Psychological Contract

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By CPA Samson Obwanga

Management Strategy to Consider for Organizations’ Growth

Organizations’ relationships between the employer and the employees are usually based on a formal contract, which spells /states the terms and conditions of employment and corresponding duties and responsibilities between the two parties (i.e., employer and employees). Besides the official contracts, which are ordinarily written and signed, informal relationships exist in organizations that are not written and are based on perceptions, expectations, and intended obligations, which are called psychological contracts between the employer and workers. 

The psychological contract may be formed during the initial periods of employee recruitment or engagement or within the employment set-up once the formal contract has been entered into and expectations are created by the organization’s employment. In the initial phases of recruitment, the employee envisions what the organization will provide outside the terms of their job, while the employer also foresees what is expected from the employees, and these may be during the interviews or engagement periods.

 Additionally, on the engagement or absorption of the employees in the organization, the mutual co-existence in the working relationship and encounters progressively develop expectations by both the employee and the employer besides the formal contract, and these constitute psychological contracts. Psychological contracts may emanate in periods when the organization is experiencing changes, which may be structural or technological, like changes in product lines, adoption of new technology, mergers and acquisitions, and organizational structure changes. In these circumstances, employees may have expectations of job retention and security, promotions, and the employers may expect forecasts on improved productivity arising from employees’ cooperation, trust and understanding.  Psychological contracts may arise from prolonged relations between both parties or transactions undertaken as part of work in the organizations for which expectations and obligations of pay, loyalty, personal development, prudent resources use, and quality may arise.

Psychological contracts play a significant role in the organization’s long-term growth or strategic direction and need to be part of the organization’s management. This defines the level of trust and commitment, which, if well managed, can propel the organization to achieving its short- and long-term strategies.

Building trust and confidence between workers and employers will address and reduce strikes, delays, and industrial unrest, which, from the management perspective, create stability for growth and commitment in the workplace and encourage sustained performance, which leads to high productivity.

The employee’s perception of job security, possible benefits in career development, fair treatment and supervision, fairness in rewards, courteous treatment, and employer reciprocity combined with the employer’s willingness to offer these and also to expect employee commitment will lead to a harmonious relationship which benefits both the employee and the employer in a mutual way that result in the enhancement of performance, stability, growth and productivity of the organization.

Failure to manage psychological contracts may create high employee turnover, low morale, slow work processes, delays in the implementation of programmes, and mistrust, which consequently negatively impact the organization’s performance and growth. If not well managed, psychological contracts in the form of expectations and obligations can lead to damaged reputation, organizational disputes and conflicts, frustrations, unethical behaviours and cultures, and lack of creativity and innovation. There may be poor use of resources, loss of competitiveness of products and services of the organization, lack of loyalty and unfulfilled promises, poor service delivery, low revenue realization and expenditure wastages, poor distribution and sales, mistrust and lack of confidence, and process delays.

The management of psychological contracts for enhanced growth may include regular communication and feedback mechanisms, team-building workshops, assurance of continued future improvements, job security, and prospects of employee/employer enhancement and development. Proper management of psychological contract also requires setting clear responsibilities, roles and expectations in the periods of recruitment; honouring promises by both parties on issues of working hours, career development, and flexibility in work processes; regular and continuous consultations between the employer and employees; providing feedback on appraisals, assessments, and work performance; respect to organizations values, transparency and honesty in handling both parties expectations, fairness in rewards and promotions, regular training and skills improvement, support on family and personal challenges, confidentiality and data protection, enhancement of positive brand and image of the employer and employees. All these, aim to improve employment relationships beyond the official contract and to support the organization’s vision, goals, and plans.

Other management mechanisms include empathy and understanding, fair supervision, enhanced benefits and rewards not provided in employment contracts, coordinated work approach, and enhanced worker-family life balance and effort recognition. 

The need for the management of psychological contracts and embracing the same as part of the management process needs to be considered by identifying the existing expectations and obligations, challenges and mechanisms through which these can be managed to achieve the organization’s goals and a satisfied workforce.

Obwanga and Associates, Certified Public Accountants Member of ICPAK National Practitioners Development Committee (PDC) [email protected]


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