Psychological Contract

A psychological contract is a belief based on commitments expressed or implied, regarding an exchange agreement between two parties, as commonly used, between an individual and an employer. People typically are motivated to fulfill the commitments they have made to others, consistent with their own understanding of what those commitments entail. In employment, psychological contracts can vary considerably across workers and between firms. They can be as limited to highly economic or transactional terms, such as an hourly wage for a temporary worker who ships packages over the holidays, or as complex and broad as the generous support and mutual investment characteristic of high involvement work. Employers in turn have their own psychological contracts with individual workers.

Features of the Psychological Contract

The dynamics of the psychological contract are shaped by its defining features.

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Psychological contracts motivate people to fulfill their commitments because they are based on the exchange of promises in which the individual has freely participated. Commitments made voluntarily tend to be kept. A worker who agrees to work for a firm for a set time period is likely to be internally conflicted on receiving an outside offer shortly after being hired. That worker is more likely to decline the offer than a colleague who had made no such commitment to the employer.

Perceived Mutuality

An individual’s psychological contract reflects the person’s own understanding of the commitments made with another. Individuals act on that subjective understanding as if it were mutual, regardless of whether that is the case in reality.


At the outset of employment, initial psychological contracts tend to be incomplete and need to be fleshed out over time. Neither worker nor employer can spell out all the details of an employment relationship that will last a period of time. Because of bounded rationality, neither party can recall all relevant details to be shared with another. Moreover, changing circumstances mean that not all contingencies can be foreseen. As a result, psychological contracts tend to become more elaborate and detailed over the course of the employment relationship.

Multiple Contract Makers

A variety of information sources shape how workers interpret their psychological contract with an employer. Employers are represented by several parties including the top management team; human resource representatives; and in particular, a worker’s immediate superior, often the most influential agent in shaping employee psychological contracts. Informal sources such as coworkers can influence how individuals interpret the terms of their psychological contract as well as the extent to which the contract has been fulfilled. Human resource practices such as development programs and performance appraisal systems can signal promised benefits and required contributions. In particular, early experiences with an employer, from recruitment to early socialization and initial assignments to particular bosses and coworkers, can have pervasive effects over time on worker psychological contracts. When contract makers convey different messages, they erode the mutuality of the psychological contract.

Reliance Losses

When a party relies on the psychological contract as a guide to action, losses result if the other party fails to fulfill its anticipated commitments. Losses mean that benefits a party has relied on failed to materialize; and they are the basic reason why psychological contract violation and change generate adverse reactions, including anger, outrage, termination, and withdrawal of support. Efforts that both workers and employer take to manage their psychological contract with the other typically focus on fulfilling commitments as well as on managing losses when existing commitments are difficult to keep. Psychological contracts are a subset of a broader array of beliefs and expectations workers and employers may hold, where expectations that are not promise based are not relied on to the same extent as more general expectations regarding worker and employer behavior. Non-promise-based aspects of employment that workers find satisfying, such as the quality of their workspace or the camaraderie of colleagues, can eventually be viewed as part of the promised status quo—and generate negative reactions comparable to contract violations.

Automatic Processes

Once a psychological contract is formed, it creates an enduring mental model of the employment relationship. This mental model provides a stable understanding of what to expect in the future and guides efficient action without a lot of need to be refreshed or practiced. Having a psychological contract as a mental model of the employment relationship helps employer and worker function despite having incomplete information regarding the other party’s intentions or expectations. Subsequent information tends to be interpreted in light of the preexisting psychological contract. For the most part, this is functional because new performance demands can be incorporated into existing understandings of a person’s work role. But when existing psychological contracts are in conflict with new employment conditions, a more elaborate change process is required.

Types of Psychological Contracts

Psychological contracts can take many forms depending on the nature of the worker’s job, the employer’s human resource strategy, and the motives the worker has in contracting with a particular employer. Promises can be very limited in nature, as in the case of the simple economic transaction temporary work entails. Or promises workers and the employer make to each other can involve a host of relational commitments including loyalty and mutual concern. Although the myriad details of a psychological contract can be as unique as each individual, there are general patterns that differentiate how workers and employers behave toward each other.

A relational psychological contract includes such terms as loyalty, worker and employer commitment to meeting the needs of the other, and stability, an open-ended commitment to the future. Workers with relational contracts are more likely to willingly work overtime, whether paid or not, to help coworkers on the job, and to support organizational changes their employer deems necessary. Although workers with a relational contract are likely to be particularly upset when it is violated, the commitment to their employer created by such contracts often manifests in worker attempts to seek redress or remedy to maintain the relationship. Failure to remedy the situation typically leads to turnover or, should the employee remain, to reduced contributions and erosion of the employment relationship. Employers with relational contracts absorb more of the risk from economic uncertainties, often protecting workers from economic downturns. An archetypal employer with a relational contract might keep workers employed during severe economic downturns. Employers in turn offer the individual workers they particularly value more relational contracts than they do other workers who contribute less.

A transactional psychological contract includes such terms as narrow duties and limited or short-term duration. Workers with transactional contracts are likely to adhere to its specific terms and seek employment elsewhere when conditions change or when the employer fails to live up to the agreement. Transactional contracts characterize workers whose contributions are less critical to the firm’s comparative advantage and employers operating in highly unstable markets such as entertainment and fashion. Both worker and employer are likely to immediately terminate a transactional arrangement that fails to meet their needs. Transaction contracts assign more risk to workers from the economic uncertainties the employer faces because the worker often has fewer alternatives (being less able to seek credit for future services). With transactional contracts workers tend to perform in ways consistent with the contributions they are paid to make. Employers receive a specific level of contribution and incur no future obligations to these workers. Such arrangements work well when workers are individual contributors, whose performance deliverables can be explicitly established and monitored, and where there is little need to coordinate with others. Transactional contracts are less functional when they are a by-product of violation of or poorly managed change in relational contracts where either worker or employer has lost trust in the other, resulting in a warier, arms’-length arrangement.

The emergence of a hybrid (balanced) form of psychological contract in recent years combines the open-ended time frame and mutual concern of relational agreements with the performance demands and renegotiation of the transactional contract. Balanced contracts state commitments on the part of the employer to develop and provide career advantage to workers, in the firm as well as in future employability elsewhere if need be, while anticipating flexible contributions and adjustment to changing economic conditions on the part of workers. Balanced contracts entail shared risk between worker and employer and anticipate renegotiation over time as economic conditions of the firm and worker interests and needs change.

Psychological contracts are related to, yet distinct from, objective conditions of work such as employment status (e.g., full-time, temporary). Part-time workers and newcomers can have highly relational agreements with an employer, and many full-timers and veterans report only limited commitments between themselves and their employer. It is necessary to drill down into the beliefs workers and managers hold and the information sources they rely on (their manager, coworkers, and events they witnessed) rather than relying on general assumptions regarding broad job categories.

Mutuality is important to the effective functioning of an employment relationship. A major feature of a psychological contract is the individual’s belief that an agreement is mutual, and a common understanding exists binding the parties involved to a particular course of action. Agreement between worker and employer on what each owes the other is critical to the employment relationship’s success from each party’s perspective. Psychological contracts are more likely to be kept when the parties agree as to their terms. Creating mutuality is the gold standard in employment relations. When both parties agree on their joint obligations, worker attitudes and job performance are higher than where their beliefs are mismatched. Nonetheless, parties tend to have different perceptions of how well each fulfills their side of the bargain. Employers tend to rate themselves more highly on ful-filling their end of the deal than workers rate their employer. Similarly, workers rate themselves on average as having fulfilled their end of the bargain to a greater degree than their employer has. This pattern conforms to the well-established availability bias, where parties to a relationship are better able to recall their own contributions than they are those of their partners. Biases in perceptions of contributions do create problems in an important aspect of mutuality: agreement on what workers owe the employer in payback for the employer’s contributions to them.

Violation where an employer or worker believes that the psychological contract has been willfully breached by the other generates a long list of dysfunctional outcomes. Anger, quitting, and lower performance, particularly in terms of discretionary contributions such as citizenship behavior, are the more overt manifestations of psychological contract violation. More subtle can be the mistrust, emotional withdrawal, and sabotage that also accompany violation, particularly in circumstances where the violated party continues in the relationship. In such cases erstwhile relational contracts can turn transactional as the aggrieved party monitors each interaction for signs of exploitation or abuse. Although more relationally oriented employment relations may withstand threats to the psychological contract, breaches of significant important or drastic changes that are poorly managed can create a cycle of escalating violation over time. Incidents that fundamentally breach valued conditions of employment can form the basis of contract violation (e.g., where worker health and safety are affected or employers fail to support workers in providing quality care to clients or service to customers). In the aftermath of violation or poorly managed change, the process of restoring trust can require the formation of a new relationship, finding ways for veterans to begin feeling like newcomers to a new relationship.

But by far the most important aspect of the employer s side is the role managers play. Managers, both immediate supervisors and higher-ups, play the central role in shaping a worker’s psychological contracts. The presence of a supportive immediate manager can serve to amplify or downplay messages sent by the firm’s HR practices regarding the nature of the employment relationship. An individual manager’s own psychological contract itself influences the contracts that manager in turn creates with workers.

Actions individual workers take can influence their own psychological contracts. First, their career goals influence the kinds of commitments individuals believe they make to the employer. Second, worker personality plays a role in psychological contracts with more conscientious workers having more relational contracts. Individual workers can negotiate special arrangements with their employer unavailable to their coworkers, resulting in distinct psychological contracts with the employer.


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