HR has a vital role in maintaining or rebuilding the ‘psychological contract’ between employees and the organisation following a merger, acquisition or other form of major change, says Valerie Garrow, Principal Researcher, Roffey Park Institute and author of a new report, Managing on the edge: Psychological Contracts in Transition. Here she provides examples of three organisations which succeeded in proactively managing the psychological contract and one that failed to do so.
The psychological contract lies at the heart of the employment relationship and relates to the mutual expectations and obligations that are unwritten and lie outside the formal contract. When either party fails to meet these obligations the damage to the trust in the relationship can have unwelcome consequences. At a time when the focus of attention is on written contracts, TUPE transfers and harmonising terms and conditions, the psychological contract is too often overlooked.
The research investigates four organisations during the first year following a merger or acquisition, three of which succeed in proactively managing the psychological contract albeit in difficult circumstances and one that fails to do so and loses the majority of its workforce within the first year. HR processes are used effectively to involve employees in the change, to set realistic expectations of the new psychological contract and also as part of the new exchange deal.
Building relationships
Moss Pharmacy, the UK’s third largest pharmacy chain, with over 800 branches throughout the country, acquired 60 pharmacies in Birmingham and the South West of England in 2001. For the acquired employees the psychological contract came to an end with their former owner and Moss had the considerable challenge of building relationships with local staff who had enjoyed highly ‘relational’ psychological contracts.
‘Relational’ psychological contracts are socially based, tend to be long-term and involve strong identification with the organisation, as opposed to ‘transactional’ contracts that are more economic in nature, based on short-term quid pro quo expectations. The new employees valued being known individually by name and having a word of thanks rather than more impersonal rewards. Becoming part of a large organisation like Moss was a lot to cope with and ‘relational’ contracts need a good deal of nurturing.
The Area Management structure was crucial in reaching people in small branches located well away from Head Office. While they couldn’t quite match the closeness of the relationship with their former owner, Moss were able to offer more structured training, increased physical security in dangerous areas, a good pension scheme and more professional processes. Staff feel they have been expected to work harder in return, as well as get used to new technology but retention has been high, which enables Moss to retain valuable local knowledge and relationships.
Dealing with redundancy
HR processes were also valuable at Satair Hardware, a Danish company that merged in 2001 with C J Fox, a leading supplier of hardware to UK aerospace equipment manufacturers. Although the expectations raised by the merger were of continued growth and new international markets, the industry was badly hit following September 11th so that within a few months of the merger, the company had to make redundancies. HR processes had always featured strongly at C J Fox and, while the company could no longer promise job security, they involved staff in difficult decisions concerning redundancy. Directors took the lead by taking a cut in pay and staff were given a vote on whether to accept a pay cut in order to try to save jobs. Although the decision was difficult, up to 40% accepted although this was not sufficient to endorse the policy. Those made redundant were given two months’ notice from the end of January though if, in the meantime they found a job, they could leave. Employees were treated fairly and with dignity and the sadness at losing colleagues was shared by the whole company.
Employee involvement
Involving employees in decisions about the future also features strongly in another of the case studies. The Durban Institute of Technology library formed in 2002 from the merger of Natal Technikon and ML Sultan is a story of both racial and organisational integration. Natal Technikon had been a historically advantaged institution (HAI) and ML Sultan a historically disadvantaged institution (HDI). The National Working Group on higher education had been looking at ways to eliminate this legacy of apartheid from the system by merging neighbouring institutions.
The Durban Institute of Technology is the first of these merged organisations. Though it lacked a blueprint to follow, the library Directors built on principles of equity and collaboration and drew up an integration plan to involve every staff member in planning the future for their joint library. With involvement came responsibility and a lot of extra work, which wasn’t too popular at the time but the benefits were soon apparent in terms of seeing people work side by side on real integration projects, giving them a sense of control over their own future work arrangements.
Fulfilling expectations and obligations
There is a danger that the psychological contract will break down where over-optimistic promises are made at the time of the announcement. This happened ironically in the case study that featured an HR consultancy. Employees had been promised a better working environment, clarity on bonus structures, access to a rich database of contacts and opportunities to progress and earn more money. Working in a more transactional environment than the other case studies, staff expected promises to be met in a much shorter time frame. When the early reality of the move proved disappointing, many were already preparing to leave the company. However the final blow came when a new HR Director, who was not respected by the staff, began to reduce benefits and impose unpopular new contracts. By the end of the first year over 80% of the staff had left the organisation.
The value of the psychological contract lies in its ability to provide a framework and a language for discussing and negotiating the employment relationship. The health of the psychological contract has an impact on attitudes and behaviour and presents a significant business risk when it breaks down. Many organisations are therefore learning to take a proactive approach to managing the psychological contract, particularly after major change.
