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Outline

A contract is an exchange agreement between parties. In employment, psychological contracts are drivers of employee behavior with a strong influence on organizational outcomes.

Abstract

Introduction
What Is a Contract?
Different Types of Contracts
Contracts in Employment
Consequences of Violations of Contracts
Cross-National Differences
Implications

1. Introduction

Contracts are the cornerstones of our society. Contracts about exchanges are a common feature of societies all over the world. We seem not to be able to do without contracts. In our private lives, we have marriage contracts and other forms of contractual arrangements that people make when they decide to live together. In our social lives, we have contracts in the form of sports club memberships, political party memberships, and the like. We make contractual exchanges when buying houses, booking holidays, paying for insurance, and so on. At work, we have labor contracts. Contracts play a very prominent role in our daily lives. One could say that, in a way, we are nearly permanently occupied with fulfilling contract terms. Therefore, it is inevitable that we will sometimes be confronted with unfulfilled or broken contracts by ourselves or by other parties.

2. What Is A Contract?

The belief of obligations existing between two or more parties is the basis for a contract. A contract is an exchange agreement between two (or more) parties. The contract may include written terms, orally communicated terms, or other expressions of commitment and future intent. As generally defined, a contract is based on a mutually agreed on, voluntarily made exchange of promises between two (or more) parties, where each party gains if the exchange agreement is fulfilled and each party loses if it is not.

3. Different Types Of Contracts

Contracts can be viewed from various angles. The economic focus is on transaction or relationship costs of the contractual exchange relationships. The legal focus is on the formalized terms and procedures and on issues related to contract fulfillment. The term ‘‘social contract’’ refers to a pact or an agreement made by all of the individuals who are to compose it.

The term ‘‘psychological contract’’ refers to ideas about mutual obligations in the exchange agreement. One view on the psychological contract is that it includes the perceptions of both parties. Another view limits the psychological contract to individual beliefs about the exchange agreement. It includes and adds to the economic and legal perspectives. The social contract is based on generalized psychological contracts.

Psychological contracts address the important issue of incompleteness of contracts. It is virtually impossible to create complete formal contracts. Unforeseen events may arise over time. Foreseen events cannot always be described unambiguously, and the costs of negotiating all possible events and consequences might be too high. Psychological contracts are generally understood agreements that fill in the gaps of the formal agreement.

A general distinction can be made between transactional contracts, which have the characteristics of an ‘‘arm’s length’’ market transaction (e.g., between buyer and seller), and relational contracts such as complex long-term relationships between employer and employee.

4. Contracts In Employment

A basic feature of employee–employer interaction is the nature of the exchange in the employment relationship. An employment relationship is a contract based on a mutually agreed on, voluntarily made exchange of promises between two (or more) parties, where each party gains if the exchange agreement is fulfilled and each party loses if it is not. Each component can vary in response to the social context in which employment is embedded.

A meeting of the minds of employer and employee is implied in the term ‘‘mutuality.’’ Whether there is actually a moment when parties share a crystal clear understanding regarding the terms of their exchange is open to question. Nevertheless, at the start of the employment relationship, there is at least a perception of agreement if not necessarily agreement in fact.

Both employer and employee have free choice in entering into and accepting the terms of an employment arrangement. However, this is always a matter of degree. Voluntariness in employment is historically rooted in the evolution of institutions such as individual rights, ownership of private property, and collective bargaining. Voluntariness in employment is possible when individuals have the right to control their own time, services, and use of their skills. Employer beliefs regarding worker freedom of choice (e.g., job opportunities elsewhere) influence the inducements that employers offer in exchange for worker contributions.

5. Consequences Of Violations Of Contracts

Fulfilling contract terms by the organization leads to greater employee commitment to the organization and to the relationship. Consequently, readiness to accept work roles and tasks, willingness to engage in extrarole behaviors, and willingness to avoid negative behaviors (e.g., coming to work late, not performing well) will be greater. This will result in more committed, motivated, and trusting organizational citizens.

More favorable psychological contracts are related to a higher degree of organizational commitment and a lower degree of intention to leave the organization. On the other hand, when employees believe that the organization has not fulfilled its side of the bargain, they are less likely to engage in extra-role behaviors (e.g., organizational citizenship). Employees who believe that the organization has violated certain terms of the psychological contract will be more likely to have high rates of tardiness and absenteeism and a higher intention to leave the organization. Anger, disappointment, and strong emotions may also be consequences of not fulfilling contract terms.

6. Cross-National Differences

Who the parties to the employment agreement are varies considerably across countries, as does the actual level at which the exchange agreement is created. Societies ascribe varying importance to the parties of an employment contract. The status and esteem of government and the state per se differ considerably. Because parties to employment agreements entail a wide range of societal actors, employment agreements can arise at several levels: between the individual worker and the firm, between groups of workers and the firm, between groups of workers and groups of firms, and in central agreements involving groups of workers, employers, and the state. An industrial relations system involves three sets of actors: employers, workers (typically in groups either within or between firms), and the government (including direct negotiation involving governmental officials, governmental mediation of employee–employer agreements, or creation of laws and statutes specifying conditions of employment).

Three general types of employment and industrial relations systems are direct exchanges between firm and employee; central agreements between employer organizations and unions (or comparable parties), with possible segregation at various levels (e.g., nationwide, type of industry); and employment relationships anchored in society (i.e., the state and institutions), where regulations and statutes predominate in the construction of the employee–employer exchange.

Direct firm–employee exchanges are more prevalent in countries such as Israel, New Zealand, Singapore, and the United States (except in the case of unionized firms). Central agreements play an important role in countries such as Australia, Belgium, India, Mexico, The Netherlands, and Sweden. Regulations play a significant role in countries such as France and Japan. One striking difference across societies is in the zone of negotiability of the individual employment relationship. Factors shaping it include the individual’s personal power in constructing an idiosyncratic arrangement with the employer, the employer’s willingness to demand or offer unique or varied employment conditions to individual workers, and the society’s regulation of employment and tolerance for unequal outcomes. State intervention or central agreements have the most salient effect on the range and boundaries for what is negotiable between employers and workers. State-level interventions have several effects. Regulations constrain what conditions are negotiable and mandate others. Central agreements, negotiated collectively, limit individual-level variability in contract terms. Both appear to be more prevalent in societies that are relatively intolerant of outcome inequality or where there are institutional concerns regarding disparities in power between labor, on the one hand, and management and owners, on the other. Laws stipulate which conditions are nonnegotiable, for example, requiring payment of retirement or unemployment taxes and providing extended family leave benefits following childbirth. Laws also serve to enforce negotiated terms of employment.

Nonlegal factors can also constrain the zone of negotiability. Cultural norms, in particular, can effectively remove certain employment terms from the bargaining table. In societies with strong state influence or central agreements, the focus of negotiation and flexibility shifts to what is possible within or around the rules. There tends to be a relatively clear demarcation of which issues are on the negotiation table and which ones are not. Yet even when the wage system has been standardized with strict rules for salary ranges for certain jobs, there is often room at the level of the individual worker for negotiation about salary within the given range or about the title of a particular job.

7. Implications

Contractual agreements play a very prominent role in our society and in the world of work. Contractual exchange agreements at work determine employee behavior and organizational outcomes.

In the contracting process clear communication and careful assessment of the contract terms is necessary; constant monitoring and renegotiating, adjusting to changing needs of the organization and the individual employee.

In the future, we can expect considerable innovation and experimentation in contracting. Critical questions will center on how to balance differentiation and fairness, especially in situations where employees are interdependent, and how to integrate groups and promote cooperation while keeping clear boundaries for individual psychological contracts. A greater variety of contract types, including more ‘‘individualized’’ results of contract negotiations, will exist. Contracts made today are a way in which to both know and shape the future. The management of psychological contracts is a core task for firms that attempt to develop ‘‘people-building’’ rather than ‘‘people-using’’ organizations in an organizational climate characterized by trust. Increasingly, managing the psychological contract is a core task for workers themselves, who seek to meet their own needs in active individual and group-level negotiations with their employers.

References:

Anderson, N., & Schalk, R. (1998). The psychological contract in retrospect and prospect. Journal of Organizational Behavior, 19, 637–648.
Herriot, P., & Pemberton, C. (1995). New deals: The revolution in managerial careers. Chichester, UK: Wiley.
Rousseau, D. M. (1995). Psychological contracts in organizations: Understanding written and unwritten agreements. Thousand Oaks, CA: Sage.
Rousseau, D. M., & Schalk, R. (Eds.). (2000). Psychological contracts in employment: Cross-national perspectives. Thousand Oaks, CA: Sage.
Schalk, R., & Rousseau, D. M. (2001). Psychological contracts in employment. In N. Anderson, D. S. Ones, H. Kepir Sinangil, & C. Viswesvaran (Eds.), Handbook of industrial, work, and organizational psychology, Vol. 2: Organizational psychology. Thousand Oaks, CA: Sage.

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