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Cath Everett

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The psychological contract 101


A recent piece of research carried out by Right Management with MDs of SMEs across the UK rather alarmingly revealed that over half (52 percent) thought it was better to motivate staff through incentives rather than career development. This rose to 62 percent in London and the South East.

This flags up a major problem in the workplace – too many organisations do not understand how to attract and retain talented staff, and there is insufficient understanding of the psychological needs of the workforce.

There are two major components to the employee/employer relationship – the Transactional Contract and the Psychological Contract. The former is made up largely of Terms and Conditions, the technical elements of the agreement, setting out hours, pay and performance expectations. This is often augmented by what are loosely called ‘Employee Benefits’ – the incentives that people in our research talk about.

The problem is that an incentive is only worthy of the name if it really does incentivise people in the way the organisation intends, and many do not. The second component – the Psychological Contract – is far more intangible. Unlike the Transactional Contract, it is not something that can be negotiated at an interview; instead it is a reflection of the way the organisation and its workforce are aligned, a reflection of the dignity with which people are treated.

It is easy to see why a manager may be tempted to focus on transactional issues, because they are more concrete than psychological issues – the problem is, evidence shows that it is the psychological contract that determines whether someone stays or leaves, is aligned and engaged or disenchanted and switched off. It is breach of the psychological contract that makes your talent walk.

In addressing the Psychological Contract, however, the organisation is not powerless; there is a solid knowledge base to support the development of a psychologically and emotionally healthy workplace but it sometimes requires managers to think differently. 

Let’s start with money. Received wisdom is that the more money you give people the more productive and happy they will be. Some readers will be surprised to know that the evidence does not support this; whilst workers may well be happy with more money they are not necessarily more productive.

In fact, there is good evidence, replicated globally, to show that sometimes the more you pay the less you get. When a task is only mechanical or rule-based the relationship between performance and pay is linear but if there is any thinking and decision-making, performance improves up to a point but then diminishes as more money is added. So what are the factors that really make a difference to the engagement and performance of workers, and how can an employer integrate them for everybody’s benefit?

The first poses a challenge to some managers: step back from being directive and allow people a degree of autonomy. It leads not only to better performance but also enhances creativity, growth and problem-solving. An empowered employee is engaged, committed and content. Flexibility in working hours, encouragement of personal development, involvement with corporate social responsibility activity, opportunities to work across silos in an organisation are all steps that have successfully been taken to enhance autonomy.

Secondly, people need to have opportunities to improve their skills, knowledge and competencies. Looking at how people spend their leisure time teaches us that striving for mastery is a key component of how people self-motivate; why would we expect it to be different at work? Creating an environment in which people can grow and develop, can learn new skills, pays dividends in enhancing the Psychological Contract.

Understanding that people need to spend some time in their stretch zone – perhaps up to 20% of a working week – rather than continually doing what they have already mastered is essential when considering how best to motivate staff.

Finally, an organisation needs to work carefully to ensure there is a clear purpose to the enterprise, one that all workers are engaged with. This requires strategic managers to ensure that communication with staff does not confuse purpose with profit. If the sole raison d’être is to make a profit, employees become disengaged and disenchanted; when the business is doing something that appears worthwhile employees are far more engaged and motivated. Strangely enough, companies that understand and apply this philosophy also happen to be very profitable, but it isn’t their sole motivator.

In a way, the MDs we spoke to were right – the way to motivate staff is through incentives, it is just that their idea of what makes a good incentive is outdated. We can influence the Psychological Contract, and indeed we must. It is the only way businesses will survive in the Human Age.

Kevin Friery is Clinical Director of Right Corecare

One Response

  1. The Psychological Contract

     Great to see a piece about the psychological contract.  As a Transactional Analyst we break down the contract into three types: the administrative, the professional and the psychological contract.  The administrative deals with fees, times, place etc. whilst the professional deals with competence to do the task and all matters that relate to professional aspects such as ethics.  The psychological contract is that which is unspoken and about "how things are done around here".  There’s a great book on the psychological contract written by Makin, Cooper and Cox entitled Organizations and the Psychological Contract (1996).  It includes, and has a good take on, Transactional Analysis.

    All the best, Anita


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