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Employees Are Rewriting the "Psychological Contract"

What does this new deal mean for organizations and managers?

Key points

  • Pre-pandemic, the psychological contract between employee and employer had grown transactional, with each party focusing on their own interests.
  • With employers dealing with worker shortages and resignations, employees now have leverage to ask for more.
  • This new psychological contract is less transactional and offers not just fair pay, but more flexibility, work-life balance, and meaning.

In recent weeks, there has been considerable discussion and debate regarding the current worker shortage and the lengths employers are going to attract and retain workers. There have also been numerous accounts of employees who are reconsidering and reimagining their professional and personal lives now that COVID cases are decreasing, and people are returning slowly to their pre-pandemic lives.

With a record quitting rate reported in April, some have described this transition as the “great resignation,” while others have referred to it as the “great reallocation,” as workers explore new career paths that might offer a better future for themselves (and their families) in the post-pandemic world of work.

Regardless of the dynamics at play, it is becoming increasingly clear that employees are not eager to return to a pre-pandemic normal. Instead, they are looking for a new arrangement, and given the ongoing labor shortage, they may now be in a position to rewrite the psychological contract.

The psychological contract refers to the unwritten agreement between employers and employees that outlines the expectations of each party. Until the 1980s, this contract might be described as relational—meaning employees had a relationship with the employer characterized by mutual commitment and a willingness for each party to consider the other’s interests. But over the years, as organizations sought greater flexibility, the psychological contract shifted to a more transactional arrangement, in which employers and employees each tend to focus on their own interests.

What employers gained in terms of flexibility from this transactional psychological contract, they lost in terms of employee commitment. Indeed, when relationships are transactional, employees expect to be paid for demonstrating commitment or sticking with the company when they are needed most. In light of the tight labor market, employees now appear to have the upper hand, and they may be using that leverage to write a new psychological contract that offers them a better deal.

Redefining the "psychological contract"

Organizations and managers should be mindful of the following points to successfully navigate this new reality and help create a better psychological contract.

1. Schedule flexibility

There has been a lot of debate lately about what schedule works best for employees. Whereas some have advocated for a four-day workweek, others have suggested that 5-hour workdays are optimal.

My colleagues and I recently reviewed the scientific literature on nonstandard work schedules, and we concluded that rather than trying to identify the optimal schedule for employees (which arguably does not exist), organizations should instead seek to find schedules that fit the particular wants and needs of their employees. Because each employee is unique, this means creating more customized arrangements for different employees, including options to do some work from home. Although this will increase scheduling complexity, it may be necessary for attracting and retaining employees in the current environment.

2. Meaning and balance

During the pandemic, many people have taken time to reconsider their choices regarding work and life in general. Of course, the idea of going back to long commutes, meaningless tasks, and work-family conflict is unappealing, and employees are taking this opportunity to consider an alternative path.

This means that organizations and managers need to work even harder to find ways of helping employees see that their work makes a difference in others’ lives, as making a prosocial impact has only gained increased importance for many. Likewise, to the extent that employees can achieve better work-life balance, they will be able to find meaning both inside and outside of work.

3. Fair pay and more

It has been widely reported that companies have responded to the worker shortage by offering recruitment and retention bonuses and increasing pay. These are positive developments, as wage stagnation has been a problem for too long.

But fair pay only goes so far, and it is equally important that organizations create a positive working environment. Indeed, a meta-analytic investigation of turnover determinants indicates that employees are less likely to quit when they have a clear understanding of their responsibilities, enjoy their job, feel emotionally attached to the organization, and have a high-quality relationship with their supervisor.

4. Relational psychological contracts

As noted earlier, relational psychological contracts create a relationship between the employee and the employer. Although a more transactional approach offers employers greater flexibility, this comes at a cost in terms of commitment. Indeed, part of the problem that many companies are now facing can be traced back to the shift towards transactional contracts.

By developing and maintaining a more relational psychological contract, employers can capitalize on principles of social exchange that motivate employees to go the extra mile for their organizations when their organizations are willing to go the extra mile for them, too. Furthermore, employers should be careful about living up to the expectations of employees, as perceived violations of the psychological contract can undermine employee commitment and performance.

5. Patience and understanding

Finally, organizations and managers should keep in mind that this is an unprecedented time that is characterized by considerable uncertainty for both employees and employers. It is still unclear how employees’ choices will play out in the long run, and whether they will change their minds about the decisions they have made.

As such, managers should be patient and understand that a straightforward return to normal is unlikely. Instead, they should recognize that there may be some trial and error as employees adapt to the post-pandemic context.

Whether this is the time of the great resignation or the great reallocation, it is clear that many employees want a new psychological contract—one that is less transactional and offers them not just fair pay, but more flexibility, more work-life balance, and more meaning. At a time when workers are scarce, organizations that can meet these needs are likely to find it easier to recruit and retain workers and return to a new normal—one that is better for employees.

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