A. Define the psychological contract and discuss the obligations of the contract currently in place.
are defined as an individual’s beliefs, shaped by the organization,
regarding the terms and conditions of a reciprocal exchange agreement between individuals and
Social exchange theory
, which argues that people enter into relationships in which not only
economic but also social obligations play a role and that people are most comfortable when the
exchange is balanced.
The current employment contract has changed from long-term employment relationships and
paternalism to employment based on business needs. Employees are rewarded for skills and
performance (with higher pay in some cases), rather than tenure, and they are responsible for
maintaining their own employability via personal reskilling and retraining. Since employers
cannot offer long-term employment, they provide valuable employees with interesting and
challenging work and training or risk losing them to their competitors. In return for high pay and
stock options (which represent shared risk exposure), many employers expect long hours of hard
work, flexibility, and commitment from highly skilled professionals, but they have less
expectation of employee loyalty. For employees, there has been a simultaneous loss of job
security accompanied by increasing demands for performance, flexibility, and innovation. This
has led to greater job-related stress and the dawning realization that, whether they wanted to or
not, many employees have become “free agents” who have to look out for their own interests.
B. Explain the importance of the psychological contract and what happens when it is violated.
Broken psychological contracts occur when someone fails to fill an obligation, either by reneging
on a promise or due to incongruence in how the employee and employer interpret the contract.
Contract breaches change their relationship 6 and also affect employee attitudes and behavior.
The trust and good faith of the employer–employee relationship is destroyed and cannot easily be
rebuilt. Violations cause less damage to the relationship if employees believe that employers were
unable, rather than simply unwilling, to keep a promise. When a psychological contract is broken,
intense emotional reactions such as moral outrage, shock, indignation, betrayal, resentment, and
anger result. The disillusionment over broken psychological contracts can lead to decreased
employee job satisfaction, performance, commitment, attendance, discretionary effort, and desire
to continue with the organization, and increased organizational cynicism.