Understanding the Psychological Contract in the Workplace

Understanding the Psychological Contract in the Workplace

June 17, 2024

The concept of the psychological contract has increasingly gained attention in organisational behaviour and human resources management.

Unlike formal, written contracts, the psychological contract comprises unwritten expectations and beliefs about the mutual obligations between an employer and an employee.

This intangible agreement significantly influences workplace dynamics, employee satisfaction, and the over success of an organisation.

Defining the Psychological Contract

The psychological contract is an implicit set of expectations and promises that are believed to exist between employees and their employers.

These expectations can often include job security, career progression, respect, and work-life balance for the employee, while employers expect loyalty, performance, and compliance from their employees.

They can also be fundamentally intrinsic expectations like I will get to work and be able to park! My handbag won’t be stolen if I leave it in the kitchen whilst I take a phone call in the office! When I meet with my manager he will look at me rather than read a script!

Although these expectations are not legally binding, they are powerful drivers of behavior in the workplace.

Formation and Evolution

The formation of a psychological contract begins at the recruitment stage when potential employees interpret messages about the organisation’s culture and values.

It continues to evolve based on daily interactions, the organisation’s policies and procedures, and changes in the external business environment. Importantly, the psychological contract is not static; it changes over time as the needs and expectations of both parties evolve.

Importance of the Psychological Contract

The primary significance of the psychological contract lies in its ability to affect employee engagement and productivity.

A healthy psychological contract, where there is a perceived balance between employee contributions and employer rewards, can lead to increased job satisfaction, loyalty, and commitment. Conversely, breaches or violations of the psychological contract can result in feelings of dissatisfaction, mistrust, and reduced motivation, which might ultimately lead to increased turnover rates.

Breach and Violation

A breach of the psychological contract occurs when one party perceives that the other has failed to fulfill their obligations, even if unintentionally. For example, if an employee believes they were passed over for a promotion without a fair justification, it may feel like a breach of the psychological contract. Such breaches can lead to a decrease in employee engagement and productivity. It can also lead to your ‘thinking performers’ leaving.

Managing the Psychological Contract

Effective management of the psychological contract involves clear communication, honesty, and mutual respect.

Employers should strive to provide clear and realistic expectations during hiring and induction processes and maintain open lines of communication to address any changes that may affect the employee’s role or expectations.

Regular feedback sessions and performance reviews can also help manage the psychological contract by aligning perceptions and addressing any discrepancies in mutual expectations.

Managers should ask themselves, “what will this do for the psychological contract?” Enhance it or Destroy it.


In summary, the psychological contract is a crucial yet often overlooked element of employment relationships.

It plays a fundamental role in shaping the behaviour and the overall atmosphere of the workplace.

By understanding and effectively managing this contract, employers can enhance employee satisfaction and loyalty, which are essential for long-term success and stability.

For employees, being aware of the psychological contract helps in aligning personal goals with the organisation’s objectives, creates a happy and more fulfilling professional life.

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