Table of Contents

              Psychological contract might not be a familiar term, but it is what a layman understands. What is psychological contract? Psychological contract, in simple terms, refers to the relationship between an employer and its employees with an unwritten set of expectations, mutual beliefs, perceptions between them. A legal contract signed by both the employer and the employees offers a limited understanding of their relationship with the workers reading and agreeing to terms with little or no contribution. In this case, a psychological contract is more essential.

This contract’s basic goal is to describe and analyze the relationship between employers and workers, and it also influences how they behave every day. We can also say psychological contract sets the dynamics for the relationship and defines the work’s detailed practicality.


               Psychological contract and normal virtual employment define the employer-employee relationship, but psychological contract expresses the relationship best, but it is not tangible as the normal employment contract. Scholar, Denise Rousseau in his article in 1989, explained the concept of the psychological contract includes informal arrangements, mutual beliefs, common grounds, and perceptive relationships between the two involved parties. It might also refer to individual expectations, beliefs, ambitions, and obligations, as perceived by the employer and the employee.

The normal contract of employment signed by the employee offers a limited reality of the working relationship. Unlike a psychological contract, an employment contract is a legal contract usually written and signed to form an employment agreement. A psychological contract is a practicable way of establishing a strong working relationship because it describes how both parties understand the relationship they share, their individual views on their commitments, and what they should expect in return.

               A psychological contract is rather defined as a philosophy, not a formula or plan characterized by showing good qualities like respect, compassion, objectivity, and trust. They are formed by beliefs and may show up in other relationship areas aside from the employer-employee relationship. A scholar once described the psychological contract as the process whereby the employer and the employee or a prospective employee develop and refine their mental maps about one another.

This process starts before the employment and also develops during the employment process. When one writes for a job opportunity, the process starts from there till the prospective employee is called for an interview and continues when the job is offered throughout the Job.

What Psychological contract covers

               Unlike a normal contract of employment where terms and conditions are listed and you see what to expect, Dos and Don’ts, etc., a psychological contract does not have a definite list of expectations. Instead, scholars have focused on certain aspects that explore the duration, stability, and quality of the relationship. The following aspects may be covered by psychological contracts to show how they interact and the employment relationship.

– Career Prospects

– Manager’s Support

– Preferential Treatment and benefits

– Job security


On the contrary, it is not easy in a very large organization to form a psychological contract because not a single person is identified as their employer. Still, they are also affected by decisions that the senior board members make. The employees might not be aware of the reason behind some decisions or who is making such decisions. Still, since it’s a general thing, it affects everybody irrespective of your relationship with your head of department. Similarly, such organizations still carry out surveys to see how the employees have been fairing, so it is safe to say that psychological contract still exists there.


               In psychological contracts, the importance of leadership transparency cannot be overemphasized because it is a big factor in this system. Achieving a successful and healthy psychological contract will not be possible if the leader is not open enough. A psychological contract is an open relationship, but when a leader chooses to operate secretly because of his work ethics or to have something to hide, he cannot achieve a healthy working psychological contract. Lack of transparency exists due to leadership negligence, bad leadership skill when the leader is a dictator, fear, or insecurity. The lack of leadership transparency results from one or a combination of the following reasons:

– An assumption on the part of the leader that the employees already know things. This often happens when the economic stability of an organization is questioned, probably due to low sale or revenue generated for the month, a leader might withhold the salaries or slash the worker’s salaries, believing that they should know that the company has not been what it uses to be over some months.

– Bossy leaders: Some leaders do not even consider transparency as an important virtue. They are called thoughtless leaders because to move your company forward. It is in the hands of both the employer and the employees. Some leaders even believe that the employees have no right to know whatever is up with the company since they are just employees.

– A policy of secrecy: Some companies have the habit of hiding things for one reason or the other.

When the leadership is not transparent enough, the employees have no reason to trust the employer. We are all humans, and we tend to trust people based on relationships, and as discussed earlier, trust is the foundation of a psychological contract. Secrecy on the part of the leader opens doors for employees to create their ideas which may tend against inaccurate information. Transparency facilitates openness and loyalty between employers and employees. It also gives employees a reliable fact about the situation on the ground.



               The significance of psychological contracts in an organization setting helps and facilitates a good working relationship between employers and employees. When the employees see that the effort they put into the company’s advancement is matched by the backings they receive from the employer, this will foster work efficiency and improve productivity.

– It improves work commitment: A good and healthy psychological contract helps to improve commitment among employees. For instance, when a worker performs excellently well among colleagues and demonstrates a flair for more extra roles and leadership roles in the future, and the leadership does not overlook this, it will boost the workers’ commitment.

– It improves productivity: We as humans tend to perform well in a good working environment, unlike working in a hostile environment where the leader is a dictator. People tend to work just for working sake without putting it to heart. A higher level of commitment is reached with a healthy psychological contract.

– It increases trust levels: Psychological contract is based on trust, and trust can be built and marred. A sense of fairness and trust on the part of the employees towards employers helps build trust levels.

Management and goal assessment: 

– When the employers and employees maintain a good and healthy psychological contract, it helps in the company’s management and goal assessment.

– It facilitates development and expansion: When the employers can trust the employees to an extent and vice versa, development and expansion will not be an issue. Trust issues come when issues related to money and promises come into play, but if this is not an issue between parties, development and expansion will not be a forced thing. It will come naturally.

– New business and organizational structure: As the company begins to expand and grow, new ideas and structures are needed, trusted, and excellent employees can be called upon to share their views and new company strategy

– For the company’s advancement: With all the signs listed above, the result is moving the company or organization to a greater height. Any leader who has the company’s interest in his heart and chooses the company’s growth as a priority will maintain a good and healthy psychological contract.

Employers need to understand that:

  1. Maintaining 100% trust within the working environment is in the company’s best interest as a whole. Preventing breaches of contract is better than trying to salvage it when it is almost gone. Trust is key to a long and lasting working relationship.
  2. Employers should employ negotiation where breaches are inevitable. It may be better to spend time on negotiation rather than defending what is not. Generally, humans honor transparency. Even in the worst cases, transparency and negotiation can help solve some issues.


               A psychological contract is the foundation of a good working environment, and leadership needs a successful people management skill. A leader must understand that people are different and must not relate to employees in the same way. We have introverts and extroverts. Being outspoken doesn’t make a person better and doesn’t make the person less of a professional. There should be checks and balances on how to relate with everybody in a working environment. These important areas include communication skills, learning and career development, management style, prospective management traits, management expectations, working attitude, and so on.

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