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The Effect of HRM Practices on Psychological Contract in Organisation Report


The practices of human resource management have a direct impact on the psychological contract between the employees and their employer. Whenever the management makes promises to the employees when they are hired or during the normal management processes, the promise will develop a psychological contract that binds the employer and the employee.

When the management keeps the promise, the contract shall have been honoured, and the two parties would have a positive working environment. When the management fails to honour the promise, the relationship between the employer and the employee may be strained, and this could lead to serious negative consequences.


Employees form a very important part of an organisation, and their commitment would always determine the ability of a firm to achieve its objectives. According to Guest, Isaksson and Witte (2010), the ability of an organization to achieve success is always based on its capacity to motivate its employees. For this reason, it is important to ensure that they remain motivated in order to remain productive in their respective tasks.

Their motivation is always defined by the kind of working environment they are subjected to by their employer, especially the junior managers who directly supervise their work. This environment will define the relationship between the employees and the employees. Psychological contract plays a pivotal role in defining the relationship and the attitude of the employee towards the employer and the task.

When one signs a contract to become an employee of a given organisation, there are always some expectations developed out of spoken or unspoken communication between the employee and the employer. The spoken expectations can be in the form of direct promises made by the employer to the employee on such issues as increase in salary, promotions, or improved working environment.

The unspoken expectations may come in the form of the impression that the manager or the organisation itself gives to the employee. For instance, BP is one of the largest firms that pay its employees handsomely.

When an employee is hired by such an organisation, he or she will expect high pay. In this research, the focus will be to determine how psychological contracts are affected by human resource management’s practices in an organisation.

Hypothesis Statement

Research hypothesis is always necessary as it guides the process of collecting data. In this study, the researcher developed a hypothesis statement below based on the preliminary information obtained in this field.

H1. Human resource management’s practices have direct impact on the psychological contract within an organisation.

As shown in the hypothesis statement above, the researcher believes that there is a close connection between the practices of the management unit, and the psychological contract. As Petersitzke (2009) observes, the management unit is always represented within an organisation by the managers.

To employees, what the managers do will be viewed as an action of the firm because they are the agents. The perception of the employees towards the managers can, therefore, be regarded as the view these employees have towards the firm. This preposition will be determined by reviewing literatures on this topic.

Definition of Psychological Contract in Organisation

The concept of psychological contract has attracted attention of many scholars who try to find its true definition and relevance in a workplace setting. According to Guest and Conway (79), psychological contract are the beliefs and expectations that an employee develops when hired in a given firm, and expects them to be fulfilled within the period he or she will be working in the organisation.

George (2009) defines psychological contract as “The mutual beliefs, perceptions, and informal obligations between an employer and an employee.” It is important to note that in this definition, there is an emphasis on the mutual agreement between the employer and the employee. In this regard, a contract can only exist when the two parties have a mutual agreement over an issue.

This may be out of verbal discussion or expectations of the employees and the employer. The verbal agreement may take place when the employee and the employer verbally agree to achieve a specific goal and give specific benefits over a specified period of time. Such agreements would not be documented, but each party will have the information that they are expected to deliver on their promises.

The second form of psychological contract takes place between the employer and employee non-verbally. This means that both parties will be expecting the other to deliver on a specific promise without verbally talking over the issue.

For example, when HSBC Bank hires a certified accountant, the human resource manager will be expecting the accountant to understand principles of accounting that is in practice within the United Arab Emirates. Although they may not talk about this, the employer will believe that the employee will be able to undertake this task without problems.

On the other hand, the employee will be expecting that his or her promotion and salary increment will be based on the output he or she delivers.

The unspoken expectation of the two parties will form a basis of psychological contract and at the beginning of the relationship both will expect the other party to meet the demands. When either of the party fails to meet either verbal or non-verbal agreement, then this will constitute a disagreement or a breach of the contract.

Importance of Psychological Contract in Organisation

According to Conway and Briner (2005), many managers have ignored the relevance of psychological contract to the success of an organisation. It would be interesting to determine why such global firms as Apple Inc have remained very successful in a market where other giant firms like Motorola failed. These are firms operating in the same market environment and affected by similar policies set by the government.

The answer to this secret could be lying with the manner in which managers view the relevance of psychological contract within the organisation. Wellin (2007) says that psychological contract could be more important than the written contract when it comes to motivating employees and making them achieve what they are expected of within a specified period.

According to McGregor’s Theory Y, employees are always optimistic individual who can work with minimal or no supervision at all, but still achieve the best results. McGregor’s Theory X on the other hand holds that employees are always cunning and would make every effort to dodge their work whenever they have the opportunity. For this reason, they need strict and very close supervision.

These two theories hold that employees would always become what an employer want them to become. A human being is an independent creature by nature, and trying to subject it to strict regulations or policies would only be a counter-productive process.

The psychological contract, unlike the written contract, would always define the manner in which the employer the the employee would view each other. It has stronger impact than written contract because the two parties may withstand each other when in cases where written contract is violated as long as the psychological contract is respected.

Psychological contract defines the way an employee would relate with the employer. As mentioned, the employee and the employer would have a mutual agreement that each party must fulfil within a given duration. When an employee fails to deliver the results that were expected by the employer as specified in the psychological contract, he or she will be considered to have breached the contract.

In such cases, there are consequences that the employee must be ready to bear. The employer may decide to retain the employee in the current position but deny him or her much anticipated promotion. The employer may decide to demote the employee as a clear warning that any breach of the psychological contract may lead to other serious consequences.

In some instances, the employer may decide to dismiss the employee on basis of incompetence. These are some of the consequences that an employee must be ready to deal with in case he or she fails to honour the psychological contract. On the other hand, the employee may also decide to take some measures in case the employer fails to honour the contract.

One of the most common reactions would be a reduced productivity of the employees who will be spending much of their time relaxing and wondering why the employer has breached the contract. In some cases, the employee may decide to take the case with the employee. This would involve confronting the manager and complaining about unmet expectation.

The employer may also consider the issue of unionisation as a way of making their views be respected by the management. In such cases, the body will have a higher bargaining power than when they have to address the issues on their own as individuals.

When the employee is convinced that the employer is not willing to honour their psychological contracts, they may despair, and those that are ambitious will consider leaving the firm to other firms where their views would be respected.

Psychological contract within an organisation is very important. It helps in maintaining a positive relationship between the employer and the employees. It helps in retaining a pool of self-motivated employees. It helps in eliminating high employee-turnover rate within a firm.

It also helps in creating trust and mutual respect between the employer and the employee. These factors are vital in creating a positive working environment that would yield positive output for the firm.

Causes of Psychological Contract in Organisation

It would be important to understand some of the common causes of psychological contract in an organisation. One of the leading causes of this psychological contract is the verbal agreement that is made between the employer and the employee. This is very common during the interview or soon after one has been confirmed as an employee of the firm.

An employee may promise the employer that he or she has some special skills that can be of help to the firm. The employer may also promise the employee some benefits over a given period as a way of motivating them. These promises would constitute a psychological contract. Sometimes the psychological contract may be developed non-verbally out of our perception.

The employee would look at the structures within an organisation, the nature of the business they are engaged in, and the profitability of their organisation and make their own independent judgement about what they should earn.

The employer may also look at the academic credentials of the employee and the past experience and develop a perception of what their output should be within the organisation. This develops into a belief, and then it becomes a psychological contract.

The Effect of HRM Practices on Psychological Contract in Organisation

The practices of the human resource management have a significant impact on psychological contract in an organisation. It would be necessary to define how the concept of psychological contract was developed.

When Argyris was introducing the concept of psychological contract in 1960, he noted that there was a strange behaviour among the employees at a construction site that was based on the type of the foreman they were given (Kiazad, 2010). When these employees were assigned strict foreman who would follow their activities closely and direct them on what to do at every stage, their output was reduced considerably.

On the other hand, when they were assigned a foreman who looked more tolerant and highly approachable, their output drastically improved. Argyris was interested in understanding this paradoxical situation. It would be expected that with the strict foreman, the output will be greater than when they had a weak supervisor.

He therefore, joined the group of employees in order to understand the trick. He realised that when the strict supervisor was on duty, employees never concentrated on their work. All their concentration was on the supervisor, monitoring his move, and putting a great show when he was approaching just to make him believe that they were doing a lot.

When the supervisor left, they would relax taking a position that would make a person standing from a distance believe that they are very busy in their work. This means that they were pretending in their work, a fact that negatively affected their output. When the employees assigned a more relaxed supervisor, the pretext was gone, and they would behave as normally as possible.

They would take a short rest when they felt a little tired, but would always try to be serious when addressing their duties. It was also observed that they had respect for the tolerant supervisor than the strict foreman.

For this reason, they were always willing to work harder in order to please the supervisor that they believe is considerate to them. This research clearly indicated that the management has a big role in defining the attitude of the employees, and the approach they take when assigned different tasks.

This experiment clearly shows that there is a close relationship between actions of the management unit and the psychological contract. According Durai (2010), employer always makes some promises that they know are unrealistic. They hide under a very misleading belief that their employees would forget those promises after some time. However, the truth is that the employees would never forget these promises.

They form a basis of a contract that must be respected by the management as promised. When the promise is not fulfilled, then there would be a breach in the psychological contract. Such breaches bring tension and mistrust between the employees and the employer.

The management has the capacity to regulate these psychological contracts. It can be done by minimizing the promises made as much as possible. Whenever a promise is made, the management should make an effort and fulfil it.

HR practices which affects psychological contract in organisation

As discussed above, there are specific human resource practices that may affect psychological contract in an organisation such as recruitment, compensation, and employee-management practices. During recruitment, each of the parties may make promises to each other that may constitute a psychological contract.

During the process of managing the employees, the management may make some promises in order to influence their performance. Compensation or rewards is one of the ways of fulfilling a psychological contract that the management has made to the employee.

An Interview with HR manager at HSBC Bank

In order to gather first-hand data on this issue, the researcher organised an interview with a middle manager at HSBC. The following were the responses obtained.

Researcher: Do you understand the concept of psychological contract between an employer and an employee?

The Manager: Yes, I do.

Researcher: Do you think it is practically taking place at your place of work?

The Manager: It is. At HSBC, we are always under pressure to give higher output. As part of management, I always make promises to reward those who excel in their work.

Researcher: Do you always keep these promises?

The Manager: We always try to, but in some cases we may fail.

Researcher: What are the reactions of the employees when you fail to honour the promise?

The Manager: They always protest and some become very demoralised. For this reason, we always avoid failure.

Researcher: Do you believe that HRM practices affect psychological contract in an organisation?

The Manager: Yes. In fact, I think that it plays the pivotal role in defining psychological contract within an organisation.

Human Resource Planning Process

Human resource planning is one of the most important tasks of the management that can be used to regulate psychological contract within an organisation. The figure below shows specific stages of the planning that should be closely observed by the human resource during the planning process.

Human Resource Planning Process

Source: (Armstrong, 2007, p. 76)

At the first stage, the management must understand the current position of the workforce in terms of their capacity and compensatory needs. With this information, it should define the future of the workforce in terms of what they should be able to achieve and how the firm will compensate them.

When this is achieved, the human resource should develop strategic means of reaching the desired destination. This should be done in a realistic manner based on the current and expected financial strengths of the firm.


Psychological contract is a mutual perception and responsibility between the employee and the employer that defines their relationship. Unlike a written contract, psychological contract is always written in the minds of two parties and a breach may not resolve through a litigation process.

However, it is important to note that its impact on the overall performance of the employees and trust between the employer and employee is greater than that of a written contract. The practices of the human resource management have a central role in defining this contact. The promises that the management make creates the contract and their ability to fulfil these promises would define its relationship with the employees.


Armstrong, M. (2007). A handbook of human resource management practice. London: Kogan Page.

Conway, N., & Briner, R. B. (2005). Understanding psychological contracts at work: A critical evaluation of theory and research. Oxford: Oxford University Press.

Durai, P. (2010). Human resource management. Chennai: Pearson.

George, C. (2009). The psychological contract: Managing and developing professional groups. Maidenhead: McGraw Hill Open University Press.

Guest, D. E., Isaksson, K., & Witte, H. (2010). Employment contracts, psychological contracts, and worker well-being: An international study. Oxford: Oxford University Press.

Guest, D., Conway, N., & Chartered Institute of Personnel and Development. (2004). Employee well-being and the psychological contract: A report for the CIPD. London: Chartered Institute of Personnel and Development.

Kiazad, K. (2010). Responses to psychological contract breach: Moderating effects of organisational-embeddedness. New York: Cengage.

Petersitzke, M. L. (2009). Supervisor psychological contract management: Developing an integrated perspective on managing employee perceptions of obligations. Wiesbaden: Gabler.

Wellin, M. (2007). Managing the psychological contract: Using the personal deal to increase business performance. Aldershot: Gower.

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IvyPanda. "The Effect of HRM Practices on Psychological Contract in Organisation." June 19, 2019.


IvyPanda. 2019. "The Effect of HRM Practices on Psychological Contract in Organisation." June 19, 2019.


IvyPanda. (2019) 'The Effect of HRM Practices on Psychological Contract in Organisation'. 19 June.

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