Samuel Goldwyn once made a humorously cautious remark – “A verbal contract isn’t worth the paper it is written on.” And nothing could be truer, given the corporate landscape we are a part of today!

Let me explain why. Over the years, I have helped various companies with their talent acquisition strategies. Contracts have always been a part of the equation – after all, how else can a company formalise its relationship with an employee, than through a written set of terms of conditions to be followed religiously by the company and the employee?

And given the ‘war for talent’, companies have to ensure that the contractual relationship between them and their employees is there for all to see!

However, despite the measures taken by companies, retention is always a challenge.

The question I usually have to face is, why, despite a written contract, is there a gap between an employee’s expectations and what the company offers them?

Not downplaying written contracts here – they are needed and at times they ‘could’ be ‘influential’ in making an employee stick around for a while. But, the moment something changes, the employee will take the first route out, if he/she is not satisfied with the company… no matter what the contract states. Wouldn’t you agree?

What I have found more effective is a contract that is not documented in a physical form… or even spoken about.

Quite frankly, when a company hires an employee, it’s not just the written contract that defines their relationship. There’s another hidden contract that binds them to each other – a psychological contract!

It refers to the employee’s and organisation’s ‘perceived’ expectations from each other when an employment contract is signed.

Let’s talk about it a little more in detail… And why companies need to take it seriously if they want to retain the talent they hire!

Now, psychological contracts aren’t something new… People have been talking about it, companies are opening up to its importance. I think understanding it is the need of the hour.

A Psychological Contract… Going Beyond the Buzzword!

As I was mentioning, a psychological contract refers to the expectations a company and an employee have from each other. While this seems like a deceptively simple and obvious thought, the implications of the same for the HR community are pretty significant.

These implicit expectations that aren’t directly verbalised have a real impact on the behaviour of the parties involved, and therefore, on the productivity and engagement in a workplace as well.

In a nutshell, a psychological contract is defined by the following features:

• It is covert and imprecise; expectations are rarely communicated directly.

• It is unstable and always in a state of flux, given that it is based on hidden expectations and assumptions, that are subject to individual perceptions.

• There is no written agreement, such as a legally binding employment contract.

• It can never be static. Expectations shift over time and change constantly, and this also influences the contract, since the company-employee relationship will require reshaping based on the new situations.

So, A Psychological Contract Seems, Pretty Unpredictable & Unreliable… How Can It Be Crucial For A Company?

One of the defining aspects of a psychological contract is that employees ‘assume’ that their expectations are accepted and agreed upon.

A ‘violation’ of the contract would simply mean that these expectations aren’t fulfilled.

So, the fulfilment of such a contract is what is critical for companies and employees alike.

Once employees realise that the psychological contract has been violated, they begin to lose trust in the organisation and adjust the psychological contract accordingly.

Simply put, employees would realise that they don’t have much to gain from this business relationship, and lower their expectations and efforts consecutively.

So, essentially, not being true to the psychological contract could lead to a fall in productivity, if the expectations of the employees are not met. Other repercussions would include employee demotivation, dissatisfaction, and withdrawal. If the situation is not remedied, this could prove fatal to the organisation’s retention policies. Now that’s quite a revelation, isn’t it?

On the other hand, when the company fulfils the terms of the contract, or ‘sticks to the deal’, the results are better performance, job satisfaction, and loyalty towards the organisation.

Let me elaborate a bit more with an example.

If an employee puts in additional hours of work every day to ensure that a client gets the best, he/she may expect to get a raise in the next appraisal or some recognition for the efforts. If another employee receives a better raise, it is effectively a violation of the psychological contract for the aforementioned employee.

This could happen either owing to a communication gap between the manager and the employee, with the manager being unaware of the contribution of the employee, and the employee not mentioning it during weekly conversations or performance reviews. This could lead to the employee reducing his/her contribution, resulting in an overall drop in productivity!

But there’s a flipside to this as well…

There is also the possibility of employees harbouring unrealistic expectations, which form a part of the psychological contract too. Unless these are communicated, it is impossible for the company to guide employees to alter their expectations. Having unrealistic expectations could prove fatal to an organisation’s performance too!

As surprising as it may sound, the fact is most issues in the workplace arise owing to violations in the psychological contracts, rather than the employment contracts recorded in writing.

So, How Can Companies Avoid The Violation And Misuse Of Psychological Contracts?

To ensure a fruitful relationship between the company and its employees, it is essential to be able to manage this contract. Here are some of the ways in which it can be done…

1. Communicate:

Considering the fact that psychological contracts are not formal, they are constantly changing and developing, based on the communication between the company and its employees. The best solution to ensuring no violations is consistent two-way communication — not just verbal, but also in terms of body language, the tone of the voice, and inferences made between the two parties.

This will ensure a balanced contract, which shows that the company respects the employees and finds their roles in the organisation indispensable for its success.

2. Write Them Down:

As ironical as it may sound, a practical solution would be to write down these mutual expectations before a review or a meeting and openly discuss the terms of the business relationship.

Companies could articulate what ‘they expect from the employees’ and what ‘employees would get from the organisation. Similarly, employees could list down ‘what they expect from the company’ and what ‘they are willing to contribute to the organisation’s goals’. The idea is to be as specific as possible, with monetary and non-monetary incentives clearly mentioned, to ensure that the contract is fulfilled.

This written document could become a part of the company’s talent management literature. This would be helpful for new employees to know exactly what they need to contribute, and how they can achieve their performance goals faster!

While writing these expectations down does help, you need to always remember that expectations are never static — they are always evolving, and need to be redefined on a regular basis. Having a written document does not mean that the expectation conveyed are set in stone — it wouldn’t serve the purpose!

Employee expectations, as long as they are practical and reasonable, should be met and psychological contracts help with just that.

A psychological contract is the responsibility of both, the company and the employees.

Companies need to make sure that they stick to their part of the bargain, while employees need to ensure that their expectations are realistic.

As a company, you just need to be true to your word of giving employees wholesome opportunities, where they get to learn, grow, and imagine a future with you. And yes, maintain effective communication channels too. As long as these things are taken care of, you will not have to worry about ‘breaches’ in a psychological contract!

When the principle of psychological contracts is applied accurately, they can be effective tools for managing an organisation, and more importantly retaining the right talent.