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Psychological Contracts: Definition & Importance

Instructor: Artem Cheprasov

Artem has a doctor of veterinary medicine degree.

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.

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.

Definition

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.

Importance

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.

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