(Read in 3 minutes)

In today’s dynamic and competitive business environment, organizations are constantly seeking ways to attract and retain top talent. While traditional employment contracts outline the legal obligations between employers and employees, there exists an unwritten agreement that plays a crucial role in shaping the employee experience – the psychological contract. Coined by management professor Dennis Rousseau in the 1990s, the concept of the psychological contract refers to the mutual expectations and anticipations between employers and employees. This article delves into the significance of the psychological contract in the workplace and explores how it can be leveraged to enhance employee engagement and organizational success. 

The Power of Expectations

When an individual joins an organization, they bring with them a set of expectations regarding what the organization can provide and what they need to contribute in return. These expectations are often unspoken but deeply ingrained in each individual’s psyche. The psychological contract acts as an “exchange agreement,” dictating the terms of this mutual understanding. 

The psychological contract plays a pivotal role in determining an employee’s level of commitment and decision to stay or leave an organization. It goes beyond the traditional manager-subordinate relationship, encompassing a tacit agreement where the manager represents the company and strives to understand and fulfill the needs of their subordinates, while the subordinates reciprocate through dedicated efforts. 

Shifting from Management to Transactional Leadership

This manager-subordinate relationship is often characterized as “using transactions instead of management.” When employees realize that they are working to fulfill their own needs rather than merely meeting the company’s demands, they adopt a proactive mindset. Consequently, managers no longer need to micromanage or constantly monitor their subordinates’ punctuality or work ethic. Instead, employees take ownership of their responsibilities and willingly engage in their work. 

The Role of Managers in Establishing the Psychological Contract

As a manager, you serve as the bridge between the company and its employees, responsible for fostering an environment where a healthy psychological contract can thrive. A famous saying at Procter & Gamble, my former employer, encapsulates this sentiment: “Employees join because of the company, but leave because of their managers.” This highlights the critical role that immediate supervisors play in employee management. 

Establishing an effective psychological contract requires seamless communication of three types of information: 

1. Understanding Subordinates’ Needs: 

To create a mutually beneficial psychological contract, managers must first gain insight into what their subordinates desire. This goes beyond surface-level needs such as salary and benefits, delving into factors like career growth opportunities, work-life balance, recognition, and a sense of purpose. 

2. Highlighting Company Offerings: 

Managers must effectively communicate the value proposition that the organization offers to its employees. This includes showcasing opportunities for skill development, a supportive work culture, competitive compensation packages, and avenues for advancement. 

3. Clarifying Expectations: 

Clear communication of expectations is crucial for establishing a strong psychological contract. Managers should articulate their performance expectations, goals, and objectives while ensuring alignment with the organization’s vision and values. This clarity empowers employees to understand what is expected of them and motivates them to strive for excellence. 

Leveraging the Psychological Contract for Organizational Succes

When nurtured effectively, the psychological contract becomes a powerful tool for enhancing employee engagement, satisfaction, and overall organizational success. Here are some key benefits: 

1. Increased Employee Commitment: 

A well-established psychological contract fosters a sense of commitment among employees. When individuals feel valued and see their needs being met, they are more likely to invest their time and effort into their work, leading to improved performance and productivity. 

2. Enhanced Retention Rates: 

Employees who perceive a strong psychological contract are less likely to seek opportunities elsewhere. By aligning organizational offerings with individual needs and expectations, managers can foster loyalty and reduce turnover rates. 

3. Improved Job Satisfaction: 

When employees perceive that their psychological contract is being fulfilled, they experience higher levels of job satisfaction. This positive emotional connection translates into increased motivation, creativity, and overall job performance. 

4. Strengthened Manager-Employee Relationships: 

The establishment of a healthy psychological contract promotes trust and open communication between managers and their subordinates. This leads to stronger relationships built on mutual respect and understanding. 

Final Thoughts

The concept of the psychological contract offers valuable insights into the dynamics between employers and employees in the workplace. By understanding and leveraging this unwritten agreement, managers can create an environment that fosters employee engagement, commitment, and satisfaction. Effective communication, empathy, and clarity regarding expectations are essential in establishing a strong psychological contract. By prioritizing the psychological contract, organizations can cultivate a motivated workforce that contributes to long-term success. 

---

Have a management or leadership issue, question or challenge? Reach out to Mister Sivann’s Newsletter – Mister Sivann & The Answer. on LinkedIn or on blog at sivann.com/blog/