This are, by and large, shorter-term monetary

This lesson goes over the concept of a psychological contract.

You’ll briefly learn about the basics of two types of psychological contracts and the importance of psychological contracts in the workplace in general.

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Job Contracts

Have you ever held a job? If you have, you almost certainly had to sign a contract. Whether you read all the fine print or not isn’t relevant. There was a document that codified things like some of your job expectations, salary, and so on. You, by signing that contract, had to abide by certain rules even if you didn’t read them.That contract was cut and dry for the most part.

But there is another kind of contract that isn’t as clear or set in stone as that job contract you signed. This contract is known as a psychological contract, and this lesson goes over its definition and importance.


A psychological contract can be simply seen as an unwritten set of agreements between an employee and employer. There are two general types of psychological contracts. There are the transactional psychological contracts, which are, by and large, shorter-term monetary based exchanges. So, there might be a monetary award doled out by an employer for precisely defined employee behaviors.

There are also relational psychological contracts, which are more long term and involve stronger emotional attachments. This could be something like ambiguously defined opportunities or promises for growth within the organization in exchange for a deeper and longer-term commitment from the employee.


Psychological contracts serve an important role within the organization. First of all, not everything can be spelled out in a traditional contract you sign with the company (nor would this be a good idea in many instances).For instance, a company is unlikely to promise your advancement every X years in exchange for Y in a physical contract. This is because employee performance and varying market conditions can easily influence that ability to, and timeliness of, such advancements.As another example, it’s hard to codify something like hard work.

Sure, you can specify in a contract that the employee has to work 40 hours a week but those 40 hours can be spent playing solitaire. And trying to come up with every scenario of what an employee can and cannot do that constitutes hard work (or not) is near impossible and completely impractical.This is why psychological contracts are used to fill in the holes, so to speak.

They are used to attract and keep highly-skilled employees with promises that would otherwise be too difficult or cumbersome to spell out in a traditional contract, in exchange for something that might be implicitly understood or vocally described.For example, Mary is an employee at Acme Co. Her physical/traditional contract says Mary is receiving $75,000/year for working 40 hours per week. But her employer also has a psychological contract in place. Her boss says that the company rewards hard-working employees that stick it out with the company through tough times with promotions.

That kind of promise is a psychological contract.Psychological contracts can help or hurt an organization. For example, employees whose psychological contracts are met and satisfied, tend to show high levels of commitment to an organization. On the other hand, those that feel like a psychological contract has been breached might purposefully reduce their work-related efforts.So, going back to our example.

If Mary’s boss sees that she really is a hard worker and has really helped the company, he can promote her the next time there’s a good opportunity to do so. Or, he can hire someone from outside of the company instead, despite Mary being a great match for the position. In the latter case, Mary may not be too happy since the psychological contract has been broken.Thus, it’s important that an organization satisfies its psychological contracts. That’s because, in a competitive environment, an organization needs all of its employees to give their very best.

Constantly promising one thing or another to an employee just to keep them around and performing at peak level may work for a little bit but eventually, the employee will catch on to the bait and switch and possibly reduce workplace performance, hurting the organization in the process.

Lesson Summary

A psychological contract is a concept that refers to an employee’s perceived expectations of what they can gain from an organization, such as job security and advancement opportunities, in exchange for providing something like loyalty or hard work.Psychological contracts are important because:1. They help fill in the details and holes that traditional contracts cannot adequately address.

2. They can help an organization via employee commitment if they are kept.3. They can definitely hurt an organization if the psychological contracts are broken, as employees might reduce their work-related efforts.


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