CHAPTER 8

The Invisible Contract

Many months passed since Ben had performed his team year-end reviews (YERs). It was now midyear and Ben was again meeting members of his group. Most of his team had performed well, so Ben expected easy discussions overall.

Ben recalled the YER conversation he had with his employee Mary. She was an excellent worker and had been a top performer in the EMEA (Europe, Middle East, and Africa) region. Her marketing campaign idea was extremely successful, and he lauded her efforts throughout the conversation. After expressing his satisfaction with her performance, Ben told her that within the next few months he would give her the chance to be team lead on all things related to regional direct-to-consumer (DTC) advertising. She seemed very excited about the opportunity and told Ben that she couldn’t wait to support the team in this area. After the discussion, Ben made a note of what he had said, and then left to prepare for his next call.

As months passed, Ben didn’t think about the discussion again until a reminder popped up on his screen. He sighed when he thought about it now. He had been so busy that he hadn’t prioritized Mary’s leadership opportunity. However, now, after thinking about it, Ben considered how much work Mary already had done. She was so busy with current regional and organizational advertising objectives and controls that she would likely be overwhelmed if he added extra work. He knew she was capable of it, but he also knew she had a busy family life as well. The more he thought about it, the more he considered postponing, or even canceling the plan. He could still send some team members to her for questions, but he decided against giving her the full responsibility of team lead.

The next day, he called her and told her the news. He iterated that she was already very busy, and he didn’t feel it appropriate to dump more work on her shoulders. He also preferred that she instead maintain continued focus on her current key performance indicators (KPIs), without the stress of new responsibilities. Naturally, she seemed disappointed, but Ben figured she would get over it soon enough. What Ben didn’t know was that he had just created a breach in what is called a psychological contract that he had made with Mary. As Ben was about to find out, this could be a very serious problem.

The idea of psychological contracts is nothing new. Conceptually, the idea of unwritten promises and their potential impact on work relationships has been around for some time. What psychological contract theory seeks to prove is a speculative description of the cognitive connection between a manager and his or her employees (Rousseau 1995). Denise Rousseau, a respected researcher in the area of psychological contract, describes it as the perceptions formed by employees based on the company they work for and concerning the agreements that have been developed through their career between them and their organization (Rousseau 1995). To simplify the concept of psychological contract even further, one could consider it as the psychological anticipation of something based on unwritten, bilateral agreements between employee and employer within an organizational setting (Armstrong 2006). Theoretically, it could also be considered a methodical framework that could be useful to examine the impact of organizational changes on individual employees over time (Storey 2007).

Even hundreds of years ago, political philosophers including Loche and Hobbes mentioned the notion of mental and subconscious interpersonal contracts existing within the sociopolitical environment between individuals and state (Robinson 1996; Wellin 2007). However, in more recent times, organizational and behavioral theorists began researching the phenomenon within the corporate environment (Smith 2012). Chris Argyris was one of the first people to coin the term psychological work contract. The original idea was based on the notion that a working relationship is theoretically founded on the concept that when a manager offers sufficient wages and benefits for the job, employees will then work harder and increase their productivity (Argyris 1960). Later the theory was expanded to include the idea of mutual relationships at work. However, Rousseau used quantitative research to increase knowledge of the more individualistic aspects of the contract, specifically focusing on the idea that an employee’s behavior can be greatly influenced by fulfilled promises of his or her manager or company (Griffin and O’Leary-Kelley 2004).

The psychological contract generally forms at the beginning of an employee’s career and continues to develop throughout, while new commitments and resulting expectations are forged (Rousseau 1995). One massive research study even found that when employees completed a corporate training protocol on the psychological contract, there was an increase in employee commitment to the organization (Rousseau 2000). Contrarily, research evidence has also shown that when the psychological contract is violated, such as in the case of Ben and Mary, trust, employee attitude, and behavior can be affected, even resulting in divergent behavior on the part of the employee (Coyle-Shapiro, Jacqueline, and Kessler 2002).

Ben had never studied the psychological contract, so he had no idea about the implications of what he had done. He did realize, however, that when he FaceTimed with Mary since his call, she seemed considerably less enthusiastic than she had during their previous meetings. Ben even started the discussion by reiterating how great she was doing and praising her efforts and results within the EMEA region. He told her that on her current trend, she could expect a nice raise at year-end. She smiled, but Ben sensed that she still wasn’t satisfied. Remembering his recent commitment to enhance his level of emotional intelligence, he asked her if everything was all right. She immediately brought up her desire to be team lead on DTC advertising. She had clearly prepared for this discussion and gave legitimate business arguments about how she could help the team and help Ben grow his business worldwide through innovative marketing programs.

Ben could see that Mary was passionate about the topic, and he knew she would do well. However, he still felt uncertain about whether or not he should give her the extra responsibility. He knew that she would need to be further compensated for the role, but now he wasn’t sure the budget would allow it. Therefore, he promised her he would consider it again and look into the viability of it. Still not satisfied, she reminded him that he had promised her it would happen at their YER. This comment took Ben by surprise. He remembered that he had mentioned it as an idea, but he didn’t recall actually using the word promise. Their conversation ended seemingly well, and Ben started to look into what he should do. After having a discussion with Finance, Ben realized that he wouldn’t be able to pay Mary the extra bonus for the work unless he cut spending in other areas. At the moment, he needed every cent where it was, so he wasn’t willing to make the sacrifice. As a result, he sent her an e-mail informing her that he was sorry, but it would not be possible to create and assign her the lead role at this time. She never responded.

Ben’s failure to fulfill his commitment is not an uncommon practice in management. In fact, one study demonstrated that many organizations across multiple industries frequently break promises with their employees. Indeed, in the study group, almost 69 percent reported that they experienced a breach of the psychological contract within the last 10 days leading up to the survey (Conway and Briner 2002). Ben felt that he had made a simple and innocuous statement to Mary. However, to her, Ben had made a promise. In Ben’s mind, he had an idea about how great it would be to have her lead the team on a special project, but it didn’t work out. In Mary’s mind, Ben promised her an exciting opportunity to develop her leadership skills and grow in the organization, but he failed to deliver. Ben was learning that words can sometimes be complicated.

The psychological contract can have many perspectives. To begin with, the employee perspective might be constructed by different factors. These might include future career prospects, perceived job security, rewards, and generous compensation based on work completed, among others (Davidson 2001). Some have even implied that the very nature of an employee/employer relationship can be entirely dependent on the constructs of psychological contract (Welsch 2003). Ideally, a work relationship should formulate a solid and stable schema that continues to flourish as the relationship develops over time.¹⁵ Schema could be defined as the intellectual process by which knowledge about a certain stimulus or information, such as a situation or an interaction with an individual, is organized cognitively (Fiske and Taylor 1991). Furthermore, the psychological contract itself can be broken down into two different facets: the relational and the transactional (Rousseau 1990).

The transactional side relates to the expectation of monetary payment as a reward for specific behavioral actions within the company or for the given job role (Woodruffe 1999). While the transactional contract is more ego driven and individualistic, the relational contract takes a long-term perspective and instead emphasizes career development and therefore focuses on a different set of behavioral approaches (Thompson and Bunderson 2003). The problem is that as a result of changes in the global economy and poorly managed organizations, the psychological contract has had a recent tendency to trend more toward the transactional approach (Herriot and Pemberton 1995). This can have very important implications in the relationship between an employee and his or her organization, which can influence attitudes such as lack of trust, lower job satisfaction, and diminishing employee motivation (Herriot 2001). To make things worse, oftentimes the transactional approach is based on fear-focused leadership, which can further isolate employees and promote continued loss of trust. Contrarily, employee-centric leadership that demonstrates commitment and concern toward the team and their career expectations can promote trust and promote creativity, higher levels of teamwork, and better overall results (Mackay 2010).

While he tried to listen to Mary’s concern, Ben simply failed to understand the importance of the commitment he had made to her. By telling her she could be in a leadership position, he was effectively promising her an opportunity for career growth, which was a tremendous motivation for Mary. Not only had she internalized the idea that she would be given this additional role, but she also spoke with her family and friends about it. She began to formulate how it might impact her future within the organization and even in her long-term career. Yet, all of this was shattered when Ben rescinded on what he had said. His intentions were good, but he entirely missed the mark and was now just beginning to see the consequences of his actions.

Aside from the transactional and relational psychological contracts, some researchers believe that there are two other different types of contracts. The first, called the transitional contract, is founded in the unseen organizational and socioeconomic changes that can suddenly arise and contradict the initial edicts of the original contract. The second, called the balanced contract, is indicative of an open-ended agreement that relies primarily on employee career development, organizational success, and the precepts for the mutually beneficial growth of the manager and employer relationship over time. The balanced contract is similar to the symbiotic approach, in that the outcome is mutually beneficial for both parties. It is the balanced contract that should be most prevalent in the modern-day organizational setting (De Jong, Schalk, and De Cuyper 2009). Indeed, much of the importance of the contract may be founded upon the prevalence of reciprocity in human culture, and the necessity to promulgate the notion of balance in the context of ongoing social exchange norms between people in the business context (Coyle-Shapiro, Jacqueline, and Parzefall 2008).

What Ben needed to realize is that if he had honored his commitment to Mary, he could have seen benefits far beyond her support of the team. Mary had an expectation of leadership and if she had been given the role, she would have been fully engaged in it, despite the extra work. Her perspective about the organization would have been positive, and her trust in Ben as a leader would have increased substantially. This in turn could have increased not only her motivation, but the team’s as well. However, after Ben breached his commitment with Mary, these possibilities essentially went right out the window, leaving Mary in a very different psychological state.

The problem for Ben and other managers in similar situations is that they may not even realize that the significance of the psychological contract goes far beyond employee attitude. Honoring commitments made with employees can potentially increase levels of employee retention as well as driving increased productivity (De Vos, Meganck, and Buyens 2006). Leaders may forget the important fact that the psychological contract and specifically informal or verbal commitments made to employees are essentially internalized agreements that employees subjectively perceive as promises made to them by leadership. The thought is as often as simple as, If I do X, then my company will give me Y. Failure to recognize this could have a devastating impact on employee perception of trust and other factors, as well as diminishing their relationship with the manager and the company (Turnley and Feldman 1998).

There exists a lot of evidence supporting the idea that the psychological contract can impact employee behavior. However, many researchers have even postulated that it can also have a powerful effect on productivity and ultimately business results (Wellin 2007). Part of this stems from employee motivation, which can be extremely important for achieving team goals. Because it is an important part of the foundation in which employee behaviors are based, motivation can push employees to go above and beyond their normal KPIs and give them the desire to work harder and deliver more than their objectives warrant (Pintrich and Schunk 2013).

Research has repeatedly shown that employees base their reciprocal work efforts within the organization on the fulfillment of corporate career promises and their subjective assessment of organizational incentives, thus adjusting their own psychological contracts with their company over time (Coyle-Shapiro, Jacqueline, and Kessler 2002). In addition, employees view psychological contracts as an indicator of corporate behavior because they perceive management follow-through as an indication of whether or not they are being treated fairly by the company. This perception of fairness can have a direct impact on employee behavior within their job role (Jackson and Wielen 1998). As in the case of Ben and Mary, promises made at the beginning of a new relationship can be crucial because they may ultimately determine the core essence of the psychological contract throughout the employee’s career (Tomprou and Nikolaou 2011). In one example, a study of 340 bank employees demonstrated that the commitments of the psychological contract influenced worker motivation and had a significant influence on attitude (Lee and Liu 2009). In today’s growing, global economic environment, the psychological contract is a fundamental tool for effective leadership in organizations that focus on high employee commitment and high performance (Burack 1993).

Four months had passed since Ben’s last discussion with Mary about the leadership role. During this time, he noted that she appeared to be more disengaged than before. Normally in meetings, she had been very active, while contributing many relevant thoughts and ideas. However, since the last communication about the role, she was far quieter. She had even missed a deadline, which was something that she had never done before. One of Mary’s team members even confided that she seemed far less enthusiastic at work, and she was concerned that Mary may be having problems at home. Ben too was getting concerned. He wondered if it was all because she was so disappointed about not getting the role, or if her recent lackluster performance was due to something else. He decided that it was time to speak with her in person. He had already planned a trip to Europe to meet with other clients. Now he could do both. He called his administrative assistant and requested that she book him a flight to Paris after his initial meetings. Perhaps, he thought, it was time to reevaluate his decision.

Mary was experiencing some of the early cognitive effects of a psychological breach. She had worked many years at the company and had always looked forward to each day in the office. However, her career was a major focus. Ben, she thought, was an okay manager. However, he really disappointed her when he backed out of his offer for a leadership opportunity. This was not the first time a manager in the company had promised her a chance at a leadership role and reneged. Just over a year before, the manager who preceded Ben told her she would be getting a promotion as director of product marketing for her brand. She was very excited about it, until he left and was subsequently replaced by Ben a few months later. The director opportunity was snatched up by a junior marketing person in the United States in the process. Mary shrugged it off and instead focused on doing well in her current role and demonstrating her skills to her new manager. During their YER, he clearly noticed and offered to reward her efforts with the leadership opportunity. When he broke his word, though, she was angry. It seemed to her that this company was full of lies and false opportunities. Thinking about the limited career opportunities she had, Mary started looking elsewhere and promptly made acquaintance with several recruiters. In her mind, the sooner she got out of this sinking ship, the better.

Sadly, cases like Mary’s happen all the time. Many studies have shown that breaches of the psychological contract can severely impact not only the employees involved, but also the organization itself. The psychological contract is a two-way street, so when a commitment is made, both employee and employer should honor it. However, a violation occurs when either party fails to deliver on the perceived personal or career promises stated within the original context of the agreement (Robinson and Rousseau 1994). Some people believe that the word “violation” in this context is too strong because many contractual breaches are relatively minor (Morrison and Robinson 1997). However, a true violation of the psychological contract goes much deeper than simple unmet expectations in a given situation. Rather, a violation occurs when a promise is made by one party and the other party perceives that the other group is unwilling or unable to fulfill their side of the promise (Vardi and Weitz 2004).

Regardless, serious violations of the psychological contract can create a severe loss of motivation to work and, in the worst cases, promote employee thoughts of getting safe, getting out of the company, or getting even. Getting safe, in this context, implies that employees will do the absolute minimum to not attract positive or negative attention to themselves. Thus, they will simply fly under the radar and wait for a better opportunity to arrive. Mary, for example, had entered this phase. She no longer made efforts to draw attention to herself in meetings or teleconferences, and she did the minimum required for her job, with little enthusiasm. She wasn’t looking to get fired, but at the same time, she had lost her dream of getting promoted. When other opportunities don’t come around within the company, the third step of the process comes into play—getting out. One of the recruiters contacted Mary about an opportunity with a competitive company. She had heard negative things from others about the work environment in the proposed company, but her emotional response and loss of trust resulting in the second contractual violation with her company pushed her to accept the interview anyway. It might have seemed irrational at the time, but Mary wanted more for her career, and she was frustrated.

In the final stage, when the situation is really bad, some employees feel that they must get even with the organization for breaking their promise. This is the most dangerous attitude and often involves the desire to somehow “hurt” the organization through sabotage or disruption (Doyle 2003). Despite the possibility of inducing these behaviors through broken promises, one study indicated that 50 percent to 80 percent of company employees feel that their organization has not fulfilled its promises and obligations (Turnley and Feldman 1999). Many times, a violation or breach occurs due to reneging of corporate or leadership promises, like what happened with Ben. In other cases, breaches occur because company leaders are aware of their promised obligations, but for whatever reason, they simply fail to or are unable to fulfill them (Morrison and Robinson 1997).

Another reason psychological contract breaches occur is cognitive incongruence. In this situation, two involved parties have entirely different perceptions about the terms of the mutual obligations referred to in the original contract. Many studies support the notion that breaching psychological contracts correlate with negative behavior on the part of the employee (Griffin and O’Leary-Kelley 2004). Another issue is that the psychological contract is emotionally binding and often includes a perceived sense of entitlement. Therefore, a violation can be a negative and palpable experience for each party (Vardi and Weitz 2004). However, the true implications and results of a breach in contract are often very subjective and therefore difficult to accurately measure.

One factor that helps remove some of this ambiguity is trust. An employee’s level of trust in their organization, or manager, can impact their perception of the contract at its initiation. Studies have shown that the level of trust an employee has in his or her company or manager can also directly impact how they perceive a psychological contract violation (Robinson 1996). Along with continued academic research of this concept, companies have started to implement their own formalized management training programs with the aim to increase awareness in the importance of the contract in leadership (Burack 1993). The psychological contract can be an effective instrument for delivering a structured framework that could help examine the cognitive relationship that exists between leaders and their people, as well as understanding how corporate changes impact employees (Johnson 2010). More importantly, as the contract has been demonstrated to directly impact employee behavior and commitment, it is important for corporate leadership to carefully consider promises before they are made (Coyle-Shapiro and Kessler 2000).

What we have discussed thus far relates primarily to the psychological contract in the traditional team setting. But what about in the virtual team environment? As previously noted, the absence of team commitment can have very damaging effects for trust and other factors on a virtual team (Snellman 2014). For virtual managers and their employees, the psychological contract can have a very important impact on what employees perceive as fair for themselves at their job. This, in turn, can directly impact both motivation and employee behavior (Jackson and Wielen 1998). On the positive side, fulfilling promises stated in psychological contracts has been shown in research to help explain trust behaviors in the virtual working environment (Piccoli and Ives 2003). Studies consistently reinforce the importance of congruency of the psychological contract as it relates to perception between both parties. This is especially true when specific constraints of obligations and expectancies between both company and employee are considered. Doing so generally promotes positive employee outcomes (Kotter 1973).

While such ideas seem great on paper, managers really do need to be cautious and choose their words wisely. Contract violations can ultimately be perceived differently in a virtual setting, greatly damaging trust (Davis and Todd 1982). While managers may be the contract violator, employees also may fail to live up to their agreements with management.⁵¹ A big part of this issue comes down to fairness. Virtual employees already have relatively limited access and connectivity with their manager. Therefore, in the virtual environment, employees’ perceptions of fairness may be one of the key ways they can determine the intentions of the organization and their supervisor. Furthermore, their cognitive perception of fairness can dictate how they behave in their work environment.

According to a research study, employees who felt they were treated fairly according to the constraints of their psychological contracts with the company were more likely to commit to positive working behaviors, including going beyond their normal required tasks for the job. On the other hand, virtual workers who experienced a breach of contract were more inclined to exhibit negative attitudes and poor work behavior (Jackson and Wielen 1998). Another challenge for corporate leadership is the fact that it is far more difficult to instill a corporate identity with employees who work in a virtual environment. Lack of corporate identity can result in diminished loyalty from the employee perspective, which can in turn continue driving the organizational trend of moving from relational psychological contracts to more transactional ones (Harwood n.d.).

Ben was still perplexed. He wondered how one missed opportunity could have such a strong impact on a great employee like Mary. Before their meeting, he decided to call a good friend who managed a tech firm in California. He explained what happened and asked his friend what he thought. The friend told him that it was likely more than just a job issue. Mary wanted to grow in her career, even if it meant working more hours. He also said that she likely felt jaded because Ben had promised her the role and then he reneged, which likely killed her trust in him as a leader. After hearing this, Ben finally started to understand that it could all be his fault. He hung up and began to formulate a plan. The first thing he was going to do was speak to her and allow her to be entirely open about her feelings. Then, he decided, if she is willing to do the work, he would offer the role he had promised again, starting immediately. A few hours later, Ben walked into the Paris office and saw Mary waiting in a conference room with some papers and a glass of water. He entered the room, shook her hand, and exchanged greetings. He sat down and was about to start, but before he said another word, she spoke.

“I’m sorry, but I quit.” Ben was dumbfounded. Mary was one of his best employees, even when not performing to her fullest. She immediately explained that she had been tempted by a recruiter and another company offered her a job with a slightly higher salary and, more importantly, a bigger title. Ben tried to counteroffer, but he knew it was already too late. Mary had mentally disconnected from the company. When Ben asked her why, she explained all the reasons, including the issue related to the promised leadership role. After their meeting, Ben started to look into the importance of promises in the workplace, even casual ones. He decided it was time to make some new ground rules. In the virtual setting, words can be spoken and promises made. However, there are two important things that virtual leaders need to consider when making promises, even in informal conversation with their employees.

Many studies have shown that the psychological contract can be a fundamental tool in managing relationships in a performance-based organization (Burack 1993). Remote leaders can certainly make mutually beneficial promises for their employees, but they should never be empty words. Ben learned the hard way that pulling out of commitments can have long-term and difficult consequences for a virtual team.