Why businesses can’t afford to forget the psychological contract.

The most commonly understood contract in the workplace is the employment contract. We are all familiar with this legal document. It’s what sets out an employee’s hours of work, salary, leave entitlements and more. However, it is not the only contract employers commit to when hiring a new team member. Every employer also creates a psychological contract when recruiting or managing someone in the company. While not a written agreement, this contract serves just like an employment agreement and can be breached. If this happens, the employer-employee relationship breaks down, and can often lead to costly outcomes for all parties involved. To avoid this, it is critical for employers to understand the psychological contract and acknowledge their role in strengthening it.

What is a psychological contract?

At its core, the psychological contract is a set of unwritten implied expectations between the employer and the employee. For the employer, it refers to believing that the employee is who they say they are with the skills, experience, and the ability to do the job effectively. For the employee, it is the expectation that the advertised job is a true reflection of the role and that the organisation (its purpose, vision and culture) is how it is portrayed in the recruitment and selection process. 

Costly risk of misalignment

Unfortunately, the importance of the psychological contract is often forgotten or misunderstood. Too often, the employee enters into a role that is different to what the employer initially advertised. Usually the role has been oversold, leaving the new team member feeling misled and disappointed. For existing employees, issues can occur when a manager fails to deliver on a promise for training, development and support. Employers may try to justify this arguing that the misalignment can be managed over time as a person grows into the role, however once the implied promise is broken, it is incredibly challenging to repair the trust once shared. The consequence of this relationship breakdown is a costly knock-on effect to business performance as resources and time are spent fixing employee engagement through performance management or team programs. The worst case scenario is that the dissatisfied employee leaves the company, which significantly drives up the cost of recruiting.

Improvement begins at recruitment

Whether businesses like it or not, the psychological contract exists and it’s essential to be proactive about it. Like any legal agreement, there needs to be a process of negotiation as well as due diligence. This process begins at the recruitment and selection phases. At the recruitment stage, employers need to be thorough about evaluating the job that is required. This is done through defining the purpose, duties and responsibilities of the role, as well as the necessary required knowledge, skills and attributes of the ideal candidate. It is critical and essential that this foundation is completed correct as it is often completed poorly due to the need to hire quickly. The information can then be used to develop a realistic job preview for the candidate to give them a better understanding of what their role will be within the organisation. The preview can involve outlining both the positive and negative aspects of the job, letting candidates meet existing employees without being supervised, and even letting them spend time in the office to see how the workplace operates. Once at the hiring stage, it is up to employers to do their due diligence on the candidate through actions such as structured interviews, reference checks, third party evaluations, work sample tests  and psychometric assessments . 

Ongoing alignment

It’s essential to note that the psychological contract is never finalised. Once trust is gained, it is important for employers to maintain and reinforce it throughout an employees career with a company. Whenever major policy changes are made within the workplace, managers should have a transparent discussion with the employee to ensure there is no misalignment as a result of the changes. Regular discussions about what is being exchanged will help strengthen the psychological contract and keep employees feeling valued. This will boost motivation as employees will have greater trust that their performance and dedication to the company will be rewarded.

The reward for getting it right

While the subjective nature of the psychological contract can be challenging to manage, the reward for getting it right is well worth it for both employees and employers. Creating alignment with employees will lead to stronger workplace relationships, increased performance, and more engaged and motivated employees. Most significantly, employees will have greater job satisfaction and loyalty to the company, saving future costs on rehiring and retraining.