In the workplace, it involves expectations concerning what the employee owes to the employer and what the employer owes to the employee (Kidder & Bucholtz, 2002, p. 602). A psychological contract is based on the notion of social exchange (Eddleston, Kidder, & Litzky, 2003). Social exchange "is a deeply rooted behavior in most societies; people form relationships in order to give and receive things" of value (Eddleston, Kidder, & Litzy, 2003, p. 87). These reciprocal expectations are formed in a manner that seeks to maximize rewards and minimize costs.

According to Kidder and Bucholtz (2002), "A psychological contract is composed of an individual’s beliefs about the nature of his or her exchange agreement with another party" p. 602. Psychological contracts are formed, therefore, whenever there is an exchange between people. In the workplace, "employment is a psychological contract in which the employee fulfills his or her responsibilities with the expectation that the employer will reciprocate" (Kidder & Bucholz, 2002, p. 602). Unlike written employment contracts, psychological contracts exist in the minds of the individuals involved—that is, the two parties may have different beliefs about their reciprocal obligations.

 

Types of Psychological Contracts

Psychological contracts can be either transactional or relational and are often depicted as opposite ends of a continuum, as illustrated by Figure 1.1. Most of the research on psychological contracts suggests that contracts can range from an extremely transactional contract to an extremely relational contract. Transactional contracts are instrumental, predominantly motivated by self‑interest seeking, where goods and services exchanged are tangible, and contracting parties can be replaced easily with alternative contracting partners. "Transactional contracts focus more on quid pro quo or direct exchange of one good or service for another"—in other words, honoring the word of the contract (Kidder & Buchholtz, 2002, p. 602). Eddleston, Kidder, and Litzky (2002) define extremely transactional contracts as those that "involve no trust and most likely occur in one-time exchange relationships, such as a temporary employment assignment, or a one-time visit to a roadside restaurant in another state" (p. 87).

 

Kidder and Bucholtz (2002) point out that "in contrast, relational contracts are more subjective, with longer time horizons and a higher level of personal commitment" (p. 602). Relational contracts tend to rely more on the principles of generalized reciprocity and trust (i.e., honoring the intent of the contract). The most extreme example of a relational contract is a marriage contract. However, "the traditional employment relationship, where an employee exchanges commitment and loyalty for long tenure and promotions also exemplifies a form of relational contract" (Eddleston, Kidder, & Litzky, 2002, p. 87). The key difference between the two forms of psychological contracts involves the presence or absence of trust.

 

 

The Importance of Trust and the Psychological Contract

Leaders must be aware that psychological contracts have a tangible impact on the effectiveness of the organization. Furthermore, the form of psychological contract that is developed will influence employee attitudes and behaviors. Employees with few expectations of their employer—for example, those who expect nothing more than wages—will feel obligated to complete only the explicit requirements of their role. In other words, employees with perceived transactional contracts aren't likely to go above and beyond their specific job requirements. Generally speaking, transactional contracts lead to employees who meet only minimum standards and who have low expectations of the employer.

In contrast, relational contracts have been shown to lead to higher commitment and involvement by employees, as long as employees believe that their employers reciprocate their trust. Leaders who uphold relational contracts based on trust will likely experience employees who perform well, are interested in going above and beyond their prescribed job duties, and are less likely to seek jobs outside of the organization.

 

Psychological Contract Breach/Violation

If either member of the psychological contract dyad (e.g., employee–employer, leader–follower, team members, etc.) perceives that the other has reneged on the deal in some way, it can lead to a perceived psychological contract breach, sometimes called a psychological contract violation.

Because of the presence of trust in the relationship, individuals perceiving a breach of a relational contract will have an emotional reaction far exceeding the negative reaction of someone who feels that their transactional contract has been violated. The consequences of a contract violation can range from lower morale and increased levels of cynicism to counterproductive behaviors, including rule breaking and violence. 

Thus, trust is a double-edged sword: The presence of trust can enhance the relationship and increase performance but may also lead to more negative outcomes than might occur in the absence of trust (Litzky, Eddleston, & Kidder, 2006). In Video 1.1 Dr. Denise Rousseau discusses trust as it pertains to the psychological contract.

Video 1.1. Changes in the Psychological Employment Contract

 

Lesson Summary

Good leaders foster cultures that support relational psychological contracts. Longer or more permanent relationships built on trust are more likely to result in positive workplace behaviors than shorter term or more temporary relationships. It's important to remember that psychological contracts are implied and are based on one’s perception of the relationship. As relationships develop over time, both members of the dyad have the opportunity to uphold or renege on the perceived tenets of the contract. The higher the level of trust, the stronger the relational contract, and the more severe the likely reaction to a perceived breach. In Lesson 2, we'll consider psychological contracts among team members.

 

References

Eddleston, K. A., Kidder, D. L., & Litzky, B. E. (2002). Who's the boss? Contending with competing expectations from customers and management. Academy of Management Executive, 16(4), 85–95.

Kidder, D. L., & Bucholtz, A. K. (2002). Can excess bring success? CEO compensation and the psychological contract. Human Resource Management Review, 12, 599–617.

Litzky, B. E., Eddleston, K. A., & Kidder, D. L. (2006). The good, the bad, and the misguided: How managers inadvertently encourage deviant behaviors. Academy of Management Perspectives, 20(1), 91–103.