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European Management Journal Vol. 13, No. 3, pp. 286-294, 1995

Copyright 1995ElsevierScienceLtd
Printed in GreatBritain.All rights reserved
0263-2373/95$9.50+0.00

)Pergamon
0263-2373(95)000194

The ChangingPsychological
Contract:
The Human Resource
Challenge of the 1990s
JEAN-MARIE HILTROP, Professor of Human Resource Management, IMD, Lausanne
The psychological contract -- what employees and

employers want and expect from each other -- has

been changing dramatically in recent years. As a
result of all sorts of pressures and trends on both
sides, such characteristics of corporate employment
as stability, permanence, predictability, fairness,
tradition and mutual respect are out. In, are the
n e w features of self-reliance, flexibility and
adaptability.

Jean-Marie Hiltrop examines the h u m a n resource

implications of the changing psychological contract,
specifically, how organisations under pressure from
greater competition, internationalisation, and
integration of functions can manage employees now
facing increased professional risk and uncertainty.
A number of suggestions are made for changing
organisation and management practices in order to
build real commitment from employees in the new
socio-economic environment.

Introduction
The economic context in which organisations operate
has been changing at a remarkable rate during the last
two decades. Increasing international competition,
deregulation and globalisation of markets have
demanded greater flexibility and productivity of
organisations, as well as new strategies focused on
speed, responsiveness to changing market conditions
and innovation. These economic changes, in conjunction with drastic corporate restructuring in much
of the private and public sectors, have induced many
organisations to eliminate jobs not just on the factory
floor, as so often in the past, but also among those who
have traditionally been offered a long-term career within
the organisation, as millions of jobless professionals and
managers can testify. Consequently, the psychological
contract that gave security, stability and predictability
to the relationship between employees and employers
has dramatically altered during the past two decades.
This article examines some of these changes and
considers their implications for the management of
h u m a n resources. Three specific questions are
addressed:
1.
2.
3.

286

What is the new 'pschological contract' between

employees and organisations?
Why and how is this contract changing?
What are the implications for human resource
management today and in the near future?

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THE CHANGING PSYCHOLOGICAL CONTRACT

The Changing Psychological

Contract
Psychological contracts of employment are defined as
the understandings people have regarding the commitments made between themselves and their organisation
(Rousseau, 1994). Originally employed by the authors
Argyris and Levinson in the 1960s to characterise the
subjective nature of the employment relationship, the
present use of this term focuses upon an individual's
belief in and interpretation of a promissory contract,
whether written or unwritten. Psychological contracts
accomplish two tasks: define the employment relationship and manage mutual expectations. Employers want
to know in advance the kind of outputs they will get
from employees. In turn, employees want to know what
kind of rewards they will get from investing their time
and effort in an organisation. Since psychological
contracts are, by definition, voluntary, subjective,
dynamic and informal, it is virtually impossible to spell
out all details at the time a contract is created. The
dynamic character of the psychological contract means
that individual and organisational expectations mutually
influence one another. People fill in the blanks along
the way, and they sometimes do so inconsistently
(Rousseau, 1994). Yet these 'additions' are a reality that
has many implications for the success of the organisation. As Kolb et al., (1991) point out, 'a company staffed
by "cheated" individuals who expect far more than they
get is headed for trouble'.
There is considerable evidence to suggest that the nature
of the psychological contract has changed dramatically
in recent years. Perhaps the most important change has
been a vast drop in job security offered to employees.
In the 1950s, and 1960s most people were afforded a
sense of stability and permanence within the organisation. Not only was the organisational structure dear, but
so was each person's current and future place in it now
and in the future. This clarity created a great deal of
predictability and security for employees, and probably
fostered their loyalty and commitment to the organisation. In addition, the promise of job security, unwritten
though powerful, probably led employees to see their
own long-term interests as intimately bound up with
the long-term fortunes of the organisation. It is likely
that this encouraged them to invest time and effort
acquiring knowledge about their organisation's specific
products, markets, technology and customers, on the
assumption that knowledge would be useful to them,
as well as their company, in the future. In return for
this loyalty and commitment, the employer would
provide a 'suitable job' with 'good pay', offer regular
advancement opportunities, provide annual wage
increases, reward outstanding or loyal employees with
higher-paid posts, provide benefits, and invest money
in the education and development of employees, being
reasonably confident that their newly acquired skills
would not be immediately lost to another company. In
other words, the corporate knot between employer and
employee was well tied. The employee received job
security and the employer, in turn, acquired a stable

work force for managerial succession and business

continuity. This stability may explain why large
Japanese firms, in contrast to many Western competitors, are clinging with such tenacity to their system
of 'lifetime employment', despite intense demographic
and economic pressures to abandon it.
Since the 1970s, however, the tie that binds employers
and employees has become severely strained (De Meuse
and Tornow, 1990). Confronted with the need to cut
costs and improve productivity, even the world's largest
organisations have increasingly reduced their workforce
and removed some of the entitlements (job security,
regular promotion up the corporate ladder, annual wage
increases, cheap mortages, etc.) offered as a rule to
employees in the earlier decades (see Exhibits I and 2).
The flexible, delayered, slimmer organisation constantly
changing to suit its volatile and shifting markets can no
longer offer the secure career progression of traditional
structures. Public companies offer some respite, but
even government agencies no longer promise to offer
jobs for life and provide generous terms to those who
wish to move on. For companies less well protected, and
with more volatile markets, a permanent redundancy
policy -- where employees can see at any time what they
would be offered to leave -- is becoming a reality (Lester,
1994).
It is not surprising, therefore, that many people
experience a sense of restlessness inside themselves and
in relation to their employers. Confronted with
increased uncertainty, fewer benefits, and very often
increased workloads and responsibilities, many people
feel the psychological contract made between themselves and their organisation has been broken. Older
employees in particular are likely to feel that the
unwritten but important psychological contract they
have with the organisation has been violated. Joe
Galerneau, a manager at AT&T, whose workforce has
been cut by 20 per cent in the past decade, thinks his
firm is typical. As he put it: 'In the past we said to
employees 'Do as you're told and you have a job for
life'. Then we betrayed them. Trust levels were
devastated'. (The Economist, September 1994)
At the same time, new value trends and changing
workforce demographics have resulted in revised
expectations from the employees themselves. Key
trends seem to be a significant shift in employee
attitudes and values relating to career management,
leadership style, rewards and motivation, working
hours, and so forth (Sparrow and Hiltrop, 1994). Some
experts suggest that work has become a less important
aspect of people's life. According to Hammett (1984),
the new generation of highly educated workers want
more opportunities for development, autonomy,
flexibility and meaningful work experiences. They want
to participate fully in the work environment, react
adversely to rigid hierarchies and denounce a lack of
involvement in decisions affecting them. Recent surveys
carried out by Harding (1991) of International Survey
Research in Britain show that young people brought up

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THE CHANGING PSYCHOLOGICAL CONTRACT

Exhibit 1 The Royal Bank of Scotland

The Royal Bank of Scotland is currently redefining the psychological contract that suggests its employees have
jobs for life. According to Steve Rick, the bank's director of personnel policy and development, the shift is part of
a major change programme that is fundamental, root and branch re-engineering of the business (Personne/
Management,August 1994). The programme was designed to end the company's 'job-for-life' culture which
focused on pay for level rather than for performance. This is being replaced by an achievement culture, where
staff are expected to be more proactive within specialist roles, the changes were first introduced to the bank's
Glasgow offices, where over 20 grades have been reduced to about five broad bands with different pay scales
within each band. Existing staff have had to re-apply for redesigned jobs. The new jobs have been advertised in
terms of competencies without reference to pay or grade, which has led to lower-ranking staff emerging much
higher in the new structure. When this process has been consolidated, it will be extended nationwide to the
bank's 10,000 staff.

Exhibit 2

The Connecticut Mutual Ufe Insurance Company

One of the oldest Hartford insurance companies, is also trying to change the existing psychological contract.
According to Bill Garfield, the Vice President of Human Resources, the objective is 'to introduce uncertainty into
an organization that has for 140 years worked on getting rid of every shed of uncertainty that could ever exist'
(The New York Times, April 4, 1994). The transformation, still only in its initial stage, calls for most jobs to be
posted and the company's 1,889 employees to be reassinged to a new position, with a new pay scale and new
duties. Company officials say that most people's salaries will not change significantly, but that some could go up
and some could go down. The responsibility for career management is being shifted back to each employee, who
may apply for any three posted managerial jobs in the new organisation. Newly hired managers will be
responsible, in turn, for hiring their own staff, for managing their own career, for keeping their skills and
competencies up to date, and for getting themselves moved to the next position at the right time. The company
chairman has vowed repeatedly that this 'Transformation Project' is not about shrinking Connecticut Mutual.
Employees are not being braced for large numbers of layoffs, but some people, despite the flurry of statements,
newsletters and question-and-answer brochures to explain the transformation, believe it is all about layoffs
anyway, no matter what the company chairman really says. Clearly, some of the risks being taken by Connecticut
Mutual will only be evident well into the future, as employees consider what has happened and adjust to the new
work environment.

in 'an atmosphere of peace and relative affluence' are

more concerned with their quality of life, are more
critical of employers and authority, and seek jobs which
are challenging as well as useful for society. Older
workers, particularly those over 50, are more likely to
emphasise the Protestant work ethic, whereas the young
value independence, imagination, tolerance and
responsibility. In addition, the increasing employment
of women and the growing number of dual career
couples are shifting the balance between the family and
the workplace, creating increased demands for more
autonomy and more flexibility in the way individuals
are treated. Apparently, among professional women
and couples, the ideal job is seen as offering flexibility,
autonomy, responsibility, variety and opportunities for
training and development.
There is little doubt that each of the factors identified
above is creating a number of new challenges for human
resource managers and line managers alike. Faced with
pressures for greater productivity, shifting demographics, and changing work force expectations, many
companies are grappling with questions such as:
How can we attract and retain people who can live
with and often thrive upon uncertainty and are
willing to change with the organisation?
288

How can we get and maintain the loyalty and

commitment of our employees, when job security,
promotion opportunities, and career entitlements
are declining?
How can we meet the career expectations of
employees who expect rapid promotions in an
organisation that is becoming flatter, leaner and
not expanding enough to create new jobs?
How can we encourage (older) employees to take
more responsibility for their own personal and
professional development?
How can we develop procedures and processes
that help a group of managers and specialists
understand and commit themselves to working
together?
How can we build an organisational culture and
structure in which employees feel satisfied,
challenged and empowered?
These are only a few questions, but they represent key
problems that h u m a n resource managers face as they
try to renew and redefine employee commitment in the
1990s. Since the traditional 'carrots' that encouraged
commitment in the past are beyond what most corporations can now afford, new types of incentives need
to be explored. These new ideas need to focus not only
on how to create incentives that encourage people to

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THE CHANGING PSYCHOLOGICAL CONTRACT

be creative, flexible and receptive to the continual need

for change.

The N e w Contract
What are the principles upon which the new
psychological contract is based? How does this compare
with the past? Some authors suggest that we are
witnessing the following changes in the relationship
between employees and employers in Western
organisations:

Packard, and Ciba Geigy among others -- are

increasingly hiring-in managerial and professional
talent and making continued employment
explicitly contingent on the fit between people's
competencies and business needs. This trend
reaches its logical conclusion in Jack Welch, CEO
of General Electric, who contends that GE offers
its people a 'one day contract' (Mirvis and Hall,
1994).
Several authors, then, suggest that a new type of
psychological contract is emerging one that is more
situational and short term and one that assumes each
party is much less dependent on the other for survival
and growth. In its most naked form, this new contract
is defined as follows:
-

1.

2.

3.

4.

5.

6.

7.

8.

Organisations are becoming much more

demanding places to work. Employees are
expected to do their work, think of ways to
improve it, contribute to learning and change
efforts, and manage their own ongoing learning
processes (Galbraith et al., 1993).
The paternalism that was possible in the 1950s and
1960s has ended. The employee does not sign up
for a career, and the employer does not assume
long-term caretaking for his or her personal
income (Clark, 1992).
We can no longer expect business organisations
always to be stable and long-lived. Roles and
responsibilities are not well specified and secure.
Consequently organisations are becoming much
more ambiguous places to work (Galbraith et al.
1993).
Increasingly, people are being utilised where they
have needed skills and can expect to move from
place to place in their organisation as needs
change. To maintain their personal income and
employability, individuals have to plan their own
development, build a professional reputation, and
learn to manage their own careers (Handy, 1989).
Many of the factors that have traditionally
supported and reinforced feelings of psychological
success, including job security, increasing levels
of income, and the status that derives from one's
position and employer, are becoming less accessible and more chancy. Hence, many working
people will have to reexamine their career
aspirations and look to other sources of personal
meaning to avoid the experience of psychological
failure (Mirvis and Hall, 1994).
Promotion is the motivational currency of the old
era. What matters now is job enrichment,
employability and providing the opportunity for
employees to develop the skills and perspective
to take care of themselves (Noer, 1993).
Because organisations can no longer offer promotion as a reward for loyalty and performance, the
rewards of managers and professionals cannot be
managed the way they used to be. Pay systems
must be altered so that people are no longer paid
on the basis of their level, position or status, but
instead on their contribution to the firm (Moss
Kanter, 1994).
Transactional contracts will become the norm in
industry. For example, many of the traditional
career-orientated employers -- IBM, Hewlett

There is no job security. The employee will be employed as

long as he or she adds value to the organisation, and is
personally responsible for finding new ways to add value. In
return, the employee has the right to demand interesting and
important work, has the freedom and resources to perform it
well, receives pay that reflects his or her contribution, and
gets the experience and training needed to be employable here
or elsewhere.

A new psychological contract is

emerging - - one which is more
situational and short-term
This development implies that commitment to corporate
goals is decreasing, and that job security and company
loyalty may be at an all time low (De Meuse and
Tornow, 1990). For example, Hirsch (1987: 46) notes that
'yesterday's rules, and pleas to climb the company's
career ladder are suddenly transformed into today's
uncertainty and fear of firing'. This does not mean,
however, that company loyalty and commitment are
dead. Rather, it means that these values must be
generated through different avenues. It also means that
companies must work harder than ever to make themselves attractive places to work. Opportunities for
promotion or pay increases are not what they used to
be in downsized and restructured companies.
Consequently, new ways to attract and keep talented
employees must be developed.
Exhibit 3 summarises the main characteristics of the old
and new psychological contracts, as described by a
group of middle managers in a recent workshop at the
International Institute for Management Development.
The key words used to describe the old contract are
stability, permanence, predictability, fairness, tradition,
and mutual respect. In exchange for a career with the
organisation, employees were expected to be loyal,
dependable and comfortable with long-term promotional prospects. In return, the employee would be
offered continued employment, annual salary increases,
and slow but steady advancement.

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THE CHANGING PSYCHOLOGICAL CONTRACT

Exhibit 3 Changing Psychological Contract

Characteristic

Old

New

Focus

Security

Employability

Format

Structured

Flexible

Duration

Permanent

Variable

Scope

Broad

Narrow

Underlying
principle

Tradition

Market forces

Intended output

Loyaltyand
commitment

Value added

Employer's key
responsibility

Fair pay for

good work

High pay
for high
performance

Employee's key
responsibility

Good
performancein
present job

difference

Employer's key

Stable income
and career
advancement

Opportunities
for selfdevelopment

Time and effort

Knowledge
and skills

input

Employer's key
input

Making a

Clearly, the situation is vastly different today. A 'selfreliance' orientation increasingly pervades the
employment relationship. The need to be flexible and
adaptive to change is emphasised. This is a far cry from
the 'Organisation Man' phenomenon of the 1960s, in
which an employee completely invested himself in his
company, worked 60- to 70-hour weeks when needed,
relocated frequently at short notice, and did whatever
the company asked (Whyte, 1956). In contrast, Hirsch
(1987) likens the current situation to an employment
strategy which professional sports call 'free agency'. In
this strategy, professional athletes attempt to maximise
their personal status and income by selling their
individual talents to the highest bidder. Their sense of
identity is linked to their profession, rather than to
specific countries, organisations or sports clubs: they are
professional athletes first, a team member second.
Hirsch suggests (American) managers may want to
adopt a similar strategy in the present business
environment.

Implications for Human Resource

Management
The implications for human resource management are
enormous. The changing psychological contract is
crucial to the nature of careers and the treatment of
people as key organisational assets in the next decades.
What will organisations expect of their employees when
they are faced with even greater competition, internationalisation and integration of functions? And what
will employees expect of their employer when faced
with increased professional risk and uncertainty? How
can the two sets of expectations be reconciled? What
290

does this mean for the management of people within

the organisation? These are key issues which must be
addressed for they will determine the context for both
the psychological and formal contracts between
employees and employers. We do not have all the
answers, but a number of suggestions can be made:

Find New Ways to Attract, Retain and

Motivate Talent
Under the traditional system, company loyalty was
rewarded with job security and large companies had a
core group of professional employees who were
dependable, who would work hard and who would
sacrifice the present for the future. The new
psychological contract rests on the assumption that
people will not be automatically loyal to their company
as a whole, but that, as professionals, they will be
moved by a new kind of loyalty to their own disciplines
and skills. It also assumes that people will care more
about their own development and that their skills are
highly transferable between companies and industries.
Companies, therefore, can no longer rely on traditional
methods and techniques to attract and retain talented
workers. Instead of career paths and job security, new
kinds of incentives have to be applied. According to
Moss Kanter (1994), companies need to switch
incentives from careers, status and promotion to
personal reputation, teamwork and challenging assignments. They have to find ways of making work
sufficiently challenging and involving so that it becomes
a source of loyalty which translates into a new kind of
security, which she calls 'employability security'. This
is the promise that the employee's skills will be
enhanced, and access to other tasks and assignments
will be facilitated. Moss Kanter says:

This is the best promise employers can give to their staff,

particularly in the current era when organisations come and
go, change shape or change sides rapidly. It is a difficult
transition of policy, but I am finding companies very receptive
to this new philosphy.

Psychological Contracts Need to Evolve in

Line with the New Characteristics and
Expectations of People Entering the Work
Force
As noted above, the work force is changing and
employees' expectations are evolving in line with the
economic situation (high unemployment, more
competition and the creation of a global market) as well
as the new demographic situation (ageing of the
population, higher education levels and more women
entering the workforce). Increasingly, employees want:
to know more about what is happening in the
organisation
to understand why managers have made decisions
to contribute their own ideas and to participate in
the decision making process
to feel valued and be personally recognised for

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THE CHANGING PSYCHOLOGICAL CONTRACT

their contribution to the success of the

organisation.
Satisfying these demands requires openness and a
genuine commitment by managers to honesty, two-way
communication, and delegating authority and responsibility to the lowest possible level. Clearly, winning
commitment to change without the old carrot of job
security can be very difficult. However, all employees
deserve at least an explanation of how that change will
affect them and what the company will or will not do
to help. In fact, Chevron has discovered that when it
candidly explains its problems to employees, their
commitment to the company and their work increases,
even if the news is bad (O'Reilly, 1994). Consequently,
moving from concealment to openness is one of the
main leadership challenges of the 1990s.

Find Ways to Avoid Burnout

One of the great unanswered questions of the new
psychological contract is how older workers will fare if
continually forced back into internal or external labour
markets to compete for challenging assignments with
younger employees. As O'Reilly (1994) points out, a
genuine commitment by companies to retrain or find
new jobs for employees with declining skills is helpful,
but not everyone can be retrained or relocated.
Companies that fail to demonstrate some sort of
commitment to helping those workers may not find
many people who are willing to commit themselves to
their long term success. Some companies have tried to
deal with this issue by making the access to jobs more
transparent. For instance, at Raychem, employees can
tap into "IIINsiders" (the internal-information interview
network), to arrange interviews with other employees
who are willing to talk about what jobs they do, and
how they got to do them. Other firms, mostly in
technology industries, have set up new career centres
where employees can find advice on everything from
information on job vacancies both inside and outside
the organisation to personal assessment tools to discover
individual interests, talents and skill requirements.
Whether these services are called outplacement, career
guidance, or inplacement, the goals are essentially the
same: increasing the mobility, 'competencies' and
'employability' of employees within the organisation.
The principal barrier to such solutions may lie in the
perceptions of individuals themselves. As BP's HR
manager says: 'The problem is how to change people's
minds, not to think about career development only in
terms of promotion, but to develop a broad range of
skills to add value to the job' (Lester, 1994: 80). Longterm careers and steady promotions may still be offered
to a chosen few, but most people will either have to
change companies to rise to senior management ranks
or stabilise at lower levels.

What Solutions Does Research

Suggest?
The implications of the changing psychological contract

for those who survive the effects of restructuring,

downsizing and reorganisation are likely to be little more
comfortable than for those who do not. Yet, more than
ever, the organisation needs the employees' commitment in order to succeed. The pressure is to do things
better, faster, and cheaper and people have to know
what they are expected to do in order to achieve these
objectives. Merely telling people what to do does not
make them committed. Real commitment can only be
achieved through mobilising energy, ideas, and effort
that come from each employee willingly and spontaneously. This section will integrate some ideas from
the literature to provide a number of general
recommendations for building employee commitment
in the new socio-economic environment.

Changes in Management

Style

Many researchers have measured the effect of

management style on employee commitment in organisations and most have found that role clarity, two-way
communication, decentralisation, and direct
participation in decision-making all cultivated higher
commitment amongst employees (Stevens et al., 1978;
Morris and Steers, 1980; Rhodes and Steers, 1982).
Other studies have found that managers can get greater
commitment from employees by giving them more
discretion, control and other resources for their work
(Dansereau et al., 1975). This finding is further
supported by Lawler and Mohrman (1989). They
suggest that to develop greater commitment among
employees, a manager must allow the employee to share
in the risks as well as in the rewards. Their concept of
Total Employee Involvement (TEI) calls for sharing
important information, sharing management authority,
delegating responsibility for performance management,
and allocating rewards based on corporate success.

Build Cross-functional Teamwork

The push towards cross-functional teamwork and
projects can be seen as a very important development
that enhances commitment to organisational objectives.
Not only do cross-functional teams make interdependence and co-operation amongst individuals and
functions more visible and decisions less reversible, but
they also provide a smaller social environment where
organisational commitment can be more easily built
through relationships, social involvements, and shared
values and ideas with team members. Furthermore,
such teams increase individual learning and skills,
provide more rapid feedback, and overall enhance an
employees personal and professional development.

Create Challenging Work Experiences

The challenge of work experience has been shown to
be one of the most significant factors in the development
of commitment (Steers, 1977; Meyer et al., 1989). Given
this strong influence, efforts should be made to design
tasks and structures that will enable people to feel a
sense of accomplishment, to express and use their

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THE CHANGING PSYCHOLOGICAL CONTRACT

talents, and to exercise their own decision-making

powers. By designing jobs to increase the opportunity
for challenge and self-development, steps can be taken
to help ensure a high commitment and identification
with the organisation. Also, involving new entrants in
work that is challenging and that increases their growth
and development is important as individuals begin their
socialisation in the organisation.

Improve the Induction and Socialisation

Process
Since the initial stages of employment have been shown
to be highly critical in setting the future frames of
reference for employees, special attention must be paid
to how new employees are introduced into the organisation. Wanous' (1975) research on the earliest stages
of employment has shown that most new employees
tend to go into jobs with inflated expectations. He
proposes that recruits be given a 'realistic job preview'
which illustrates both the desirable and undesirable
aspects of the organisation, rather than using the
traditional approach, which tries to maximise the
positive aspects of the organisation to the exclusion of
realistic aspects. Research done by Louis (1980) also
suggests that unmet expectations during the initial
stages of employment result in a lack of commitment
and increased turnover. In view of the fact that most
turnover occurs within the first six months, more
'realistic job previews' and a concern towards understanding and meeting new employees expectations
could provide a more realistic and positive initial
organisational experience and reduce the cost of early
resignations.

Create an Attachment Through Professional

Relationships
The management of expectations through realistic job
previews are critical at the later stages of the
employment relationship as well, especially in the light
of the finding that people at medium tenure and
position express more commitment to their profession
and less to their organisation. Perhaps a way to avoid
the declining commitment experienced at that stage
would be to provide various 'social involvements' (e.g.,
opportunities for group affiliation, off-the-job contacts)
that create an attachment through professional relationships and help bridge the gap between commitment to
personal interest and the organisation (Sheldon, 1971).

Build Organisational Pride and Recognise

Personal Values.
The organisation should be a vehicle with which
individuals can develop personal pride and express
important values about their work to their friends,
family and relatives. As pointed out at the beginning
of this paper, the relationship between the organisafion
and the individual has weakened, often resulting in
distrust and cynicism towards the organisation. Also
given that many organisations have been restructuring
292

and eliminating jobs and people that were deemed

important, it must be pointed out that the changes in
the 1980s have resulted in an employment relationship
primarily based on instrumental or more extrinsic factors
-- 'What's in it for me?'. This type of relationship may
not generate the effort and spontaneity necessary for
managing a competitive organisation (Katz and Kahn,
1978). To be successful, organisations need to integrate
as far as possible the needs and values of the organisation with those of the individual, so that the latter
believes that if the organisation thrives, he or she will
thrive too. As Armstrong (1990) says, people may work
hard if they believe in the mission of the company and
can identify with its values, aims and activities; they will
work even harder if they feel that achieving these values
does something for them too.

Organisationsneed to developa
new kind of commitment -through the creation of meanings
and values by individuals and
groups

Organisations, then, need to develop a new kind of

commitment -- commitment through the creation of
meanings and values by individuals and groups through
their work, their relationships with other people, and
their opportunities for growth, rather than impersonal
values and mission statements handed down from the
top. This does not mean that a chaos of values will
occur. As Carlile (1991) argues, what it does suggest is
that shared values will form around personal values and
meanings which are unique and important to the
individual and the group. Rockwell has operationalised
this to a degree by suggesting that each management
team, work group, or division articulate a statement of
values (a credo) that expresses the work they do and
how they accomplish that work in a meaningful way.
What is important is that these credos are unique to each
group and help create an identity that can be shared and
in which each individual can find meaning. It is these
more intrinsic factors that build the kind of commitment
that allows employees to be energetic, proactive, and
competitive.

Further Implications for Human

Resource Management
All of these organisational changes place new demands
on the human resource manager. The following lists a
few possible practices to consider when building a new
type of employee commitment now and in the
foreseeable future:

Reward and Recognise High Achievement

Given the pressure to do things better, faster, and
cheaper, reward systems should recognise contribution
rather than position or status. In addition, since crossfunctional projects and assignments are more temporary

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THE CHANGING PSYCHOLOGICAL CONTRACT

and less hierarchical, reward systems should be more

dynamic and flexible. Reward and remuneration
packages (salary, incentives, bonuses, benefits) should
encourage employees with opportunity to serve beyond
their job description, gain professional expertise, and
cultivate core competencies across functional groupings.

Manage Career Expectations

As noted in the previous section, realistic job previews
should be used to provide more accurate information
to the potential employee. New employees must be
given jobs that provide challenge and that also provide
the opportunity to interact in a group setting. To
maintain organisational commitment, people at later
career stages should be given the opportunity to work
part time with professional groups (business schools,
professional associations, consulting agencies, etc.), an
opportunity traditionally reserved for non-managerial,
less-seasoned employees.

Decentralise Performance Appraisals

Considering the shift towards decentralisation and
empowerment, it is essential that individuals and
groups have more responsibility over the appraisal
process. Furthermore, appraisals should be based on
continuous performance and continuous improvement,
rather than single events or past achievements.

Provide Systematic Training

Systematic training and development (opposed to
sending individuals away on ad hoc training
programmes) will enhance commitment by giving
talented employees the opportunity to develop their
skills and to achieve positions of greater challenge and
responsibility. In-company programmes, especially
cross-functional and non-hierarchical ones, can also help
to improve identification with organisational values and
increase communication among functions, levels and
departments.

Nurture Leadership Talent

In view of the need for teamwork, individuals need to
be trained in the skills needed for working in groups.
Managers need to be trained in counselling and
coaching to exercise leadership and facilitate the
relationships betweeen the various functions and
professions within a work group.

Eliminate Systemic Barriers to Change

Strategies and resources need to be developed in order
to implement these structural and management
changes. As Carlile (1991) points out, the question needs
to be asked: how should individuals be trained, groups
be structured, and management practices be changed
to facilitate employee empowerment and involvement?
There are a number of obstacles that must be overcome
in order to make the changes effective. A traditional pay

structure, based on status and position, is one of them.

Poor working conditions, inadequate training, and
unduly restrictive or bureaucratic human resource
practices are others. As Armstrong says, you will never
prevent people grousing about these, but you can at
least reduce the scope for legitimate grumbles.
Overall, these six activities can be seen as a set of
methods and techniques designed to increase the loyalty
and commitment of employees by setting up a system
for establishing and discussing employee expectations
early in the employment relationship, creating opportunities to check out whether the psychological contract
is still valid at later stages, and renegotiating the contract
if necessary. For some companies, these techniques are
consistent with the human resource policies and
practices that are already being employed to attract,
retain and mobilise people at all levels of the
organisation. For many others, however, the task of
developing and implementing systems and structures
that support the new social and economic reality will
contradict a set of personnel policies and practices that
have served the organisation for a long time. In my
opinion, this transformation will occur only when
general managers develop a viewpoint of how they wish
to see employees involved in and developed by the
organisation, and what personnel policies and practices
are appropriate to achieve these goals. As Beer et al.,
(1984) point out, without either a central philosophy or
a strategic view of the link between human resource
management and the overall capability and performance
of the company (which can be provided only by general
managers), managerial behaviour with regard to people
is likely to remain a set of independent activities carried
out by individuals, each guided by their own personal
values, opinions and practical experience. Clearly, from
the organisational standpoint, it is wise to develop a
coherent human resource policy that will make it
possible for managers at all levels of the organisation
to attract and retain the right mix of people and to
establish the type of employment relationship that is
consistent with changing business needs, social values
and employee expectations. With the help of human
resource specialists, general managers play an important
role in creating a set of human resource policies and
practices that are consistent with business requirements,
societal changes and the values and expectations of
employees.

Conclusion
To conclude, increasing competition and changing
expectations among employees have prompted a
growing disillusionment with the traditional approaches
to the management of human resources based on
lifetime employment and steady promotion from within.
Consequently, companies have experimented with a
radically different strategy, designed to increase the
flexibility, productivity and competitiveness of the
enterprise. This transformation has highlighted some
fundamental questions about how to develop and
maintain the commitment of people who no longer

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THE CHANGING PSYCHOLOGICAL CONTRACT

enjoy the job security and stability that was traditionally

o f f e r e d the l o n g - s e r v i n g e m p l o y e e s . The key
assumptions underlying these questions are that:
1.

2.

the psychological contract that defines the

relationship b e t w e e n e m p l o y e e s and their
organisation is changing dramatically;
this change is causing a strong need for
organisational structures and systems that provide
opportunities for greater personal and professional
growth.

Companies like AT&T, Chevron and the Royal Bank of

Scotland have already begun re-examining all policies,
practices, and managerial values that affect the
management of h u m a n resources. They find that the
transition is difficult, but see reform as essential for
achieving a better reconciliation of the needs of the
organisation with the needs of the individual and of the
broader society. Unfortunately, most organisations
change h u m a n resource policies and practices in
response to crisis. For them, the needed changes are
more likely to be a matter of revolution than reform.

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JEAN-MARIE
HILTROP, IMD,
Chemin de Bellerive 23,
PO Box 915, Lausanne,
CH-IO01, Switzerland
Jean-Marie Hiltrop is
Professor of Human
Resource Management at
the International
Institute for Management
Development (IMD),
Lausanne, in Switzerland. He was involved, for
many years, in executive education at the
Management Centre of the University of Bradford
and at the Department of Applied Economic
Sciences at the Katholieke Universiteit Leuven in
Belgium. He has been a personnel manager and
consultant for several European companies.
Recently, he co-authored European H u m a n
Resource Management in Transition and
European Casebook on H u m a n Resource and
Change Management, both published by PrenticeHall, and he is currently leading an international
research project which examines the impact of
human resource practices and competitiveness of
European organisations.

EUROPEAN MANAGEMENT JOURNAL Vol 13 No 3 September 1995