Explanation
What it is
A psychological contract is the unwritten set of expectations between individuals and the institutions they serve.
Unlike formal contracts, it operates through mutual belief, trust, and perceived fairness — shaping how people interpret their value and obligations within a system.
When to use it
- To understand disengagement or loss of trust in teams or institutions
- When diagnosing mismatched expectations between leaders and employees
- During organisational change, mergers, or restructures where implicit promises are tested
Why it matters
When the psychological contract is honoured, it reinforces belonging, motivation, and loyalty.
When it’s broken — through unmet promises, opaque decisions, or perceived betrayal — it erodes trust faster than any formal breach.
Understanding this invisible agreement helps leaders align words with deeds and sustain legitimacy in times of uncertainty.
Reference
Definitions
Psychological Contract
The unwritten and subjective set of mutual expectations between an employee and their employer, encompassing perceived promises, obligations, and fairness beyond the formal employment contract.
Contract Breach
When one party perceives the other has failed to fulfil promised obligations, resulting in loss of trust, decreased commitment, or disengagement.
Reciprocity Norm
The implicit rule that cooperation and effort are exchanged for recognition, respect, and fairness — forming the behavioural foundation of psychological contracts.
Canonical Sources
- Argyris, C. – Understanding Organizational Behavior (1960)
- Levinson, H. – Men, Management, and Mental Health (1962)
- Rousseau, D. M. – Psychological Contracts in Organizations: Understanding Written and Unwritten Agreements (1995)
- Conway, N. & Briner, R. B. – Understanding Psychological Contracts at Work: A Critical Evaluation of Theory and Research (2005)
Notes & Caveats
- The contract is subjective: each side interprets expectations differently.
- Cultural and generational differences influence what is perceived as fair or reciprocal.
- Breach perception often matters more than intent — trust breaks through experience, not paperwork.
- In the modern gig and hybrid economy, the psychological contract often shifts from stability to opportunity — making its management more complex and fragile.
How-To
Objective
To recognise, nurture, and repair the psychological contract between individuals and their institutions — ensuring alignment between stated values and lived experience.
Steps
- Surface implicit expectations
Gather honest feedback on what people believe was promised (security, growth, flexibility, recognition). - Clarify mutual obligations
Translate unspoken assumptions into visible agreements; document behaviours that signify trust on both sides. - Check alignment with reality
Compare institutional behaviour (policy, communication, decisions) with the promises employees perceive. - Address breaches quickly
When expectations diverge, acknowledge the gap, explain context, and co-create a path to resolution. - Reinforce consistency
Align leadership tone, performance systems, and everyday rituals to reaffirm what “keeping our word” means.
Tips
- Use stay interviews or open retrospectives to uncover what employees value most.
- Monitor for language drift — how stated values are discussed in meetings reveals silent erosion.
- Empower managers to act as interpreters of trust, not just enforcers of policy.
Pitfalls
Assuming goodwill is self-sustaining
Regularly refresh shared understanding of “the deal”
Over-promising during change
Anchor communication in transparency over certainty
Treating breach repair as transactional
Address emotional impact and re-humanise the exchange
Acceptance criteria
- Mutual expectations are documented and reviewed in retros or check-ins.
- Leaders actively reference these expectations in decision rationales.
- Pulse surveys or feedback loops show increased trust and perceived fairness.
Tutorial
Scenario
A mid-sized education charity has promised staff that its shift to hybrid work will “empower flexibility and balance.”
Six months later, employees perceive the policy as unevenly applied — managers hold implicit biases toward in-office visibility, and remote staff feel overlooked for recognition and promotion.
Walkthrough
Decision Point
Should leadership reaffirm or revise its hybrid policy in light of perceived inequities?
Input/Output
Input
Employee survey data showing declining trust and motivation.
Output
A co-authored “Fair Work Charter” outlining expectations for both leaders and employees in hybrid arrangements.
Action
Leaders convene mixed-focus groups to surface the unspoken deal: what “flexibility” and “trust” mean in practice.
HR facilitates translation of qualitative insights into shared principles (e.g. camera-off respect, output-based evaluation).
Error handling
If defensive reactions arise (“we already trust our teams”), pause for reflection and data empathy: contrast leadership’s intent with lived experience evidence.
Reframe not as blame, but as a recalibration of mutual trust.
Closure
The new charter is presented in an all-hands session, co-signed by leadership and staff representatives.
Managers incorporate its language into performance reviews and onboarding, reinforcing cultural coherence.
Result
- Before → After:
- Before
Confusion, resentment, and perceived favouritism undermined the implicit promise of flexibility. - After
Shared clarity restored trust and morale; employees report stronger confidence that values match actions.
- Before
- Artefact Snapshot:
- Name
Fair Work Charter - Location
Internal knowledge base → Culture & Policy > Trust and Behaviour
- Name
Variations
- If hybrid work isn’t the trigger, apply the same model to career development promises, pay equity commitments, or culture-change programmes.
- In small organisations, this can take the form of a team covenant, refreshed quarterly through retros.