Understanding what really matters to your people

A guest contribution from Hatty Richmond

The Psychological Contract is a term well known to organisational researchers and psychologists, but less recognised in the workplace.

An example of how the Psychological Contract can be spectacularly broken is the recent Volkswagen emissions scandal. Volkswagen has undergone reputational evisceration in the press and the full picture of the fallout has yet to emerge, but you can bet your bottom dollar that the human (employee) impact of this colossal breach of trust will be huge – never mind the immediate impact on share price and consumers.

Whilst contracts cover the tangible basics of the employer/employee relationship, the Psychological Contract is all the unwritten, intangible stuff – or ‘expectations’ – held by the employee. It covers the things that are implied in return for work and commitment.

A strong Psychological Contract is often the basis of extra effort made above and beyond the minimum. Examples include; an ‘understanding’ that delivering to a certain standard over time will bring promotion; everyone will be treated in a fair and balanced way; or that an organisation will fulfil its environmental and ethical commitment.

Every individual has a intuitive sense of what they intrinsically need in order to give their commitment.

It is up to the organisation to understand this and act accordingly. As a result, the early interaction between organisation and employee – starting with public image – is crucial, and well-meaning efforts to attract talent can lead to problems down the line.

The modern age of more flexible working, the move away from jobs for life, higher levels of education and the huge and immediate power of social media and instant communications all mean that the balance of power has tipped towards the employee. Work is no longer grounded solely in contractual obligation; instead it’s much more about commitment and choice. On this basis all organisations, especially those who want to attract and retain talent, ignore these changes at their peril.

The impact of a broken Psychological Contract is significant. Even more so, when it’s en masse, like in the case of Volkswagen.

Another example is the niche, owner-managed Executive Coaching consultancy bought out by a major accounting/consulting firm. The buyer liked the numbers, but failed to recognise the subtleties of the unwritten deal between organisation and people. The new culture and operational practices were alien and – to the acquired company – hostile. Every single consultant left within a year, taking the value of the acquired business with them.

Professional Services acquisitions, where human capital IS the product, are littered with examples like this.

Closer to home, a client of mine was suffering from problematic staff turnover – 50% of new employees were leaving within a year. The leadership was tolerating this as, incredibly, it was the norm for the sector. A programme of research showed that expectation set early on in the relationship – of the company, the job, the conditions of work – was wildly out of step with reality.

By making simple changes to align expectation with experience, this churn rate was cut in half, putting £2m on the bottom line of this medium-size enterprise.

A breach in the Psychological Contract is not synonymous with poor leadership, nor with ethical scandals, although these factors can certainly result in a breach. The consequences of such practice tend to snowball, which could then easily result in further reactive behaviour that then DOES breach the contract.

It is about whether the employees expectations are met with in reality. To that end, an organisation could be riddled with poor practice, but as long as its people don’t experience dissonance, the contract remains intact.

Clearly, though, we wouldn’t recommend it!

All this poses interesting questions for organisations and its leaders. Even if you are not in the fight for top talent (for whom simple remuneration and contractual benefits are only the basics) a more mobile workforce with greater choice can simply vote with its feet and the cost of churn – or even of the withdrawal of discretionary effort – can be devastating.

Equally, if like my former client you are taking this cost in your stride, removing it can be positively transformational.

The Psychological Contract can be helpful to provide a framework for discussion, and changes in practice and behaviour.