The psychological contract during the downturn

Aug 10 2009 by Graham Dietz Print This Article

When you arrived at your current employer you would have had expectations. They would have focused on promotion prospects, career development and bonuses among other things. However, since the recession the chances are that these expectations have been revised down dramatically.

If you have managed to hold onto your position during the ongoing turmoil you have probably been undergoing a change. Because while employment contracts are unaltered, the psychological contract between employees and employer has shifted markedly. And this applies to everyone in the organisation.

The psychological contract's terms are not the guarantees set out in a legal employment contract they refer instead to the unwritten, and often unspoken, expectations about all the other aspects of work that matter.

For employees this means expectations about work tasks, fair treatment, job security, career progression, skills development, work-life balance, and maybe performance-related bonuses. Employers, meanwhile, may have expectations on employees' levels of effort and performance quality, as well as loyalty and commitment to the organisation's goals.

It sounds straightforward but, by definition, everyone's psychological contract is idiosyncratic. The expectations may be purely transactional. Other employees may have forged a strong emotional bond to their employer. The employer may have encouraged this with glossy recruitment materials promising lavish perks and share options.

Then there is the impact of organisational history, culture and sector-specific norms on the contract. Some organisations and sectors operate with an active, even paternalistic, interest in their employees' well-being. They will have policies in place for looking after their people in a recession. Others will not.

The difference between the way bankers took the news of redundancy and manufacturers highlights this. Most investment bankers in the UK cleared their desks the day they heard. Probably none would think to demand the statutory 90-day consultation. It just isn't in the contract.

Workers from manufacturing plants or the public sector, especially where unions are present, looked for rather more in terms of personal attention and support. Concern in good times and bad is not just a matter of employer brand, it's what many employees believe there are entitled to.

Any contract depends on whether each party delivers their side of it. If they do, a mutually beneficial exchange can bring heightened commitment and effort, and satisfaction. But a broken psychological contract can sour relations. Engagement tumbles as employees stew in resentment, while employers disappointed by one of their employees may try to push them towards the door.

The problem in determining the psychological contract in an organisation is that it is always being rewritten by each party's shifting needs and interests. And a recession can blow all expectations out of the water. Obligations made in good faith when the money was piled high are prone to be abandoned when the bottom line loses a few noughts.

Intuitively this should lead to employees withdrawing effort and looking elsewhere for employment. But a recession means fewer alternatives in the job market, and a near-primal desire to keep the job one has got. Employees can then feel trapped, like in a bad marriage. And the one most likely to start divorce proceedings is the employer.

It is important that during a recession all parties engage with the psychological contract. It is instructive to think through what expectations were, what they are now and to prioritise those that matter most.

Employees, line managers and HR departments can use appraisals to clarify everyone's expectations. Top of the list for most employees will be stable employment, and fair and decent treatment. Career progression and big bonuses are probably in the nice-to-have category for now.

Unfortunately, all of the above are at risk in a recession. But it is often interpersonal violations that hurt hardest. In a downturn, poor or non-existent communication, bullying and callous job losses can make a grim situation worse.

The psychological contract's mutually recognised expectations are best shaped by honest communication and solid information. What matters is the explanation that employers offer for the current crisis.

If the order book is looking thin, or investors are bailing out, it makes sense to show this transparently to employees and explain the consequences. JCB took this approach and managed to save nearly 300 jobs that would otherwise have been lost. Unions worked co-operatively with the company over lowering working hours.

The truth, however unpalatable, is much preferred to the rumour machine or empty exhortations of fanciful optimism. Public life is awash with deceit and callous indifference, and the economic situation is so dizzyingly complex, that genuine honesty and humility might be refreshing Ė even innovative.

So as part of strengthening the psychological contract in the downturn sketch out several realistic possible scenarios, and have a credible vision ready for getting through. Likewise if the future is rosy, show this as well, because the nightly news can make everyone fearful.

Few companies have been lucky enough to escape without making redundancies. When you have to let people go ensure the process is transparent and open. Provide consultation and listen and take on board suggestion being offered. You could be surprised.

Most importantly you need to empower those left behind to offer them a personal sense of control. You can do this by giving their role meaning and demonstrate how it is important to the company's recovery. Explain how the job impacts on the whole company.

There should also be an emphasis on competency and the skills those left behind need. Assess survivors' skills, isolate training needs and act on them. Also offer survivors more autonomy in their work. A little hands-off, non-controlling management will help them regain focus.

One bruising but character-building outcome from reflecting on the psychological contract may be a close encounter with what many academics argue is the core truth of the employment relationship. That is that most companies' interests are only ever temporarily aligned with those of their workers.

If employees find only rhetoric in the psychological contract productivity will plummet. By ensuring the contract is intact you help boost, or even restore, trust in your organisation. This can help offer employees a sense of a useful future, which will aid your organisation in rising out of the downturn.

About The Author

Graham Dietz
Graham Dietz

Graham Dietz is a lecturer in Human Resource Management at Durham Business School in the UK. His research interests revolve around the nature of trust in the employment relationship.