03 Note on Managing the Psychological Contract-Protected

Harvard Business School9-474-159Rev. April 30, 1985Note on Managing the Psychological Contract

The purpose of this note is to consider the individual-organization relationship and itsimplications for the manager of a functional unit (a sales force, manufacturing plant, controller’sdepartment). Since most business organizations are built on functional units, managers at this levelare centrally involved in managing the interface between the work of the organization and the skillsof the employee. Managers are responsible not only for insuring that the technical resources forperforming tasks are available (the necessary equipment, raw materials) but also for managing themotivation of their employees. They must facilitate a relationship between employees and the firmthat encourages their subordinates to willingly expend energy on organizational tasks.

The Relationship

Dynamics of Reciprocation

In the relationship between the individual employee and the organization, each partyparticipates only because of what it expects to receive in exchange for participation.1 An individual,like an organization, constitutes a system with particular needs. These two systems enter into a jointcooperative relationship only when it offers opportunities for the fulfillment of their respective needs.The organization employs the individual because his or her services are essential for the achievementof its goals; similarly, the individual contributes services only when it leads to the fulfillment of his orher personal needs.

The Psychological Contract

The basis of this reciprocal relationship is the psychological contract, which may be definedas the mutual expectations of the individual and the organization as articulated by its managers.2Both parties bring to the relationship a set of expectations of what each will give and receive. (TableA provides examples of areas in which the organization and the individual are likely to have1 Discussion of the psychological contract is based primarily on: Harry Levinson et al., Management and MentalHealth (Cambridge: Harvard University Press, 1966), pp. 22-38 and David J. Lawless, Effective Management: SocialPsychological Approach (Englewood Cliffs, New Jersey, Prentice-Hall, Inc., 1972), pp. 144-164.

2 Levinson et al., p. 36; Lawless, p. 147.

Assistant Professor R. Roosevelt Thomas, Jr., prepared this note as a basis for class discussion.

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474-159Note on Managing the Psychological Contractexpectations.) When each party enters into the relationship, it tacitly accepts the expectations of theother. The set of both the individual’s and the organization’s expectations becomes the basis of thepsychological contract.

Table AExamples of Expectations

What the individual may expect to give and theorganization may expect to receive:

1. An honest day’s work

2. Loyalty to organization

3. Initiative

4. Conformity to organizational norms

5. Job effectiveness

6. Flexibility and a willingness to learn and to developWhat the individual may expect to receive and theorganization may expect to give: 1. Salary 2. Personal development opportunities 3. Recognition and approval for good work 4. Security through fringe benefits 5. Friendly, supportive environment 6. Fair treatment

7. Meaningful or purposeful job

Source: Adapted from John Paul Kotter, “The Psychological Contract: Managing the Joining-Up Process,” CaliforniaManagement Review (Spring, 1973): p. 93.

The individual-organization contract is termed psychological because much of it is oftenunwritten and unspoken. There are several reasons why this may be so:

1. Both parties may not be entirely clear about their expectations and how they wish

them to be fulfilled. They may wish to avoid defining the contract until they have

a better feel for what they want. This may be one explanation of the tendency of

management recruiters and applicants to define their expectations in very

general terms. Frequently recruiters see themselves “buying brains” which will

adapt to some as yet undefined job, while applicants want to maintain as much

latitude as possible in specifying the type of jobs which interest them.

2. Employees and the organization’s representative may not be aware of some of

their expectations. For example, organizations frequently are not explicitly aware

of how much loyalty they demand of their employees. Similarly, employees are

not always aware of the extent to which social interactions on the job are

important to them. The fact that the parties are unaware of these needs does not

make them any less real, for if they are not fulfilled, both parties will quickly

become aware of their reality.

3. Some expectations may be perceived as so natural and basic that they are taken

for granted and left unstated. Two examples would be the expectations of no

stealing and an honest day’s work for a day’s pay.

4. Connected to the above, cultural norms may inhibit verbalization. Wanting to be

perceived in the “Horatio Alger” tradition of self-starters may prevent an

employee from probing too deeply into what is expected of him or her; similarly,

norms against violating an individual’s privacy may make an organization’s

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