The Psychological Contract

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Interpersonal skills refer to the manager’s ability to communicate with, understand, and relate to both individuals and groups. Managers interact with many different people, including subordinates, peers, those at higher levels of the organization, and colleagues from other organizations.

Most people have a basic understanding of a contract. Whenever we buy a car or sell a house, for example, both buyer and seller sign a contract that specifies the terms of the agreement. A psychological contract is similar in some ways to a standard legal contract but is less formal and well defined. In particular, a “psychological contract is the overall set of expectations held by an individual with respect to what he or she will contribute to the organization and what the organization will provide in return.

Thus a psychological contract is not written on paper, nor are all of its terms explicitly negotiated. The essential nature of a psychological contract is illustrated in Figure X-1. The individual makes a variety of “contributions to the organization.

Contributions such as effort, skills, ability, time, loyalty, and so forth, are what an employee offers to the organization.

These contributions presumably satisfy various needs and requirements of the organization. In other words, because the organization may have hired the person because of her skills, it is reasonable for the organization to expect that s/he will subsequently display those skills in the performance of her job.

In return for these contributions, the organization provides “inducements to the individual.

Inducements are what an organization provides to the employee, such as pay, career opportunities, job security, status, and so forth.

Some inducements, like pay and career opportunities, are tangible rewards. Others, like job security and status, are more tangible. Just as the contributions available from the individual must satisfy the needs of the organization, the inducements offered by the organization must serve the needs of the individual. Thus, if a person accepts employment with an organization because s/he thinks s/he will earn an attractive salary and have an opportunity to advance, s/he will subsequently expect that those rewards will actually be forthcoming.

If both the individual and the organization perceive that the psychological contract is fair and equitable, they will be satisfied with the relationship and will likely continue it. On the other hand, if either party sees an imbalance or inequity in the contract, it may initiate a change. For example, the individual may request a pay raise or promotion, decrease his or her contributed effort, or look for a better job elsewhere. The organization can also initiate change by requesting that the individual improve his skills through training, transfer the person to another job, or terminate the person’s employment altogether.

A basic challenge faced by the manager, then, is to fully understand psychological contracts. The manager must ensure that the organization is getting value from its employees. At the same time, the manager must be sure that the organization is providing employees with appropriate inducements. If the organization is underpaying its employees for their contributions, for example, they may perform poorly or leave for better jobs elsewhere. On the other hand, if they are being overpaid relative to their contributions, the organization is incurring unnecessary costs. Effective interpersonal skills can help managers understand psychological contract and enable him or her to more effectively explain and implement such contracts.

The Interpersonal Nature of Organizations

A great deal of what all managers do involves interacting with other people, both directly and indirectly and both inside and outside of the organization.

The schedule that follows is a typical composite day for the president of a Houston-based company, part of a larger corporation headquartered in California. He kept a log of his activities for several different days so that you could better appreciate the nature of managerial work.

  • 6:00 – 6:30 A.M. Read and respond to email from home; scan major news stories.
  • 7:45 – 8:15 A.M. Arrive at work; review hardcopy mail sorted by assistant.
  • 8:15 – 8:30 A.M. Scan the online version of The Wall Street Journal; read and respond to email.
  • 8:30 – 9:30 A.M. Review internal report; read and plant manager to resolve minor labor disputes.
  • 9:00 – 10:00 AM. Meet with two marketing executives to review advertising campaign; instruct them to fax approvals to advertising agency.
  • 10:00 – 11:30 A.M. Meet with company executive committee to discuss strategy, budgetary issues, and competition (this committee meets weekly).
  • 11:30 – 12:00 noon. Send several emails; read and respond to new email.
  • 12:00 – 1:15 P.M. Launch with the financial vice president and two executives from another subsidiary of the parent corporation. Primary topic of discussion is the Houston Rockets basketball team. Place three calls from cell phone en route to launch and receive one call en route back to office.
  • 1:15 – 1:45 P.M. Meet with human resource director and assistant about a recent OSHA inspection; establish a task force to investigate the problems identified and to suggest solutions.
  • 1:45 – 2:00 P.M. Read and respond to new email.
  • 2:00 – 2:30 P.M. Conference call with four other company presidents.
  • 2:30 – 3:00 P.M. Meet with financial vice president about a confidential issue that came up at launch (unscheduled). 3:00 – 3:30 P.M. Work alone in office; read and respond to new email; send several emails.
  • 3:30 – 3:15 P.M. Meet with a group of sales representatives and the company purchasing agent.
  • 4:15 – 5:30 P.M. Work alone in office.
  • 5:30 – 7:00 P.M. Play racquetball at nearby athletic club with marketing vice president.
  • 9:00 – 9:30 PM. Read and respond to email from home; send email to assistant about an emergency meeting to be scheduled for the next day.

How did this manager spend his time? He spent most of it working, communicating, and interacting with other people.

And this compressed daily schedule does not include several other brief telephone calls, brief conversations with his assistant, and brief conversations with other managers.

Clearly, interpersonal relations, communication, and group processes are a pervasive part of all organizations and a vital part of all managerial activities.

So, just imagine the differences in effectiveness if this manager has strong interpersonal skills (which he does) as compared to someone else with poor interpersonal skills.

Interpersonal Dynamics

The nature of interpersonal relations in an organization is as varied as the individual members themselves. At one extreme, interpersonal relations can be personal and positive.

This occurs when the two parties know each other, have mutual respect and affection, and enjoy interacting. Two managers who have known each other for years, play golf together on weekends, and are close personal friends will likely interact at work in a positive fashion.

At the other extreme, interpersonal dynamics can be personal but negative. This is most likely when the parties dislike each other, do not have mutual respect, and do not enjoy interacting. Suppose a manager has fought openly for years to block the promotion of another manager within the organization. Over the objections of the first manager, however, the other manager eventually gets promoted to the same rank. When the two of them must interact, it will most likely be in a negative manner.

Most interactions fall between these extremes, as members of the organization interact in a professional way and focus primarily on goal accomplishment. These interactions deal with the job at hand, are relatively formal and structured, and are task directed.

In another example, two managers may respect each other’s work and recognize the professional competence that each brings to the job. However, they may also have few common interests and little to talk about besides the job they are doing.

These different types of interactions may occur between individuals, between groups, or between individuals and groups, and they can change over time.

Two managers may decide to bury the hatchet and adopt a detached, professional manner. In doing so they could find more common ground than they anticipated, and their interactions could help their relationship evolve into one that is more positive on a professional as well as personal level.

When the company was younger and smaller, [Microsoft CEO Steve Ballmer] could, quite honestly, overwhelm most of the issues he faced with his energy and smarts. Now he’s learned to manage through people. … I think he will come off looking like a really unique and special leader. James Cash, Former Microsoft director

Outcomes of Interpersonal Behaviors

A variety to things can happen as a result of interpersonal behaviors. Numerous perspectives on motivation suggest that most people have social needs.

For many people, interpersonal relations in organizations can be a primary source for satisfying this need. For a person with a strong need for affiliation, high-quality interpersonal relations can be an important positive element in the workplace. However, when this same person is confronted with poor-quality working relationships, the effect can be just as great in the other direction.

Interpersonal relations also serve as a solid basis for social support. Suppose that an employee receives a poor performance evaluation or is denied a promotion. Others in the organization can lend support because they share a common frame of reference —an understanding of the causes and consequences of what happened.

Good interpersonal relations throughout an organization can also be a source of synergy. People who support one another and who work well together can accomplish much more than people who do not support one another and who do not work well together.

Another outcome is conflict — people may leave an interpersonal exchange feeling angry or hostile. A common thread is woven through all of these outcomes — interactions between people in the organization. A manager with strong interpersonal skills is well-positioned to understand, manage, capitalize on, and help improve interactions among others.

An effective place to start understanding the role and impact of interpersonal skills in the workplace is the basic nature of the relationship between individuals and organizations. It is also helpful to gain an appreciation of the nature of individual differences.

See Also:
    Research data for this work have been adapted from the manual:
  1. Management Skills: Assessment and Development By Ricky Griffin, David Van Fleet.