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Psychological Contract Theory

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DOI: 10.1002/9781118785317.weom110075

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 Encyclopedia of Management
Theory
Psychological Contract Theory

Contributors: Denise M. Rousseau, Maria Tomprou & Samantha D. Montes

Edited by: Eric H. Kessler
Book Title: Encyclopedia of Management Theory
Chapter Title: "Psychological Contract Theory"
Pub. Date: 2013
Access Date: April 27, 2016
Publishing Company: SAGE Publications, Inc.
City: Thousand Oaks
Print ISBN: 9781412997829
Online ISBN: 9781452276090
DOI: http://dx.doi.org/10.4135/9781452276090.n199
Print pages: 635-639
©2013 SAGE Publications, Inc.. All Rights Reserved.
This PDF has been generated from SAGE Knowledge. Please note that the
pagination of the online version will vary from the pagination of the print book.
SAGE SAGE Reference
Copyright © 2013 by SAGE Publications, Inc.

According to psychological contract theory (PCT), psychological contracts are

individual-level cognitive structures that reflect how people think about their exchange
relationships. More specifically, a psychological contract is individuals’ systems of
beliefs regarding the obligations that exist between themselves and exchange partners.
Such obligations motivate current judgment and behavior through anticipation of the
exchange's future. Psychological contracts are important to management scholars and
practitioners because they influence how individuals think, feel, and behave in
organizations, thus providing the basis for coordination and cooperation among
employees, managers, executives, and business owners. This entry begins with a
description of the fundamental tenets of PCT and is followed by a discussion of the
historical roots and later significant contributions that led to current-day understanding.
Empirical support for the theoretical propositions of PCT is then reviewed, and the
practical implications of psychological contracts for management are discussed.

Fundamentals

Generally, a psychological contract represents any exchange relationship wherein two

parties trade things of value. Applications of PCT exist in online marketing, distributor-
supplier relations, information systems outsourcing, law, marital relations, and doctor-
patient relations. The greatest theoretical and empirical attention has been directed at
the employment relationship, particularly from the employee's perspective, the focus of
this entry.

Several theoretical domains influence PCT, including cognitive, social, and

organizational psychology, law, and economics. In organizational research, PCT is
positioned between broad theories such as social exchange and social information
processing and more discrete theorizing regarding constructs such as perceived
organizational support (an employer's contribution) and organizational commitment (an
employee's contribution). PCT is thus a midrange theory addressing how individuals’
beliefs influence their judgments, affect, and behavior in exchange arrangements.

PCT is related to, but distinct from, theorizing on general employee expectations.
Although psychological contract beliefs can be influenced by pre-employment
expectations, the psychological contract reflects a wider array of obligation-based
beliefs, including perceived promises. As such, reactions to psychological contract
breach (failure to fulfill psychological contract obligations) are theorized to be much
stronger than are reactions to unmet expectations, an effect meta-analytic findings
support. Breach (and its positive counterpart, psychological contract fulfillment) has
stronger effects than do unmet expectations on job satisfaction, turnover intentions, and
performance.

Underlying Rationale of Psychological Contract Theory

The qualities and dynamics of psychological contracts are rooted in psychological

principles. Psychological contracts are developed through an individual's social and
organizational experiences. At the same time, their cognitive architecture is shaped by
limitations in human cognitive capacity (i.e., bounded rationality). For instance, people
can pay attention to only a portion of the information in their environments. They do so
selectively, attending to highly salient or easily accessible information (e.g., employees
tend to believe that their immediate manager speaks for the organization). They also

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tend to interpret events in a manner confirming their existing beliefs, thereby interpreting
the exchange through the lens of their psychological contract. This makes the
psychological contract a means of ensuring continuity and predictability in the
employment relationship.

Psychological contracts are dynamic. Once formed, they tend to be relatively stable,
operating at a high-order, subconscious level. Nevertheless, psychological contracts
are subject to more systematic cognitive processes and revision as circumstances
change. On-the-job experiences such as unexpected events (e.g., a surprise promotion
or demotion) and observations (e.g., coworker experiences) can lead to new beliefs
being integrated into an individual's psychological contract to influence subsequent
judgments and behavior. People must actively alter the way they think about the
exchange in order to revise the psychological contract.

Content and Dynamics of the Theory

Psychological Contract Beliefs

Employees tend to join organizations with preconceived notions about their obligations
(e.g., loyalty, operate in best interest of the company) and their employer's obligations
in return (e.g., skill development opportunities, a competitive wage). Perceived
employer promises from recruiters and others impact the initial structure of the
psychological contract. However, neither worker nor employer can spell out all the
details of what might be an indefinite employment arrangement. As a result,
psychological contracts tend to evolve over time as a function of new salient
information. Recruiting practices generally have less impact on employees’
psychological contracts than do their postentry experiences. As such, employees’
psychological contract beliefs can be influenced by various sources over the course of
employment, including recruiters, supervisors, formal policy, human resource practices,
and coworker experiences within the organization.

Whatever the source, fundamental to PCT is that psychological contract beliefs reflect
perceived reciprocal obligations between the employee and the organization. In turn,
these perceived obligations affect the parties’ feelings, attitudes, and behaviors toward
each other. Types of psychological contract obligations can vary considerably across
workers, firms, and even cultures. They can be limited to wholly economic terms as in a
transactional psychological contract (e.g., an hourly wage for a temporary worker who
ships packages over the holidays) or be as complex and broad as personal support
and developmental investment as in a relational psychological contract (e.g.,
characteristic of high-involvement work by research and development scientists).
Commonly, psychological contracts contain elements of each.

Regardless of content type, ideally, the psychological contract should be perceived as

high in mutuality (the parties hold common beliefs regarding contract obligations),
reciprocity (the parties report commensurate obligations), and alignment (the
psychological contract reflects balanced reciprocity between employee and employer
obligations). These characteristics are associated with positive evaluations of
psychological contract fulfillment and positive employee reactions. They can be
cultivated through open communication and trust between the parties and by ensuring
that contract-relevant signals are consistent. Creating and sustaining such
psychological contracts remains an enduring organizational challenge.

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Psychological Contract Evaluation

Emotional and attention-grabbing events trigger systematic, effortful cognitive

processing. In particular, direct experiences with supervisors and managers are salient,
providing contract-relevant information, from the enjoyment of promised recognition to
the frustration experienced when promises go unfulfilled. Because psychological
contracts unfold over repeated cycles of exchange, as a general principle, how
exchange experiences are evaluated impacts the parties’ perceived future obligations.
An employee who believes that the employer has fulfilled prior commitments is more
likely to view his or her employment as having a relational focus (e.g., open-ended,
socioemotional obligations), making him or her more likely to react positively to
requests or opportunities to contribute to the employer in new ways. On the other hand,
lower past fulfillment is likely to diminish subsequent feelings of obligation toward the
other party, prompting revision of certain beliefs. Failure to meet one's obligations
typically increases the other's suspicions and monitoring and as such, leads to a
decline in the perceived value of the employment arrangement.

Evaluations of psychological contract fulfillment impact various employee attitudes,

affect, and behaviors beyond its impact on future obligations. Generally speaking,
psychological contract fulfillment is associated with positive outcomes, whereas
psychological contract breach is related to negative outcomes for both employees and
the firm. A psychological contract breach refers to the judgment that a party has failed to
fulfill its obligations (e.g., an employer who fails to promote a high-performing worker
after agreeing to do so). In itself, the experience of breach is not rare, as psychological
contracts can be evaluated as having been unfulfilled in varying degrees. PCT
distinguishes breach, the judgment of low contract fulfillment, from an act of “violation—
that is, the willful failure to honor one's commitments. Violation is associated with
negative emotional reactions (e.g., anger, outrage, disappointment, frustration),
collectively referred to as feelings of violation. Feelings of violation and breach, though
interrelated, are distinct. The extent to which psychological contract breach results in
feelings of violation depends on how individuals interpret the breach. When deemed
under the control of the organization, breaches will be associated with strong feelings of
violation.

Several factors influence perceptions of and reactions to psychological contract breach.

First, breach tends to be more prevalent in employment arrangements with limited
interactions between employee and organizational agents (as in a lack of socialization
or mentoring activities). When left to learn about the organization from their peers more
informally, incidences of breach tend to be greater. Second, breaches that engender
emotions are more likely to be noticed, an effect associated with certain personality
traits. Individuals higher in neuroticism or an external (rather than internal) locus of
control tend to perceive higher levels of breach. Personality also plays a role in the
severity of postbreach reactions. Individuals higher in equity sensitivity or internal locus
of control tend to respond with stronger feelings of violation. Finally, certain factors
within the control of the organization can mitigate reactions to breach. Cultivating high-
quality socioemotional relationships, offering retribution in the form of idiosyncratic
deals (e.g., special perks for that particular employee), and providing “social accounts”
such as explanations justified by resource constraints, can all help reduce negative
employee reactions to breach.

Evolution

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Although ideas consistent with PCT can be traced back to the early 1900s (e.g.,
equilibrium theory, the contribution-inducements model), the first formal application of
the psychological contract construct to organizational settings is credited to Chris
Argyris in 1960. He used the term psychological work contract to describe an implicit
agreement between employees and their foremen that, when honored by the foremen,
ensured continued employee effort and performance. Harry Levinson and colleagues
subsequently defined the psychological contract as a series of mutual expectations,
often implicit in nature, that governed relationships. Both Argyris and Levinson
emphasized human needs as the primary driver of psychological contract processes
and on maintaining positive well-being. Building on earlier work, Ed Schein offered
predictions about the effects of a correspondence between employee and employer's
expectations (later empirically supported by John Kotter) and called attention to the
employer's perspective regarding the employment arrangement. Despite these initial
developments, active research regarding the psychological contract did not commence
until the construct was reconceptualized by Denise Rousseau in 1989.

Rousseau's seminal article marks a transition in the development of the psychological

contract construct and PCT. She defined the psychological contract as people's beliefs
regarding the terms and conditions of a reciprocal exchange agreement between
themselves and another. Setting this conceptualization apart from earlier ones was her
claim that psychological contract obligations were promissory in nature and that the
exchange of these promises between employees and employers (not employee needs)
was the driver for the development and maintenance of the psychological contract.
Rousseau also cast psychological contracts as an individual-level phenomenon
(making the construct more readily testable) and introduced the notion of psychological
contract violation. Her 1995 book developed PCT more fully. This work coincided with
significant change in employment reflecting the rise in global competition, economic
deregulation, and a trend toward organizational restructuring and downsizing. The need
to understand and manage such changes, coupled with Rousseau's work on PCT,
stimulated a flurry of empirical research and further theory building.

Much subsequent work on PCT has been survey based, predominantly from the
employee perspective, and focused on contract content or the outcomes of breach.
There remains inconsistency regarding the types of beliefs that constitute the
psychological contract, particularly with regard to its operationalization in research.
Some scholars have focused on promises, whereas others focus on non-promissory-
based expectations or fail to distinguish clearly among promises, obligations, and
expectations. Regardless, the distinction between relational and transactional contracts
has garnered theoretical and empirical attention over the years. Researchers have
examined theoretical predictions, often but not always supported, that relational
contracts lead to more favorable outcomes than do transactional contracts. The
transactional-relational distinction and its effect on important employee behaviors have
been extended beyond North America to cultures such as China, Japan, and
Singapore. Additionally, there has been widespread testing of Elizabeth Wolfe
Morrison and Sandra Robinson's 1997 model of psychological contract violation
wherein the constructs of unmet expectations, psychological contract breach, and
feelings of violation were distinguished. Propositions related to the mediating and
moderating mechanisms put forth in their model have guided empirical work that
culminated in a meta-analysis by Hao Zhao and colleagues, demonstrating the strong
negative effects that breach of relational contracts have on employee affect, attitudes,
and behaviors.

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Other advances to PCT have occurred over the years. For instance, basic principles of
social exchange theory (e.g., norm of reciprocity) and employment relationships in
general have been integrated into psychological contract research. In a published
exchange, David Guest and Denise Rousseau argued critically regarding tenets of
PCT, pushing scholars to question and empirically test and thereby clarify its underlying
assumptions. Violet Ho along with her colleagues expanded understanding of the key
players of the psychological contract to include people other than the employee and
employer. Specifically, a social network perspective has been found to inform how
employees evaluate their psychological contract. J. Stuart Bunderson and Jeffrey
Thompson expanded the relational versus transactional content focus of modern-day
psychological contracts to include ideology, a dimension reflecting the obligation to act
in accordance with core values (e.g., professionalism or socially responsible causes).

Neil Conway and Rob Briner undertook a critical review of the psychological contract
literature. They questioned whether the beliefs making up the psychological contract are
purely promissory, or whether they might also include expectations based on sources
other than promises made by the employer. Expanding on Rousseau's original work,
research by Mark Roehling and by Samantha Montes and David Zweig suggest that the
beliefs that constitute the psychological contract may not be limited to perceived
promises. Conway and Briner also called for research to begin examining
psychological contracts as a process of reciprocal exchange. Researchers have begun
examining changes in psychological contracts over time. As such, PCT is slated for
further development as it incorporates new research findings.

Importance

Psychological contract research has largely supported PCT's main propositions.

Traditionally, it has relied on a narrow range of methods—that is, cross-sectional and
survey-based. Concern exists regarding its conflicting measures of breach, use of
difference scores versus direct measures of breach, and the confounded effects of
promises and delivered inducements. Stronger methods are being introduced to the
study of psychological contracts. Conway and Briner introduced the use of diary
methods. Lisa Lambert has demonstrated the advantages of examining the separate
and joint effects of promised and delivered inducements using sophisticated statistical
methods. Researchers also have begun employing longitudinal designs to capture
causal relations and changes in psychological contracts over time, and others have
begun using experimental designs to test basic assumptions of PCT. Use of these
advanced methodologies continues to improve the theoretical insights reported
findings yield.

Once thought of as a useful heuristic to describe implicit employment agreements, the

psychological contract and the theory it has spawned represent an evolving theoretical
map to establishing and maintaining positive employee-employer relationships—and to
identifying and overcoming dysfunctions in employment. The impact of PCT has been
far-reaching in management training and practice in North America, Europe, and
beyond. Textbooks in organizational behavior, marketing, and human resource
management typically include sections devoted to the psychological contract to help
management professionals understand the dynamics of exchange relationships and
how employment relationships affect attitudes and behaviors within organizations.
Educators and administrators use the construct of the psychological contract to
describe and manage relationships among faculty, students, and staff within

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universities.

Perhaps because of professional education, increasing numbers of managers actively

apply PCT to the workplace to establish clarity, manage expectations, foster positive
relationships, and maintain positive attitudes and productive behaviors among
employees. David E. Guest and Conway report that 36% of 1,300 human resources
managers surveyed in the U.K. use the psychological contract as a tool in managing
their employment relationships, and a full 90% agreed that it is a useful tool. PCT has
helped managers understand that there is more to maintaining a positive relationship
with employees than sheer economic exchange. Indeed, in times of economic crisis
and belt-tightening, shifting promissory obligations from the more transactional to the
more relational sort can help retain committed, high-performing employees while
incurring lower overall costs. PCT also helps managers understand the impact of
implied promises and the implications of failing to fulfill such promises. Concurrently,
generational and societal changes are introducing new facets to the psychological
contract of employment, building on worker concerns with life balance and the social
consequences of their employer's business strategy and actions.

• psychological contracts
• contracts
• staff
• psychological contract theory
• employment relationships
• employers
• contract management

Denise M. Rousseau, Maria Tomprou, and Samantha D. Montes

http://dx.doi.org/10.4135/9781452276090.n199
See also

• Human Resource Management Strategies

• Leader–Member Exchange Theory
• Organizational Socialization
• Social Exchange Theory
• Trust

Further Readings
Conway, N., & Briner, R. (2005). Understanding psychological contracts at work: A
critical evaluation of theory and research. New York, NY: Oxford University Press.
http://dx.doi.org/10.1093/acprof:oso/9780199280643.001.0001
Guest, D. E., & Conway, N. (2002). Communicating the psychological contract: An
employer perspective. Human Resource Management Journal, 12, 22–39.
http://dx.doi.org/10.1111/j.1748-8583.2002.tb00062.x
Lambert, L. S. (2011). Promised and delivered inducements and contributions: An
integrative view of psychological contract appraisal. Journal of Applied Psychology, 96,
695–712. http://dx.doi.org/10.1037/a0021692
Montes, S. D., & Zweig, D. (2009). Do promises matter? An exploration of the role of
promises in psychological contract breach. Journal of Applied Psychology, 94, 1243–
1260. http://dx.doi.org/10.1037/a0015725
Morrison, E. W., & Robinson, S. L. (1997). When employees feel betrayed: A model of
how psychological contract violation develops. Academy of Management Review, 22,

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226–256.
Roehling, M. V. (1997). The origins and early development of the psychological contract
construct. Journal of Management History, 3, 204–217.
http://dx.doi.org/10.1108/13552529710171993
Rousseau, D. M. (1989). Psychological and implied contracts in organizations.
Employee Responsibilities and Rights Journal, 2, 121–138.
http://dx.doi.org/10.1007/BF01384942
Rousseau, D. M. (1995). Psychological contracts in organizations: Understanding
written and unwritten agreements. Thousand Oaks, CA: Sage.
http://dx.doi.org/10.4135/9781452231594
Rousseau, D. M. (2011). The individual-organization relationship: The psychological
contract. In S. Zedeck (ed.), Handbook of industrial and organizational psychology (Vol.
3, pp. 191–220). Washington, DC: American Psychological Association.
Zhao, H., Wayne, S. J., Glibkowski, B. C., & Bravo, J. (2007). The impact of
psychological contract breach on work-related outcomes: A meta-analysis. Personnel
Psychology, 60, 647–680. http://dx.doi.org/10.1111/j.1744-6570.2007.00087.x

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