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The Psychological Contract: How Does it Affect Employee Retention?

In the 1940s, American psychologist, Abraham Maslow introduced the world to a theory that all humans have a hierarchy of needs. One of the key tenets of this hierarchy is psychological safety, and today, leaders across all industries and verticals are conscious of how the psychological safety of their employees impacts engagement, productivity, and retention.

Beyond feeling secure in the workplace, though, psychological safety is part of a larger concept most businesses are learning to prioritize, and it’s called the psychological contract. Not so surprisingly, this contract is extremely important in ensuring employees not only understand their roles and responsibilities but actually remain with their existing employers.

Why?

Because this contract encompasses the entire commitment (spoken and unspoken) employees have with their employers. And, when this contract is broken, businesses feel the effects through disengagement, low morale, poor company culture and turnover. 

But what exactly is a psychological contract, and why do leaders need to be cognizant of what their contract with their employees means for retention? Let’s dive deeper.

The psychological contract defined

First conceptualized by Denise Rousseau, a Professor of Organizational Behaviour, the psychological contract is an unwritten and, in some cases, unspoken set of expectations between an employer and their employee that includes elements like mutual beliefs and values.

In other words, it’s not a written nor formal contract, but a mutual understanding of sorts. 

There are typically three main characteristics of a psychological contract:

The first is subjective – the obligations based on what an employee believes they are expected to give, and what they can expect in return. 

The second is implicit – obligations aren’t written down or formally recorded, but are instead mutually understood. 

And the third is mutuality – this occurs when employees believe both they and their employer understand and agree on what the employee perceives of what is owed by and to both parties.

Interestingly, the psychological contract is developed over time, which means it’s directly impacted by the everyday communication and relations employees have with their leadership. Even when employers feel they have been clear, explicit, or direct, employees can think and feel differently, and all of this informs the psychological contract.

Now, that may sound as though leaders have zero control over this contract or how employees form their own perceptions of it, but what’s important to keep in mind here is that employees will develop their own perspectives of this contract based on what they do or do not know.

That means that leaders have to communicate their expectations, beliefs and values to their teams to avoid setting misguided or unintended expectations. But more on that later!

Why does this contract matter?

When employees feel the psychological contract is fulfilled - meaning, they feel that you, as a leader, are holding up your end of the ‘bargain’ – they are far more likely to engage in their work, feel connected to their organization, and psychologically safe among their colleagues or peers.

But when employees feel the contract is broken, they can feel betrayed or let down, which inevitably leads to resentment and key issues with employee engagement, like absenteeism or poor performance. 

For leaders, the most dire consequence of a broken psychological contract is turnover. If an employee in your organization feels that they are giving what they feel is expected of them, but you as an employer aren’t living up to your end of the unspoken ‘deal,’ they have every incentive to leave your company for one that will provide safety and security.  

Prioritizing this contract makes sense not only from a business perspective but from an employee development one; if your employees trust you as a leader and believe you are doing what’s best for them, they will continue to contribute because the psychological contract is being fulfilled. 

As a leader, however, it’s your responsibility to ensure that both you and your employee understand the unspoken contract you both have. Which leads us to our next point.

How can leadership form a clear psychological contract with their employees?

Only 30% of employees feel their leaders proactively involve them in setting expectations, goals, and responsibilities in the workplace. 

Lack of communication, understanding and mutual agreeance mean most employees don’t actually know that their perception of the psychological contract likely differs from that of their employer. So it follows that leaders have to openly communicate with their teams and form an understanding of the contract that is both mutual and clear.

Practice consistent communication

By being explicit in the information they provide their employees, but especially new hires, leaders can form a clear and mutual understanding, as the psychological contract evolves constantly based on the interactions and experiences employees have when working with their leaders.

Manage expectations

Go out of your way to give employees as much information as you possibly can regarding their roles, responsibilities, tasks, and what’s expected of them in the workplace. On the same note, however, make sure you’re asking and listening to your employees when it comes to what they need, or what their expectations are.

Constantly engage

Employees crave engagement and open communication with their leaders, but a lack of engagement means your teams feel unsure as to where they stand and whether everyone is proactively fulfilling the psychological contract. Don’t be afraid to talk to your employees, checking in with them consistently and engaging them in their work. Employees that feel they can talk with their leaders are 2.8x more engaged according to a Gallup study.

By being proactive in communicating the goals and expectations you have between yourself and your employees, you can better prepare yourself to fulfil the psychological contract already existing among your teams. And that’s good news for employers, given happy and secure employees will stick with your organization where others experience high turnover.

If you’re concerned about your psychological contract, it may be time to consider engaging your top talent. Organizations that consistently engage their employees not only experience less turnover, but can increase their profitability, sometimes up to 20%. Communication, recognition and a healthy psychological contract can help you retain the talent your organization needs to succeed, and an engagement tool like Kudos can help you do just that.

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