There is nothing either good or bad, but thinking makes it so.

—WILLIAM SHAKESPEARE, HAMLET, ACT 2, SCENE 2

The Brand Contract and the Transactional Contract address employee expectations that are typically evident and open. They are intentional and purposeful. However, other expectations are often veiled and obscure. Consider our earlier analogy that a Contract is like an iceberg. The visible part above the water is the Brand Contract and the Transactional Contract. The mass lurking below the waterline, hidden from view, is the Psychological Contract. These are the expectations in a relationship that remain largely unstated and implied. The following story illustrates what we mean.

We were discussing with a close friend the differences between two prominent CEOs. Both had built technology companies worth hundreds of millions of dollars. Our friend had worked closely with both leaders, and a question arose: What was the biggest difference between them? The surprising answer had to do with the simple act of walking.

On one occasion, our friend had been walking in New York City with one of the CEOs and his team. As the group walked, the executive unconsciously lined his people up according to rank, with the next most important person in the company walking next to him and the subordinates following behind according to their perceived place in the organization.

Later, our friend found himself in a similar situation in San Francisco, observing the second CEO as the group walked to dinner. But this time, as the entourage began walking, some of them started to hang back. The CEO stopped and invited all members of the group to catch up, stay close, and walk with him, not behind him.

Two similar stories, two completely different Psychological Contracts. It’s not hard to see why both CEOs were respected, but one was beloved.

LEADERSHIP AND THE PSYCHOLOGICAL CONTRACT

The Psychological Contract has been placed last in our rubric because, while the Brand Contract and the Transactional Contract are essential, the Psychological Contract has the greatest potential influence on the Employee Experience (EX). Hidden in our hearts are the ideas, hopes, and dreams that truly define us. These expectations cannot be addressed adequately by clauses in an employment contract or hiring slogans that attempt to align expectations. These expectations are part of the Psychological Contract. The Psychological Contract is the unwritten, implicit set of expectations and obligations that define the terms of exchange in a relationship. Transformational leaders know this and use the Psychological Contract to tap into the enormous power sealed in these expectations.

The Psychological Contract is the unwritten, implicit set of expectations and obligations that define the terms of exchange in a relationship.

When President Franklin Roosevelt took office in 1933, the Great Depression was destroying the United States’ economy along with the American people’s will to fight. Unemployment stood at 25 percent—even higher in some parts of the country. Nearly one-fifth of the nation’s farms had been sold. Bank withdrawals were restricted out of fear that a run by cash-desperate account holders would cause the system to collapse. Leaders worried that the nation’s social fabric was close to deteriorating into anarchy and violence. By 1933, economic carnage ravaged the country’s GDP, which fell by half from 1929 to 1933.¹

Roosevelt stepped into the crosshairs of the worst economic crisis in modern history and immediately began looking for solutions. With no specific ideas in place at his inauguration, he leaned on his “Brain Trust,” an informal group of advisors. Together with cabinet officials, members of this think tank began cobbling together a plan to save the nation. It included such revolutionary (for the time) concepts as a forty-hour workweek, a minimum wage, Social Security, universal health insurance, workers’ compensation, unemployment compensation, and laws banning child labor, most of which have become entrenched throughout the world today.

In 1933 and 1934, FDR exercised executive power in a way that has never been seen in the United States before or since, creating dozens of new government agencies: the Works Project Administration, the Resettlement Administration, the Civilian Conservation Corps, the Agricultural Adjustment Administration, and many others. The staggeringly large program, which Roosevelt called “a new deal for the American people,” was built on what came to be known as the “Three Rs”:

1. Relief. Measures designed to temporarily employ and aid millions of impoverished families, elderly people, children, and those with disabilities.
2. Recovery. Measures designed to stop the bleeding and spark new economic growth, including price supports and stimulating industrial production.
3. Reform. Measures designed to prevent another catastrophe, including the creation of the Federal Deposit Insurance Corporation and the Securities and Exchange Commission.

Yet the economy wasn’t the only thing suffering; the American people were suffering, too, and not just physically. The Great Depression was inflicting deep psychological wounds. Rather than fomenting revolution as many plutocrats feared, Americans were actually frightened, depressed, and hopeless, beaten down by the endless privations of daily life.

Roosevelt and his advisors understood that their “New Deal” needed to address these psychological wounds just as much as it needed to help Americans find work. From this perspective, the New Deal was far more than a politician’s plan to get America back on track. It was a Psychological Contract with the American people. The New Deal told them that someone was in charge and that their leaders were going to restore some semblance of the good life that had been taken from them.

We could write a thousand-page book on the New Deal alone, particularly viewing it as a Psychological Contract between the government and the governed. But it suffices to say that the program not only revived the U.S. economy between 1933 and 1937, it also gave hope to the American people.

FDR’s New Deal wasn’t just an economic contract. It wasn’t just about jobs and saving farms. It was about motivating a downtrodden people. It was a Psychological Contract of hope.

SOMEONE’S IN CHARGE

Some regarded FDR as poorly qualified to be president when he took office, and he may have been. But he exhibited something critical to guiding the wounded nation through the worst economic storm in its history: a clear understanding of the people’s need for trust and confidence in their government.

In his First Inaugural Address on March 4, 1933, he said, “Confidence . . . thrives on honesty, on honor, on the sacredness of obligations, on faithful protection and on unselfish performance. Without them it cannot live.”² Regardless of whether you agree with Roosevelt’s political leanings, the New Deal and this view of confidence, obligations, and performance were important to all citizens because it said to the American people, “Someone’s in charge. We’re going to survive this. There’s a plan. If you’re down and hurting, we’re going to help you get back up.”

That promise created emotional stability that allowed the massive economic angst to die down long enough for other programs to restore farm prices, imports, and industrial activity. The New Deal wasn’t perfect, of course. But so what? Even if the American people didn’t get fair value for the bridges, hospitals, national park overlooks, and parkways that were built, so what? They got stability.

People began to believe that FDR was in charge—that the country wasn’t in free fall anymore. The contract created the expectation that if Americans didn’t panic, left their money in the banks and the stock market, and worked hard, everything would be all right. It was transformational. FDR’s vision for the American people illustrates the power and the purpose of the Psychological Contract.

MATTERS OF THE HEART CAN BE HARD

With the Psychological Contract, the leader’s challenge lies in understanding and managing something that is dependent on elements such as feelings, perceptions, culture, memories, and other cognitive dynamics. These factors cannot always be easily defined or measured. Your organization may have a compelling Employee Value Proposition, a great reputation (Brand Contract) and a drawer full of pristine employee documentation (Transactional Contract), but without accounting for the Psychological Contract, you don’t know if the messages are complete or if the expectations are aligned.

The Psychological Contract is something that anyone who has been part of an organization could identify—an “I can’t describe it, but I know it when I see it” sort of phenomenon. Observing the Psychological Contract can be like looking for a black hole in astrophysics: Sometimes you can define it only by what’s not there.

Faced with such murkiness, you might be tempted to ignore the Psychological Contract as being too nebulous to worry about. That would be a mistake. Even though you may be unable to point to the Psychological Contract within your organization or your relationships, you can’t ignore it. Remember the iceberg and what happened when Captain Smith ignored ice warnings on the Titanic’s maiden voyage.

POWERED BY EXPECTATIONS

Let’s look first at a modern example of the Psychological Contract in action—social entrepreneurship.

Microfinance is the practice of providing loans and other financial services to low-income people who have no access to traditional banking. Economics professor and Nobel laureate Dr. Mohammad Yunus popularized modern microfinance in the 1970s, and since that time it has attracted investors, spawned Internet startups, and grown exponentially. According to Microfinance Barometer 2014, 91.4 million people around the globe received $81.5 billion in microloans to start businesses, run farms, purchase livestock, and buy necessary technology ranging from mobile phones to water pumps and solar cells.³

But what makes microfinance even more interesting to us is the fact that the Psychological Contract makes it possible. Not the Transactional Contract; that’s typically a standard loan agreement specifying the amount of money to be borrowed and the terms of repayment. No, what’s fascinating is the psychological agreement that exists between lender and borrower, binding the two parties together.

Sixty-eight percent of microfinance borrowers are women.⁴ Why? Because men of the villages have proven to be more likely to squander the money, much of it on vices like excessive drinking. (We decline to comment on what that says about the male gender.) Women have proven more responsible, and that’s led to some extraordinary repayment rates. For instance, online microlending network Kiva reports that 98.42 percent of its more than 1 million loans have been repaid.

In part, that’s the result of a psychological agreement between investors and borrowers that says, “We trust you and believe in you, so we are willing to lend you funds where nobody else will.” A microloan to an impoverished mother of six in Uganda is a show of faith and respect, and the resulting pride is what makes microfinance so effectively self-enforcing. No one wants to break a contract that brings with it such a powerful sense of self-worth, and that’s a big reason why so many women entrepreneurs (and, to be fair, some men, as well) have turned loans of $50 and $500 into new freedom from poverty. Where a normal Transactional Contract would collapse (there really isn’t much a microfinance lender can do to enforce the transactional agreement), the expectations established by both the New Deal in the 1930s and modern microloan finance illustrate the power of the Psychological Contract.

STUDYING THE PSYCHOLOGICAL CONTRACT

Let’s say a division of a company has a new employee join its team. The new recruit, Ésme, found her dream job through an online posting. She was impressed by what the ad referred to as a “fast-paced, innovative culture where people with ideas can thrive.” As the company is one of the largest and most respected employers in the area, it’s not surprising that she has known of it for a number of years. In fact, her aunt was a longtime employee of the company until she retired last year. The company’s reputation (Brand Contract) is definitely solid, and two of Ésme’s friends who now work for the company gush about their jobs.

Before Ésme even starts her first day of work, she is contacted by the hiring manager, the general manager, and her immediate boss, welcoming her on board. Each explains the expectations of her role, and these expectations are emphasized again during her new-hire orientation.

Ésme is especially glad to hear that what her friends have told her about the company’s working environment and benefits are accurate (generous paid time off policy, flexibility, fair compensation, opportunity to participate in training programs, etc.). It appears the Transactional Contract is all in order. Thumbs up.

Ésme, as with all of her colleagues (and each of us, for that matter), expects to be treated with dignity and respect. She expects to be listened to and that she will be cared about as a person, not just as another employee. She takes these expectations for granted, and assumes they will be part of the working relationship.

Ésme hopes this company will be a place where she can plant herself for a while. She plans on giving her all and knows she has a lot to offer. It’s a great job; she will be a great employee, at least in her mind. One of the reasons she was excited to join the company was that she wants to have an impact. She wants her ideas to be taken into consideration and wants the opportunity to make a difference—and she knows she can. She doesn’t want a job where she puts in her eight hours and then doesn’t think about it for the rest of the evening. She is committed to the company and hopes that the organization is equally committed to her.

Where is all that stated in the Contract? Where does it say “Ésme, part of your job is to make a difference in the world, and we will pay you for it”? There may be a hint of it in the Brand Contact, as on the surface the company appears to be innovative and to value fresh ideas. It even claims to be a strong supporter of the community, which is appealing. But it’s not spelled out anywhere. It’s not in the Transactional Contract, either. It’s part of the Psychological Contract.

The notion of the Psychological Contract has been around since the early 1960s, when Harvard Business School professor and management theorist Chris Argyris first referred to the “psychological work contract.” During that time, unionization and collective bargaining agreements were prevalent, due largely to the need to improve working conditions, which were sometimes less than ideal.

Prior to this era, work often required little thinking and reflected ways of working that had been around for centuries. Even most office jobs were designed such that employees followed procedures, but weren’t expected to bring innovation or creative problem-solving to their roles. Employees did their jobs and got paid. The most valuable aspect of the Brand Contract was stability: Employees wanted jobs they could keep for a long time, maybe even retire from.

Frederick Taylor, the father of scientific management theory and the assembly-line mentality, referred to this sort of corporate culture as “pick up a pig and walk,” meaning your job was to do what the boss told you to do. There was no talk of employee expectations, dreams, goals, innovation, or needs. Taylor said of managers, “When he tells you to pick up a pig and walk, you pick it up and walk, and when he tells you to sit down and rest, you sit down. You do that right through the day. And what’s more, no backtalk.”⁵ That was the Contract. It wasn’t pretty, but it was certainly clear.

Argyris observed, however, that employees aren’t machines. They have ideas, opinions, beliefs, family, background experiences, and other factors that shape the way they view their employment. They form expectations of their employment situation, and their performance reflects whether those expectations have been met or not.

After observing the relationship between foremen and crews, Argyris noted:

Since the foremen realize the employees in this system will tend to produce optimally under passive leadership, and since the employees agree, a relationship may be hypothesized to evolve between the employees and the foremen which might be called the “psychological work contract.”⁶

These observations marked an important shift in the employer-employee relationship. Following on the heels of Argyris, MIT professor Edgar Schein observed that both individuals and organizations have expectations (sounds vaguely familiar, doesn’t it?). Together, those expectations form a Psychological Contract. Each side has a set of expectations for the other side that aren’t part of any written agreement, but they directly impact behavior. On the organizational side, the Contract is backed by authority. By joining the organization, an employee accepts the authority of the organization. On the employee side, the employee can influence the organization, based on his or her expectations, in order to protect his or her interests and desires.

While Argyris and Schein argued that the Psychological Contract contains an implied agreement regarding expectations, Carnegie Mellon professor Denise Rousseau claimed that the two parties don’t have to agree in order for the Psychological Contract to exist. One party doesn’t even have to know the other has expectations, and the perceived contract can still exist. Thus Rousseau defined the Psychological Contract as “an individual’s belief that a promise has been made and a consideration offered in exchange for it, binding the parties to some sort of reciprocal obligations.”⁷

Some contend that the term “Psychological Contract” is a misnomer, as it has little to do with the way the mind functions (the “psychology” piece). Further, they argue, without mutual agreement, there cannot be a contract. While no single definition exists, the Psychological Contract is something, as stated earlier, that most of us can recognize—especially when it is not working the way it should.

CREATED, INTERPRETED, EXAMINED, ACTED UPON

Despite arguments to the contrary, we find the term very appropriate. The Psychological Contract gets its name because the human mind is where it is created, interpreted, examined, and acted upon—and it certainly creates an understanding in one’s mind that there is an agreement:

• Created. The Psychological Contract doesn’t exist on a piece of paper or in a policy manual. It’s not born to a marketing campaign. It’s created within the minds of each party, often separately and without common agreement.
• Interpreted. Although two employees may face identical employment circumstances, they may each interpret the Contract differently based on factors ranging from personal background to religious beliefs. An organization will interpret the Contract through the organizational lens, while an employee interprets it through the employee lens.
• Examined. A Transactional Contract is subject to the scrutiny of HR, supervisors, employees, and even the legal system. Similarly, the Brand Contract is a public contract, available for all to examine. The Psychological Contract, however, is checked privately, within one’s own mind.
• Acted Upon. Our behavior is directly impacted by our perception of the degree to which our Psychological Contract is honored. However, the outcome isn’t always apparent. The outcome might be a change in perception, a shift in emotion, or a difference in engagement.

MOM’S ON THE ROOF

There’s an old joke (a pretty bad one, in fact) that goes something like this: Larry goes out of town for a week and asks his brother to take care of his favorite cat. After an enjoyable week on the beach, he phones his brother to see when it might be convenient to drop by and pick up his cat. His brother stumbles for a moment, then blurts out, “The cat’s dead!” and hangs up the phone without another word.

Devastated, Larry calls back and confirms that, indeed, his cat is dead. Larry shouts at his brother for his perceived lack of sympathy for something that was obviously so important to Larry. His brother apologizes, saying “I’m sorry, the cat died a few days ago and I didn’t know how to break the news to you.”

Larry explains, “You could have at least eased me into it so I wouldn’t be so shocked. When I called the other day you could have told me the cat was on the roof and wouldn’t come down. Then maybe the next time you could have told me the cat fell off the roof and that he was at the vet. At least you could have prepared me. Then it might have been easier to hear that the poor cat had died.”

Frustrated, Larry attempts to end the conversation. However, his brother stops Larry before he can hang up, saying “Uh . . . by the way, Mom is on the roof and won’t come down.”

This humorous anecdote is the perfect setup for some compelling research findings. Recent studies looked at organizations that went through downsizing and found that these layoffs severely damaged morale and engagement. In addition to confirming the existence of common sense (it’s tough to be engaged when coworkers on both sides of you are clearing out their cubicles), these studies found some other interesting points. Not only did the organization lose the people who were let go, the number of employees who left the organization after downsizing initiatives was actually five times the number laid off.⁸

The layoffs were a violation of the Psychological Contract, and the attrition was the damage. While a Brand or Transactional Contract will never say “We guarantee your long-term employment”—organizations go to great lengths not to imply this—for employees of these companies, the Psychological Contract suggested they were valued. When the kiss-of-death announcements were made, employees immediately rewrote their Psychological Contracts to anticipate the next chapter: We can’t trust you and you’ll let more of us go without warning. Preservation mode kicked in, and they looked for new employment elsewhere. With the Psychological Contract violated, the Brand and Transactional Contracts weren’t worth the paper they weren’t printed on.

WHAT FORMS THE PSYCHOLOGICAL CONTRACT

The Psychological Contact has some unique qualities that set it apart from the other two Contacts. The Psychological Contract is:

• Implicit. The terms and intended outcomes of the Psychological Contract might be discussed, but often are not.
• Unilateral. The terms are not always mutually agreed upon or even understood by both sides. Each party forms its own terms and expectations.
• Left to interpretation. As the terms are often unilateral, interpretation often differs between parties. Violation of the Contract is largely perceptual and can easily go unnoticed by the other party.
• Belief based. The Psychological Contract is based on each side’s beliefs about mutual obligations. In other words, what matters is what each side believes both parties are expected to do, not the agreed-upon requirements.
• Nonreciprocal. Unlike the Transactional Contact, with Psychological Contracts there is no quid pro quo exchange. Not every component of one side’s Contract must correspond to an action on the other side.
• About fairness. Both parties pay attention to the fairness of the process rather than to just the fairness of outcomes. “How” is just as important as “what.”
• Open-ended and dynamic. The Psychological Contract doesn’t seek to tie down all potential outcomes or possibilities, because it can’t. It is constantly being rewritten and evolves based on the state of one or both parties.
• Flexible. The Psychological Contract can withstand short-term violations if the long-term investment is perceived to be worthwhile. Further, the Contract is looked at as a whole, rather than as a set of individual elements, so even if parts are violated, the larger Contract can still remain healthy.
• Illogical. The Psychological Contract is emotional and based on perception, bias, and emotion.
• Inclusive. The Psychological Contract takes over when the others are AWOL.

That last point is particularly important. Every relationship has a Contract. In the absence of a clear Brand Contract or a comprehensive Transactional Contract, the Psychological Contract takes over. Humans aren’t very good with information vacuums, so if no Contract exists, we’ll create one in our minds. It is this characteristic that gives the Psychological Contract its power. In the end, it will always have a seat at the table because it applies even in the absence of explicit terms and conditions.

In the absence of a clear Brand Contract and a comprehensive Transactional Contract, the Psychological Contract takes over.

DON’T WAIT UNTIL IT’S TOO LATE

Consider this scenario. A new senior-level employee is brought onboard a small technology firm. The firm has only been around for thirteen months, so it is still in growth and startup mode. The employee works his rear end off for the first six months because he knows that although he isn’t being paid well (in fact, he actually didn’t get a paycheck last month), it’s what’s necessary to take the business to the next level. And it’s starting to pay off, as the company looks like it will finally have its first profitable quarter.

Sure enough, the company makes a profit, and the employee is given not only his missed paycheck but a 10 percent bonus. Fantastic! The next step, which is to discuss ownership and equity in the company, is obvious in the employee’s mind.

But when he brings up his terms with the owner, the owner is taken by surprise. Nobody ever talked about giving up ownership! Whoops. An Expectation Gap the size of the Grand Canyon just opened up.

Both sides set expectations. Those expectations turned into Psychological Contracts. Though it was never discussed, the Brand Contract implied that as a technology startup—an inherently risky environment where employees often give their all for minimal pay with the hope of stock option gold at the end of the rainbow—equity would be on the table. The employer assumed the “minimal pay” part was true; the employee focused on the equity part.

The Transactional Contract consisted of a non-compete agreement, a discussion of compensation, and an outdated policy manual copied from a previous employer. There were no clear guidelines for performance or rewards.

Brain, meet vacuum. Without express promises, both parties created their own set of expectations—Psychological Contracts. For the employee, this meant “work hard and get ownership.” For the employer, it meant “hire a good professional, reward him with bonuses when we become profitable, and grow my company.” What’s also unsaid is that the boss, the founder, has sacrificed everything, including his life savings and his marriage, to make a go of this company. He’s not about to surrender even a sliver of equity. Lack of awareness of the Psychological Contract leads to a breach that’s more perceived than real, but it’s damaging nonetheless.

PSYCHOLOGY AND THE EMPLOYEE EXPERIENCE

When the Psychological Contract is breached (we’ll talk more about this in the next chapter), the result is often psychological (and even physical) disengagement in the relationship. In the case of our new employee, this could mean anything from a refusal to continue putting in long hours to resignation and a lawsuit.

Remember the study earlier in this chapter where employees quit their organizations after layoffs were announced? Most didn’t leave because they were part of a reduction in headcount; they chose to leave because in their minds, the organization had violated their trust unforgivably.

In looking at our own attrition research data, our team found not only similar results, but also something potentially more damaging. Often, employees who leave an organization of their own volition after downsizing are also those who are valuable enough that they have little trouble finding work elsewhere. That’s why they can afford to leave over a perceived trust violation.

Employees who stick around after downsizing are usually the dedicated employees (who are, of course, still valuable) and the less employable workers who can’t get hired elsewhere. So when an organization obliterates the Psychological Contract with a thoughtless action, it also chases away many of their most skilled, engaged people—the ones who made the company successful in the first place. What often remains is a top layer of dedicated employees over a body of unemployable people whose mere presence sows seeds of discontent.

The Psychological Contract—and its fulfillment or violation—is a critical factor in the EX. It has a profound effect on engagement. What employers failed to recognize over the centuries—and many still don’t even today—is that the Psychological Contract plays a major role in whether employees choose to give their hearts, spirits, minds, and hands to their work. In fact, studies show that fulfillment of the Psychological Contract can predict half (49.9 percent) of the variance in employee engagement.⁹

Honoring the Psychological Contract = Engagement

Violating the Psychological Contract = Disengagement

Our beliefs and our expectations are reference points against which we compare our EX. That EX depends on the degree to which expectations and perceived obligations—the substance of the Psychological Contract—are fulfilled. Depending on whether they are and how, we will reaffirm our perceptions and have a positive EX, change our beliefs when discrepancies exist, or exit the relationship.

Whether in the workplace or in life, when the Psychological Contract is honored, we engage in that relationship. When the contract is violated, we disengage.

AN ALIEN CONCEPT

In 1954, social psychologist Leon Festinger and his associates came across newspaper reports surrounding a religious group whose members were preparing for the end of the world. A woman from Chicago founded the group after she claimed to have received “messages from the planet Clarion.” These messages outlined the destruction of the world through a great flood that was to take place before dawn on December 21, 1954. The woman, later known as Sister Thedra, managed to win the faith and support of a number of followers whose expectations aligned with her predictions.

Convinced of their beliefs, the group made drastic preparations for the apocalypse. They gave away their possessions, left their jobs and families, and gathered in preparation.

According to the followers, a UFO would arrive at their gathering place prior to the flood and grant them safe passage to the planet Clarion in time to escape the disaster. An expectation was set, and group members placed their confidence not only in the event coming to pass but in their leader, as well. A Psychological Contract was formed. Faithful members of the group, who did what they believed was expected of them, would escape the catastrophic event.

The commitment of this group intrigued Festinger and his colleagues. They were even more fascinated by what would happen to the group’s zeal when the time for the cataclysm came and went without event. When the appointed hour passed without the arrival of a UFO or a flood, the reaction of the group members was interesting. Some, as predicted, left the group, seeing that what they had come to expect was a falsehood. Their contract had been violated.

However, others increased their proselyting efforts. Their convictions actually became stronger. According to the group, because they had “spread so much light, God had saved the world from destruction.”

This second group made for an interesting study. In what Festinger refers to as a “disconfirmation of belief,” a conflict was created between their perceived reality and the actual events. They eliminated the conflict by discounting the events that took place—rather, the events that did not take place—and shifted “reality.” They created a new Contract.¹⁰

MAKING SENSE OF THE CONTRACT

Humans are wired to resolve cognitive dissonance and changing beliefs and expectations however we can. We don’t do well with conflicting Contracts. Just as the ear wants to hear dissonant music resolve, it’s the natural desire of both individuals and organizations to resolve dissonance.

We all have a tendency to believe the world is as we see it—that our view is correct. We form expectations, both of ourselves and of others, to support that view. When confronted with evidence to the contrary, we attempt to reduce this conflict by justifying, blaming, or denying, among other things. Less often, we see the disconnect in beliefs for what it is, and look for ways out. That’s why disagreements over politics and religion are usually intractable; they are about worldviews, which change grudgingly, if at all.

Our minds aren’t good with unresolved dissonance. We try to resolve confusion and lack of clarity by searching for cues from our environment and interpreting their meaning. When confronted with lack of clarity or ambiguity, or when we feel our expectations haven’t been met, we try to make sense of what is going on around us. We interpret the cues—actions by the organization, interactions with others, conversations with the boss, memos, and the like—in ways that create meaning. We try to make sense of what’s going on in a process that organizational theorists call sensemaking.¹¹ Really, that’s what it’s called.

It’s important to understand sensemaking because it helps us see how Psychological Contracts form. Where information is ambiguous or lacking, we try to fill in the blanks. Sometimes this is logical. Other times we invent our own reality or story based on our needs and identity: “The boss never brings me in on critical projects, therefore she must not trust me, which means I had better look for another job.” We interpret the Contract for ourselves, which is perilous.

If employer and employee don’t clarify the missing pieces of the puzzle, each side will form its own Psychological Contract and set of expectations. For this reason, understanding and clarifying the content of the Psychological Contracts of both employer and employee is essential.

TIME FOR A CONTRACT REVISION

Let’s take another look at CHG Healthcare, the company we mentioned earlier in the book. If you remember, CHG was a good company, but not good enough in a competitive industry where there was little differentiation between players. CHG wanted to be great. In order to do so, the organization realized it had to address all three Contracts—in some cases making expectations clear, in others establishing a new Contract.

CHG realigned and clarified its internal and external Brand Contracts around “Putting People First.” The concept became a way to describe not just how CHG did business, but who it was. This concept meant that everyone would need to start thinking differently about the value of people. Additionally, by putting into place accountability systems, clear job descriptions, and more precise performance expectations, CHG realigned the Transactional Contract. This took time, and change didn’t happen overnight.

Perhaps the most difficult Contract to realign, however, was the Psychological Contract. Employees had formed expectations and beliefs about their roles and work. Some employees, including some executives, could not comprehend the shift in the message to “We’re not going in the right direction, we need to change course, and your jobs are about to change.” Some resigned while others were encouraged to leave.

To make this shift in thinking and behavior work, CHG had to reestablish and clarify expectations for its leaders and its employees. Unlike those waiting for the ship to Clarion, however, the leaders of the organization weren’t asking people to follow along blindly. They let employees know the old Contract was null and void. The leaders set new expectations for the company that said: “We will not be the same company as before. This isn’t just about what we do, it’s about who we are. If you’re on board with that, great. If you’re not, we wish you well.”

“This [change] starts with the intention to build a company that you’re proud of, in the same way that you’re proud of your family or the way that you conduct yourself,” said CHG CEO Scott Beck. “You’re trustworthy, you take care of each other, you have each other’s backs, you learn from mistakes, and you all help each other reach your potential. Those are the things we aspire to achieve in our personal lives, so there’s no reason not to bring them to the corporate environment, too.”¹²

ALIGNING THE PSYCHOLOGICAL CONTRACT

Aligning the expectations created by the Psychological Contract is not for the faint of heart. It’s subjective, relies on perceptions, is illogical, changes often, and is based on many different variables and perspectives. But it can be done; just ask CHG.

Start by nailing down your Brand and Transactional Contracts. As we said, the Psychological Contract fills in the blanks left by the other two Contracts. If it’s not clear in one of the other Contracts, human nature is to assume the Psychological Contract rules.

Then have important conversations. Ask questions. Strong leaders listen and then defuse explosive situations simply by asking good questions and acting on the answers. Does an employee expect rapid development? Informal mentorship from the CEO? The ability to interact with high-level clients? Power and prestige? The most up-to-date software apps? Such expectations may not always be rational, but they matter.

Finally, match the Psychological Contract to your organization’s mission. All CHG employees know that their Contract involves putting people first. It permeates all they do. Be clear about your own Psychological Contract. Help employees understand the “why” behind the “what.” When you do so, you’ll stop being seen as automatons running a business and start being seen as people working together for a common cause.

CHAPTER 7. THE PSYCHOLOGICAL CONTRACT: THE CHAPTER EXPERIENCE

• Although Brand and Transactional Contracts are the most visible parts of Contracts, like an iceberg, the Psychological Contract makes up the bulk of your Contract.
• The Psychological Contract is the unwritten, implicit set of expectations and obligations that define the terms of exchange in a relationship.
• The Psychological Contract is powered by expectations.
• The Psychological Contract is created, interpreted, examined, and acted upon in the mind.
• Unlike the Brand and Transactional Contracts, the Psychological Contract is implied and often illogical.
• When we feel the Psychological Contract is honored, we engage. When it is violated, we disengage.
• In the absence of a clear Brand Contract and a comprehensive Transactional Contract, the Psychological Contract takes over.
• When our view is ambiguous or unclear, or when our expectations are not met, we use sensemaking to interpret, assign meaning to, and act upon the cues in front of us.