Why Implement a Psychological Contract?


29 February 2008 Michael Wellin


One of the biggest headaches that keep chief executives awake at night is how to engage and align their people more to fulfil company business strategy. Michael Wellin describes how the psychological contract can be leveraged by companies to increase employee commitment and performance.


"An increasing number of businesses use the psychological contract to clarify understanding between employees and the company."

The term 'psychological contract' refers to the mutual expectations people have of one another in a relationship, how these expectations change, and how fulfilment or breach of the contract impacts feelings and behaviour. The recent TV media furore over exclusion of callers from winning phone-in competitions is a powerful demonstration of the impact of breach of the psychological contract.

The most common use of the psychological contract is to describe the expectations an employee has of the organisation he or she works for and the expectations the organisation has of the employee. Every company has a psychological contract – in most cases it is not clearly defined or communicated, and in too many cases the words even if articulated are not fulfilled by management actions.

THE PSYCHOLOGICAL CONTRACT IN PRÊT À MANGER

An increasing number of businesses use the psychological contract to clarify understanding between employees and the company. A great example of this comes from the successful sandwich company Prêt à Manger. Comments on the company website allow interpretation of the psychological contract with store employees as two components.

What Prêt à Manger expects from employees:

  • Reasonably hard working
  • Good sense of humour
  • Enjoy delicious food
  • Start early and leave early

What employees can expect from Prêt à Manger:

  • Get paid as much as we can afford (not as little as we can get away with)
  • Cosmopolitan atmosphere as a result of diverse employee backgrounds
  • Invest in people training & development (in-store trainer)
  • Most managers are promoted from within
"By clarifying the deal between the employee and the company, employees know what is expected of them, and what they are likely to get in return."

As well as defining the relationship between employees and the company, an effective psychological contract, such as Prêt's, is a powerful manifestation of the company's business model. By making a feature of diversity and employing people from different backgrounds, Prêt à Manger is able to make its shops feel more interesting for customers as well as employees. Prêt à Manger is therefore simultaneously fulfilling the goals of being a socially responsible and equal-opportunity employer, while also creating a differentiator in its marketplace.

Another key component of the Prêt à Manger psychological contract is that employees are expected to start early, typically 6.00 or 6.30am, because sandwiches are freshly made on site on the day of sale, something which is fundamental to the company business model and sales proposition.

A clearly defined and implemented psychological contract has business value at three levels. At a high level it aligns what people do to the business model and customer proposition.

By clarifying the deal between the employee and the company, employees know what is expected of them, and what they are likely to get in return for working for Prêt. It has value for store managers by providing guidelines about working arrangements between them and their team members. It also supports human resource processes such as recruitment – people who find it difficult to get up early need not apply. When people join Prêt the rules of engagement are clearly spelled out, and this helps new employees achieve the required store performance standards faster.

THE PSYCHOLOGICAL CONTRACT IN ERNST & YOUNG

A very different psychological contract is provided by Ernst & Young, one of the 'big four' accounting organisations. The underlying assumption is that the firm will create more value and confidence for clients if its people provide outstanding solutions and services. By showing commitment to people's careers Ernst & Young hopes people will reciprocate through greater commitment to their work and the quality of client solutions they provide, and continue to work for the firm.

What E & Y expect from employees:

  • Do the right thing and succeed for clients
  • Energy, enthusiasm, stretch and excel yourself
  • Build relationships, teamwork and the courage to lead
  • Take charge and personal responsibility for your career

What employees can expect from E & Y:

  • Recognise and reward individual's contribution
  • Enjoyable place to work
  • Care, listen and respond to people's ideas and concerns
  • Continuous learning opportunities, access to knowledge and support for personal and career growth and achieving your potential

This implies a very different relationship between employees than exists at Prêt à Manger. While Prêt à Manger refer to 'working hard', Ernst & Young refer to 'success for clients'. Working hard is not enough in E & Y; the firm expects people to achieve high-level business outputs and results for clients and the firm.

Other clear differences occur with regard to career development. While Prêt implies few expectations about employees having a desire for long-term careers, Ernst & Young takes this for granted in its offer to provide 'continuous learning opportunities, access to knowledge and support for personal and career growth and achieving your potential'. The firm expects its people to want to develop their careers and responsibility for this is placed on the individual.

Ernst & Young also undertakes to reward and remunerate individuals according to their contribution – the more you achieve the more you will be rewarded. Prêt à Manger makes no promise to do this.

"While a company-wide psychological contract has real value, it has the drawback of not focusing on specific job requirements or individual employee needs."

One of the reasons for the success of companies such as Prêt a Manger , Ernst & Young, John Lewis and Richer Sounds in the UK, and Arthur Gallagher and Lockton in the US is that they have clearly defined, articulated and very importantly, fulfilled, meaningful company-wide psychological contracts with their people.

EMERGING NEW APPLICATIONS OF THE PSYCHOLOGICAL CONTRACT

While a company-wide psychological contract has real value, it has the drawback of not focusing on specific job requirements or individual employee needs. Work by Business Transformation Ltd is addressing this through facilitating 'Personal Deal' discussions between managers and each of their team members.

This is done by researching and creating a unique 'Personal Deal Toolkit' based on the specific business and people issues in each organisation. Managers and employees then use this as a framework to create their own unique 'Personal Deal'.

Feedback suggests that the Personal Deal discussion is a simple and powerful vehicle for improving understanding between leaders and team members. Both formal and informal performance management discussions can be revitalised into a powerful vehicle for aligning what individuals do to company strategy, and what leaders do to fulfil employee wants. Evidence suggests this is a recipe for increasing employee commitment, engagement and most importantly for a chief executive business performance.

The value of implementing robust psychological contracts at both an organisation-wide and individual level is that they create practical mechanisms for alignment, integration and commitment of people to business and market success.