Theory of the Psychological Contract in Organisational Success or Failure - Literature review Example

Introduction

Many company executives seek to understand the drivers of high performance. That question is fundamental in the modern day management practice and research and remains vital for research in HRM (Human Resource Management). Within the framework of organisational level HRM research, the link between organisational performance and HRM has gradually developed into a subject of interest. Based on books and articles regarding exemplary workplace systems and the increasing attention of HR tools such as the balanced scorecard remain crucial to organizational success. Nonetheless, psychological contract scholars such as Eriksson, Qin & Wang, 2014; Veld, Paauwe & Boselie, 2010 cite inadequate knowledge regarding the methodologies through which HRM affects organizational performance. HRM individual level analyses primarily concentrate on the relationship between different features and characteristics of staff workers. Additionally, they address employee behavioural aspects and work perceptions of performance. Some commonly discussed behavioural issues and opinions revolve around employee satisfaction and their intent to depart the company (Wood & Wall, 2007).

The research will highlight the uniting force between the two typical HRM research streams. The two research streams involve individual and organizational level research. Individual level research represents the link between individual performance and work relations. On the other hand, organisational level analysis characterizes the relationship between performance and HRM. Notably, both streams relate to the Psychological Contract theory. According to Payne et al. (2015, p. 42), Psychological Contracting involves personal perceptions and beliefs regarding employment relationships and reciprocal responsibilities moulded by organizations. Work relationships include not only what organisations owe workers but also what employees owe a company. Three major aspects constitute psychological contracts. The facets involve perceived violation or fulfilment of employer obligations, alleged employer obligations, and apparent employee responsibilities. The Psychological Contract model links individual and organisational levels of HRM research. Notably, the two levels concentrate on the exchange relationship between persons and organisations. The Psychological Contract is of paramount importance based on its effects on employee behaviour and attitude.

For an institution to attain preferred performance objectives, fulfilment, and violations of staff member's psychological contracts are factors of great importance. The term violation also commonly referred to as breach indicates circumstances in which staff members recognize the inadequate fulfilment of employer obligations. Several studies link an infringement of the psychological contract to people's behaviour and attitude. For example, intention to leave, commitment, loyalty, and trust denote breaches of the Psychological Contract (Sadiq 2014).

Employment contracts unify organisations and individuals in addition to controlling the behaviours of both parties (Tyagi& Agrawal 2010, p.381). Principally, employment contracts guarantee the actual attainment of organizational objectives. Appropriate realization of organisational goals entirely depends on employer-employee relationships. Exemplary relationships between workers and their employers remain crucial to the achievement of organisational goals, particularly, in the modern competitive business environment. The faster flow of information, proliferating expansion, pervasive globalization, and increased business complexity characterize the modern world (Tyagi& Agrawal 2010, p.381).Furthermore, the unfolding technological changes in the modern sophisticate the business environment. In addition to creating great opportunities, the current business environment is highly competitive and increases the chances of organisational failure. Consequently, organisations must maintain perfect employee relationships to penetrate and gain a competitive advantage in the modern business environment. Organisations nowadays apply strategies similar to contract labour and temporary staffing to manage cost in addition to promoting employee welfare (Tyagi& Agrawal 2010, p.381).

According to Conway and Briner (2005), contractual agreements define and create enforceable obligations and rights between parties who knowledgeably initiate a relationship. Psychological and legal contracts are both fundamental aspects of employment engagement. The disparity between psychological and legal contracts is that latter is specified, openly defined, and explained as opposed to psychological contracts. Organisations hold Psychological contracts individually, unwritten and naturally perceptual. Psychological contract analysts concentrate on aspects touching on the employment relationship on observed expectations, promises, and obligations concerning future contributions and inducements. The fundamental idea supporting this perception is that staff members formulate a psychological contract with their employees depending on their official recognized contract. Additionally, other informal and formal organisational signs and individual features, and created psychological contract affects the conduct and performance of employees.

There are two fundamental research studies seen as the pioneers of the theory of psychological contract. These two writers namely, Levinson et al. and Argyris played significant roles in the expansion of the psychological contract concept. In addition to the two researchers as noted above, Rosseau also contributed significantly to the elaboration of the psychological contract. The author designed to specify the understanding of employment rapport among employers and employees. Principally, the scholar denotes the perceptions, informal obligations, and mutual beliefs between employers and their employees. According to Rosseau, PCT forms the basis for the development of a shared understanding during employment and contracting.

Sakamoto, Jones & Love (2008) argue that Argyris was the first person to introduce the phrase "psychological contracts" initially. While describing the association between leadership styles commonly applied in organisations and the employees, Argyris indicated that the informal culture is an essential element. According to Argyris, informal culture symbolizes the comprehension of the arrangement between supervisors and the employees that served under them, i.e. the psychological contract. Argyris posits that psychological contracts control the administration of the supervisor-employee relationship. He further argued that violating this psychological contract leads to a non-customary behaviour by the supervisor. Consequently, he ends up describing psychological contract as the acuities by two entities. The two entities involve the work relations conjoint understanding of the particulars of the psychological contract perceptions.

Contrarily, Levinson et al. theorized psychological contract as a sequence of joint prospects between the employee and the organization both intentionally and intuitively. He focused on expectations and argued that they have something to do with psychological requirements. For instance, expectations related to aggression, growth, and anticipations directly affect particular elements of the work such as rewards and job security. Both explanations make assumptions of an exchange connection between the employee and the employer (leader or organisation), in which the prospects of both sides taking part are considered.

Several elements remain crucial to the definition of the psychological contract. The elements commonly referred to as psychosocial components revolve around obligations, perceptions, beliefs, expectations, and beliefs. The items as noted above usually occur between parties in an employment relationship. These parties include managers, employees, employees, and work colleagues. Contrary to formal contracts, psychosocial elements are not only implicit but also tacit. They are also informal, invisible, and assumed (Collins, Cartwright &Hislop 2012, p.213) However, they can also be partially articulated in some instances. Regardless of being unofficial assumptions, psychosocial elements possess a powerful impact not only on employee performance but also on motivation. Analysts argue that psychological contracts are different from the more general perception of outlook in that contracts have the aspect being reciprocal and promissory. Additionally, they provide an obligation to some tendencies on the part of the entity employed, in return for some reaction on the employing entity or in a reciprocating manner.

As noted before, there are numerous arguments regarding organisational issues or the employer's point of view. Analysts suggest several individuals that play the role of formulating contracts as organisational viewpoint representatives (Collins et al., 2012, p.213). One method of taking note of the company's perspective is the suggestion of observing the issue through the managers' lens. For example, analysts look into the relationship between employees and employers (Moody 2008). They propose that a senior manager can best characterize the company’s point of view.

According to Collins, Cartwright & Hislop (2012), the organisational section of the psychological contract comprises of several agents. Such agents include managers, co-workers, top management, and owners. The broad range of agencies involved in psychological contracting presents a full spectrum of challenges. For instance, the agents may possess varying views regarding psychosocial elements. The varying opinions may end of compromising beneficial employment relationships due to different expectations and conflicts of interest. Besides, a broad range of agents in an organization may raise significant administrative issues. Particularly, in big organisations, it appears complex for staff members to interpret what or who stands for the employers' point of view. Distinctions between secondary and primary contract formulators become advanced. Apparently, secondary contract formulators are structural signs and signals whereas original contract formulators are individuals. These signals are vehicles and tools individuals employ to express and communicate their commitments and provide incentives for future and present behaviour. In light of this, tools of organisational design similar to HRM and design may be regarded as contract makers/designers. The tools may also act as are a presentation of the company's viewpoint.

Balance, reciprocity, and exchange are the main ideas in the literature on employee organisational contracts (Pesqueux 2012; Moody 2008). The Social Exchange Theory by George Homans offers the essential fundamental elements of the psychological contract. The theory differentiates the two types of exchanges social and economic. The pure economic exchange is present in cases where the employing entity provides exclusive financial enticements in the short term in return for well-defined employee contributions. At least for external adaptation and job complexity reasons, the employer may see it fit to leave open some obligations. Additionally, the employer may perceive employment relationship as a mixture of social and economic exchange, instead of being treated as an exclusively economic exchange. Sleeth (2013) notes that although economic elements drive the legal or formal relationship in employment, there develops a social factor. The evolution occurs because each party has a personal notion of the contract they share. Such perceptions can be drawn from indirect and direct communication between the parties.

Depending on the concept of economic and social exchange, individuals analyzing psychological contracts differentiate between relational and transactional psychological contracts. Chaudhry, Coyle-Shapiro and Wayne (2010) posit that easily defined, close-ended, specific and fundamentally, economic transactions develop transactional psychological contracts. Therefore, concentrating on magnetisable and short-term exchanges is crucial in employment relationships. Conversely, relational contracts open-ended associations comprising significant investment by both employers and employees, commonly referred to as social exchanges formulate open relationships. Relational contracts are not only developmental but also value-laden nature.

The relational or transactional element of psychological contract has been studied primarily in the perspective of the interest in the changing employment relationship. For instance, analysts present a summary of emergent and past forms of the exclusive working relationship. The labour relations denote relocation from relational towards contractual transactional elements (Jensen, Opland and Ryan 2009). Employment relationships are more dependent on the potential of both employees and employers within a working environment as compared to inadequate working relationships. They are becoming more transactional in nature. Based on the tendency of having to pursue cost competitiveness, companies have thus transformed to be less committed to a relational work relation.

It seems intricate to procure empirically and conceptually psychological contracts that are just relational and transactional fundamentally. Besides, other differentiating elements concerning contract types appear to substantiate the lack of support for a different association between employees and employers in general. The differentiating factor between relational and transactional responsibilities seems to require a precise definition, based on several empirical studies. For instance, Conway and Briner (2005) failed to identify a clear support for the changeover from relational towards a transactional psychological contract. Other studies indicate that in the run up towards the status of the psychological contract, there is a limitation of this changeover. The flaw revolves around the development of different forms of employment relations to a comparatively little group of young and highly educated professionals.

Other researchers such as Lee and Faller (2005) argue that psychological contracts can have both relational and transactional characteristics, which can influence each other. There are cases where contracts that combine both long-term investments and transactional performance requirements between employers and employees are typical of relational agreements. Much evidence for the disparity between relational and transactional contracts is non-existent (Chaudhry, Coyle-Shapiro & Wayne 2010, p.250). In some cases, the evidence depends on this difference, for a recent work contract that necessitates a transfer from more relational features to transactional features. A related feature of the employment relationship often regarded of paramount importance involves perceived balance (Chaudhry &Tekleab 2013, p.159) The supposition is that workers feel compelled to respond to generate the supposed poise in the swap with the company.

Similarly, Suazo, Turnley and Mai-Dalton 2005; Jafri 2014; Guest, Isaksson & Witte 2010 present exchange relationships typology founded on perceived balance. According to the researchers, both obligation and balance levels are significant. These researchers developed their typology through performing a clustering procedure. The process involved the categorizing of persons into four distinct groups. The researchers found that the mutual level and high obligation categories were at most found. The findings provide support for the reciprocity model and that individuals typically look for balance in actions and exchange relationships. Therefore, endure the consequences of each other’s actions.

Psychological contract evaluation comprises assessments of contract violation, breach, and fulfilment. There exists psychological contract execution when an organisation or the employee upholds the terms of the contract. When employees cite an organisational failure in meeting the provisions of a psychological contract, a breach of contract occurs (Chaudhry &Tekleab 2013). If there is a purported violation of the psychological contract, and the perceived violation is noteworthy, it constitutes a contravention. An alleged breach denotes the cognition that an organisation failed to meet its end of the deal single or numerous responsibilities based on the psychological contract. Breaches represent the active and emotional state availed in particular conditions (Bal &Vink 2011). They indicate organisational failure in maintaining a psychological contract.

Breach does not necessarily have to result in violation. Nonetheless, it depends on the value of the alleged violated element, the reason, and the context within which the breach occurs (Bal &Vink 2011). Insight into the fulfilment level, violation and violation of the psychological contract and their reasons is paramount given their various consequences for employee behaviour. According to Tyagi & Agrawal (2010, p. 383), there exists a connection between civic virtue and psychological contract breach, withdrawal, turnover, and intention to remains. People may perceive that the development of guarantees depended on their understanding of the implicit or explicit information (Sleeth, 2013). Individuals developing the contracts may not even have the knowledge of the other party's contractual agreements and terms in addition to consents. Personal conduct is to a certain level affected by the psychological contract pegged on supposed future promises, which is a communiqué of future intent. A sequence of individual and organisational processes affects the evaluation and creation of the psychological contract.

Present empirical studies give the indication of effects of the staff members initial trust level and experiences with employers, past experiences, and personality. Additionally, they indicate the impact of contract status, age, and careerism on the psychological contract. The factors as noted above should guide the mental contracting process of an organisation. The elements are of importance because they represent employee interests in addition to the opinions of employers. George (2009) contends that there could be variations across employee groups concerning breaches. A common variation revolves around age(Hicks & Monroy-Paz 2015, p.70).Apparently, employees of a younger age are less likely to anticipate staying with a single employer for extended periods compared to older workers(Hicks & Monroy-Paz 2015, p.70). Consequently, their reactions to breaches will be minimal if the company downsizes.

Additionally, other studies limit their examination to employees working on a full-time basis (Wöcke& Sutherland, 2008; Veld, Paauwe &Boselie, 2010; O'Donohue, Hutchings & Montes 2011). Employees may have a different perception of their psychological contract based on contract's concentration on flexibility and other methodologies of organisational identity. Contract status plays a significant role in the way persons perceive the exchange connection and their reactions to the enticement they receive from that link (Lee et al. 2011). Contributions, fulfilment, and inducements in fresh worker psychological contracts motivate them towards the active realization of duties. Consequently, because dependable staff members spend few hours in an organisation, there is a possibility of limited knowledge concerning the functions of the organisation. Employers may end up having great lenience levels for organisational policies than employees employed on a permanent basis have (Bal &Vink 2011). The opinions of both full time and part time employees should guide organisational psychological contracting. Appropriate incorporation of employee ideas will result in the creation of dynamic employment relation, which in turn will enhance the actual attainment of organisational goals.

Despite the fact that individual characteristics control psychological contracting, the contracts widen in relationships between organisations and individuals (Hussain, 2013). The research additionally indicates that organisational structures and, particularly, HRM are vital interaction sources with staff members. Consequently, they have an effect on psychological contract evaluation and formation in personnel and HRM departments of companies. Organisational structure affects not only the policy-making function of firms but also business practices and actions. Therefore, the organisational structure remains vital to the determination and evaluation of psychological contracts.

Events expressing plans indicating future contributions and incentives usually occur during HRM functions such as promotions, hiring, and socialization. The plans happen during organisational changes. According to Payne et al. (2015, p.50) maintenance and creation of the psychological contract between workers and their organisations is a significant HRM function. HRM activities communicate future promises intent in exchange for employee contributions. Subsequently, they influence the evaluation and formation of the psychological contract. O'Donohue, Hutchings & Montes (2011), argues that every HRM activity denotes a choice by the organisation. The options represent the anticipations of staff members.

Promises are integral to the day-to-day HRM actions. HRM practices and policies, therefore, need to have a noteworthy consequence on the assessment and shaping of employer and employee obligations. Researchers argue that among others, the process of performance appraisal gives a vital moment for communicating the psychological contract (Wöcke& Sutherland 2008). Some HRM activities similar to performance evaluations and recruitment remain crucial to delivering the competencies and skills that the organisation anticipates from its staff members. Furthermore, they denote the expectations and promises of employees.

Characteristically, psychological contracts can result from the contact between employees and the organisational environment by methods related to HRM. In spite of the fact that contracts differ from one operator to the other. Factors such as company variables and elements of a particular HRM design, the size of organisational field have an effect on the evaluation of contracts. They also affect development through the signs and signals they send to staff members. Besides, message consistency sent by companies remains vital regarding the psychological fulfilment contracts.

Conclusion

The underlying concepts and theory in research regarding psychological contracts revolves around the economic and social exchange, reciprocity and balance. Depending on insights drawn from the Social Exchange Theory and other related concepts of reciprocity and balance, employees identify the obligations of their organisations. Therefore, if requirements contract with their individual contributions, they will subsequently react by adjusting their behaviour and attitudes. In this regard, psychological contracts depend on the perceived behaviour of the other party. Based on this viewpoint, organisational practices related to HRM elements and organisational structure represent communicating models that are applicable and relevant to employee's evaluation. HRM components and organisational structure evaluates the level of breach of the psychological contracts of employees. The practices possess the most favourable influence on psychological contracts when these events promote a consistent and rational organisational sign. The arrangement between various perceived messages or signals sent by an organisation and alignment among company practices remain vital to organisational reputation and performance. These methods usually revolve around specified psychological contract contexts.