Round Table

The Relationship between

Human Resource
Practices, Psychological
Contract and Employee
Engagement
Implications for Managing
Talent
Upasana Aggarwal
Sumita Datta
Shivganesh Bhargava

Upasana Aggarwal is a Doctoral Student in

Human
Resource
Development
and
Organisation Behaviour at the Shailesh J Mehta
School of Management, IIT Bombay.
upasana.aggarwal@iitb.ac.in
Sumita Datta is a Doctoral Student in Human
Resource Development and Organisation
Behaviour at the Shailesh J Mehta School of
Management, IIT Bombay.
sumitadatta69@rediffmail.com
Shivganesh Bhargava is Professor, Human
Resource Development and Organisation
Behaviour, Shailesh J Mehta School of
Management, IIT Bombay. bhargava@iitb.ac.in
IIMB Management Review, September 2007

n todays era of accelerated changes across the globe, managing talent

has become a top priority and a key business challenge. Having the right
talent in pivotal roles at the right time is of strategic importance, making
a difference to revenues, innovation and organisation effectiveness1. With
talent emerging as a key driver for competitive advantage, it is important to
examine the factors that determine higher utilisation and retention of talent.
Organisations are also grappling with myriad strategies to improve
organisational performance. Lately, there seems to be a heightened focus on
individual employees as a source of competitive advantage.
The ways in which people work make a crucial difference between successful
and unsuccessful firms2. Pro-social employee behaviour is a necessity for
organisational, national and economic survival3, and in todays fiercely
competitive times, organisations need employees who are flexible, innovative,
willing to contribute and go above and beyond the letter of their formal job
descriptions or contracts of employment4.
The traditional one-size-fits all approach to managing employees is now
being replaced by more individualised employee approaches. The individual313

There is a growing interest in

employee engagement (EE) and
psychological contract (PC)
because both the constructs have
the potential to predict employee
outcomes, organisational success
and financial performance.
Employee-employer relationships
influence the economic as well as
the behavioural outcomes of an
organisation.
specific psychological state of employees is recognised as a
key determining factor of employee behaviour and responses
at work. As Kahn5 suggests in his seminal work ...the more
people draw on themselves to perform their roles within
those boundaries, the more stirring are their performances.
Two psychological constructs which have been extensively
studied and are said to achieve tangible as well as intangible
firm level outcomes are employee engagement (EE) and
employee psychological contract (PC). A common thread
passing through the constructs of engagement and
psychological contract is that they are recognised as processes
for developing and retaining talent6. Likewise, there are many
other dimensions of these two constructs which call attention
to their significance in the effectiveness of human resource
(HR) management practices.
Research suggests that HR practices have a significant impact
on employee attitudes and behaviours. Though studies suggest
that HR practices are a part of high performing organisations,
HR practices alone do not guarantee such high performance7.
How is it then that organisations with similar HR practices
and employee skill sets vary in their outcomes? Presumably,
there are factors which moderate the relationship between
effective HR practices and organisational outcomes. We posit
that employee engagement and psychological contract are
the key explanatory variables which could help in explaining
the difference in performances across various organisations,
and are worthy of detailed examination. Further, the literature
suggests that employee psychological contract, engagement
and human resource practices (HRP) need to be looked at as
an integrative whole, and that HRP is the linchpin between
PC and EE which can be important strategic tools for talent
314

utilisation and retention. The paper suggests an integrative

framework which proposes new directions for these
relationships and suggests areas for further research.

Psychological Contract and Employee

Engagement The Constructs
Psychological contract is a widely discussed and debated
construct. Studies on PC commenced in the early 1960s8,
but empirical assessment of the construct can be put down
to the 1990s. In general, there is a dearth of academic
literature on employee engagement9 and much of what has
been written on the subject comes from practitioner literature
and consulting firms10. However, since 1994, the two
constructs have continued to be a serious topic for conceptual
and empirical analysis11.
The growing interest in EE and PC can perhaps be attributed
to the fact that both the constructs have the potential to
predict employee outcomes, organisational success and
financial performance12. Employee-employer relationships
influence the economic as well as the behavioural outcomes
of an organisation13. If employee engagement affects financial
outcomes and the bottomline, disengaged employees
uncouple themselves from work, withdraw cognitively and
emotionally, display incomplete role performance and task
behaviours, put in less effort and become automatic and
robotic14. Unhappy employees, who perceive a discrepancy
in the promises made to them by the employer, may feel
cheated and look for more attractive options outside the
organisation. This is a costly proposition for organisations
and it is imperative for them to understand what employees
primarily want. The psychological states of employees are
key factors in determining their behaviour and responses at
work15. It is at least in part through the management of these
psychological states that organisational effectiveness can be
achieved16.
Contracts are recognised as the mainstay in employment
relationships17 and contracting has become an important
focus of studies in recent times18. Contracts can be legal and
behavioural/ psychological in nature. Rousseau, who has
pioneered work on different types of behavioural contracts
and has worked extensively on understanding the
psychological contracts of employees, defined PC as a set of
expectations held by the individual employee that specifies
what the individual and the organisation expect to give and
receive in the working relationship19. Rousseau described
the process by which organisational policies and practices
influence employee psychological contracts as contract

The Relationship between HR Practices, Psychological Contract and Employee Engagement

making20. Based on MacNeils21 typology, psychological

contracts can be classified as transactional and relational,
which are two ends of the continuum in terms of their
features. Transactional psychological contracts are of the
limited duration of employment, with well specified
performance levels and focus on material rewards and are
publicly observable. Relational contracts on the other hand
are broader, more amorphous, open-ended, they focus on
intangibles as well as material rewards, are wide ranging and
subjective to the parties involved. The key features of relational
contracts are that they emphasise mutual commitment and
continuity.
The antecedents which influence PC can be broadly classified
into individual, organisational and extra organisational factors.
Under personal/individual factors, past job experience and
personality of employees have been recognised to have a
significant impact on shaping employees psychological
contract22. Early life experiences also shape an employee,
influencing values about fairness, hard work and reciprocity23.
Literature suggests that the newcomers needs, motives and
goals influence what information they seek and attend to.
Organisational factors having an impact on employee PC
have been studied under the categories of organisational
socialisation; human resource practices as well as human
contract makers (line manager, HR personnel and coworkers). (The impact of HR practices on PC is discussed in
detail later in this paper.) The social setting/national culture
has been identified as the third or extra-organisational
antecedent of psychological contract24.
Employee engagement is another construct which is gaining
relevance for practioners as well as academicians. There are
many definitions of employee engagement and in this paper
EE is defined as physical, cognitive and psychological
absorption in ones work-roles. Towers Perrin25 defines
engagement as bringing discretionary effort to work, in the
form of extra time, brain power and energy. Kahn26, who
can be credited with conceptualising as well as theoretically
deriving the dimensions of employee engagement in
organisational studies, held that an employee can be
physically, emotionally or cognitively engaged. Employees are
cognitively engaged when they are aware of their mission
and role in their work environment27, have what they need at
work and have opportunities to feel an impact and fulfilment
in their work28. Employees are emotionally engaged when
they perceive that they are part of something significant with
co-workers whom they trust, form meaningful connection
with and experience empathy and concern for, and also have
chances to improve and develop. Employees can be engaged
IIMB Management Review, September 2007

Past job experience and personality

of employees have been recognised
as having a significant impact on
shaping employees psychological
contract. Early life experiences also
shape an employee, influencing
values about fairness, hard work and
reciprocity. The social setting/
national culture has been identified
as the extra-organisational
antecedent of PC.
on one dimension and not on others. However the more
engaged an employee is on each dimension, the higher will
be his or her overall personal engagement.
Focusing on how peoples experience of themselves and their
work contexts influenced moments of personal engagement
and disengagement, Kahn recognised three antecedents of
employee engagement: psychological meaningfulness how
meaningful is it for me to bring myself into this performance
(measured by job enrichment, work role fit and co-worker
relations29); psychological safety how safe is it to do so
(measured by supervisor relations, co-worker relations and
co-worker norms; and (3) psychological availability how
available am I to do so? (measured by resources, work role
security and outside activities).
EE has been measured by using different tools, questionnaires
and inventories. One of the most popular measures is the
Gallup Workplace Audit30, though scholars are still identifying
new measures of EE.

Conceptual Distinctiveness of Psychological

Contract and Employee Engagement
A number of constructs in organisation behaviour theory
indicate the psychological relationship of an employee with
the organisation or role. Psychological contract has an impact
on job satisfaction31, organisational commitment32, intention
to quit33 and organisational citizenship behaviour34, as does
employee engagement35. As differentiating between seemingly
similar constructs is important to avoid construct
proliferation36 an attempt has been made to distinguish PC
and EE from other related constructs.
315

We can discern the constructs on the

basis of the question addressed by
them. Organisational commitment
asks: Why should I maintain
membership? Is it because I want to/
I need to/ I ought to? Job involvement
asks: How important is the job and
job performance to my self-image?
Job satisfaction asks: What
evaluative judgments do I make
about my job?
Psychological contract is perceptual in nature and defined as
a set of promissory expectations held by the individual
employee37. Kahn defines employee engagement as the
physical, cognitive and affective involvement of an employee
and the harnessing of organisation members selves to their
work roles. Job involvement (JI) is a cognitive judgment about
the need satisfying abilities of a job and is defined as a belief
state of psychological identification38, while job satisfaction
(JS) is an attitude towards ones job39. Organisational
commitment (OC), on the other hand, is an attitudinal state
of an employee, defined as identification with and involvement
in a particular organisation40. Organisation citizenship
behaviour (OCB) is discretionary behaviour, not included in
an employees formal job description, such as assisting coworkers with their work, helping peers learn a new task,
volunteering to do things that benefit their work groups,
among others41.
We can discern the constructs on the basis of the question
addressed by each of these relationship constructs42.
Organisational commitment asks: Why should I maintain
membership? Is it because I want to/ I need to/ I ought to? 43.
Job involvement asks: How important is the job and job
performance to my self-image44. Job satisfaction asks: What
evaluative judgments do I make about my job? Employee
engagement can be of three types. While cognitive engagement
asks: Is performing my job so absorbing that I forget about
everything else? emotional engagement asks: Do I put my
heart into my job? and physical engagement asks: Do I exert
a lot of energy performing my job? OCB asks: Am I willing to
volunteer to do things for my work and work group not
included in my formal job description? Psychological contract
asks: Are my promissory expectations fulfilled?
316

These seemingly similar constructs can further be

differentiated from one another on the basis of the conceptual
core and motivational basis. The motivational basis of PC is
need fulfilment 45. Job involvement satisfies an individuals
desire to belong, to be part of while organisation
commitment fulfils the desire to remain affiliated. The
motivation behind employees feeling engaged is a result of
the perceived benefits from engagement in meaningful work.
OCB, on the other hand is an indicator of workers responses
to their employment relationship.
Psychological contract is different from organisation
commitment or the feeling of desire, need or obligation to
remain in an organisation. It also differs from job involvement
or being consumed by work and the job being a central life
interest 46. The feeling of fulfilment of promissory expectations
differentiates PC from positive or negative evaluative
judgments of the job, as in the job satisfaction construct, as
well as from constructive discretionary behaviour or
organisation citizenship behaviour, which is a result of
fulfilment of PC.
Employee engagement, similarly, can be distinguished from
other constructs. While EE is grounded in theories of
motivation, it is different from motivation. Motivation is a
broad term, incorporating within itself many constructs such
as JI, EE, commitment and so on, which could also be
independently and exclusively studied as mediating variables
of performance. Similarly, although EE is closely associated
with existing constructs like job involvement, organisation
commitment, OCB and job satisfaction among others, it is
distinct. While JI is connected with the need satisfying abilities
of a job and is tied to ones self image, EE is the degree of
involvement, physical, mental and psychological, that an
individual employs in his/her work roles. While organisation
commitment is understood to be an attitude towards the
organisation47, EE is the degree to which individuals are
attentive and absorbed in the performance of their roles.
Further, OCB is defined as voluntary extra-role behaviour
and concerns roles outside the job description, EE although
discretionary, refers to how an individual employs himself
during the performance of his formal role rather than extrarole. While job satisfaction concerns how people feel about
their jobs 48 or the positive attitude of the person towards his
job, EE is not an evaluative judgment but the cognitive, emotive
and behavioural involvement of an employee in his work
roles.
It may be argued that employees with deep engagement in
their roles (EE), will identify more with their jobs, be more

The Relationship between HR Practices, Psychological Contract and Employee Engagement

committed and satisfied with their jobs. Therefore these

attitudinal constructs may be considered as antecedents of
EE. Further, as attitudes are affective and to a significant extent
can predict behaviour49, employees with a deep sense of
engagement will demonstrate behaviours which are not
mandated, and assist organisations through organisation
citizenship. Literature has established the impact of EE on JS
as an outcome. We suggest that highly engaged employees
will also have a positive relation with JI, OC and OCB.
Alternatively, it is possible that the relational constructs are
predictors of employee engagement, such that employees
who have positive JS, OC as well as JI and demonstrate
discretionary behaviour, will be highly absorbed in their work
and will experience a higher degree of engagement.
Furthermore, JS, JI and OC may coexist with employee
engagement. Therefore the relationships between EE, JI, JS
and OCB could be of those of antecedents, outcomes or
correlates. The direction of relationship between these
constructs needs to be empirically ascertained.
The literature examining the relationship between PC and
other relational constructs is far more developed. The
fulfilment of psychological contract predicts employee
attitudes and behaviours, some of which (JS, OCB, OC) have
been studied while some still need to be investigated (EE, JI
among others). The distinction between PC and EE has been
elaborated in a later section of the paper.

What Psychological Contract and Employee

Engagement Add
While there is evidence in the literature that PC is a
determinant of employee attitudes and behaviours, and an
important regulator of employee-organisation relationship,
PC as a construct has the potential to integrate a number of
key organisational concepts50. The value addition that EE
makes in employee-organisation relationships is that it
integrates most of the dimensions which have been used in
other relational constructs. The strength of EE is that it is a
multi-dimensional construct and unlike other constructs it is
not only an affective but also a cognitive and physical state of
involvement in ones job. Unlike other constructs such as JI,
OC and OCB, EE views the relationship between employees
and their work, co-workers and organisation closely, at a
more day-to-day level. While other relational constructs are
quite broad and generic to account for or explain
organisational challenges, Harter et al51 suggest that EE is
more immediate and specific and has perhaps therefore
gained relevance as a powerful strategic technique.
Importantly, as disengagement is central to the problem of
IIMB Management Review, September 2007

While PC is a determinant of
employee attitudes and behaviours,
and an important regulator of
employee-organisation relationship, as
a construct it has the potential to
integrate a number of key
organisational concepts. EE is a multidimensional construct and unlike other
constructs it is not only an affective but
also a cognitive and physical state of
involvement in ones job.
workers lack of commitment and alienation52, the employee
engagement construct explains the dynamics of employee
involvement which fosters employee motivation and
attachment to work and facilitates personal growth53. This
may provide avenues for corporate executives to garner prosocial behaviour as well as increase psychological ownership
of its employees.
To sum up, PC and EE focus on the emerging issues in
employment relationships. They are analytical constructs that
understand the concerns about employment relationships
and neatly capture the spirit of contemporary times.

Psychological Contract and Employee

Engagement Similarities
PC and EE are both mechanisms of motivation. EE and fulfilled
employee PC engender pro-social attitudes and behaviours.
Both are constructs of employment relationships, and the
subject matter of organisational behaviour with a focus on
person-role relationship. The construct PC refers to employee
expectation from and towards his job/organisation;
employee engagement also operates in the context of the
employee and his/her role and the organisation. Literature
suggests that both EE and PC are cognitive in nature. PC is
idiosyncratic and lies in the eye of beholder. That is, even if
the same deal (benefits, rewards) is offered to every employee,
his/her psychological contract towards the organisation may
vary. Ceteris paribus, the engagement of employees to their
job or organisation also varies from one employee to another.
Furthermore, PC and EE are psychodynamic processes. Both
operate at the psychological level. Literature on PC and
317

Employee engagement and

psychological contract are
essentially social exchanges. They
are both anchored in and well
explained by the Social Exchange
Theory, which suggests that
although the formal or contractual
relationships in employment are
economically driven, a social
element to such relationships
typically evolves.
socialisation54 establishes that the psychological contract of
employees evolves over a period of time (it may decrease or
increase) as a result of experience and organisational policies;
Similarly, like PC, EE is not a static concept. It is subject to
revision. Kahn defines employee engagement and
disengagement as moments in which people bring themselves
into work or remove themselves from particular task
behaviours55.
Employee engagement and psychological contract are
essentially social exchanges. EE and PC are both anchored in
and well explained by the theory of social exchange. The Social
Exchange Theory (SET) suggests that although the formal or
contractual relationships in employment are economically
driven, a social element to such relationship typically evolves56.
Simply put, where an individual does another a favour there
is an expectation of some future return. Trust and the norm
of reciprocity are the core elements of SET. Using this
perspective in the employment relationship context, when
individuals receive economic and socio emotional resources
from their organisation, they feel obliged to respond in kind
and repay the organisation57. Moreover, the exchange between
two parties is in somewhat diffuse terms and without any
guarantee of a future. Therefore trust is the cornerstone of
the relationship between the two parties of the social
exchange process and relationships evolve over time into
trusting, loyal and mutual commitments as long as the parties
abide by certain rules of exchange.
The social exchange theory is the most cited framework for
understanding the psychological contract process58. As an
explanatory theory, SET views the process of psychological
contract by predicting employee-employer relationships.
318

Likewise, SET is also one of the theoretical foundations of

employee engagement. When employees receive economic
and socio-emotional resources from the organisation, they
feel obliged to repay. One of the ways to repay the organisation
is employing greater levels of engagement.
In addition to the aforesaid similarities, there are a few factors
which are common in terms of shaping both PC and EE,
these being perceived organisational support (POS), job
characteristics and procedural justice.

Psychological Contract and Employee

Engagement Differences
Although the literature suggests that there are overlaps
between EE and PC (with regard to nature of the constructs,
their origin in SET, the level of operationalisation being the
individual, their antecedents and the impact on attitudes and
behaviour of employees and organisational outcomes), they
are essentially two different constructs.
A sense of fulfilment of promissory obligations (PC) is different
from degree of physical, mental and psychological presence
(EE). While PC is a cognitive construct, EE is multidimensional
in nature. Kahn argues that besides being cognitive,
engagement operates at the emotional as well as the physical
plane. Although PC and EE are both dynamic in nature, while
EE literature focuses on moments of task performance59,
PC is assumed to be comparatively more constant and
stable. Amongst other differences, PC and EE vary at their
level of operationalisation. Literature distinguishes between
job and organisation engagement as two different constructs.
Though PC has been generally discussed from an
organisational perspective and there are no studies
distinguishing between psychological contract of an employee
towards the job and towards the organisation, nonetheless
literature on PC discusses how an employees expectations
as well as response may vary towards multiple agents of an
organisation for example, will breach of contract from a
line manager result in an employee perceiving an
organisational breach?

Inter-relationships between Psychological

Contract and Employee Engagement
Based on suggested similarities and differences between PC
and EE, we have raised some research questions about the
relationship between these two constructs.
In the literature on PC there is enough evidence of the negative
reactions of employees to unfulfilled and under-fulfilled

The Relationship between HR Practices, Psychological Contract and Employee Engagement

promises. But research on the impact of over-fulfilment of

contract promise on attitudinal and behavioural
consequences is sparse60. Therefore, one can make a case for
the need to investigate the positive outcomes associated with
overinvestment in employees.
Furthermore, SET suggests that if employees perceive that
the organisation has provided them more than it promised
or agreed to provide, they experience a positive imbalance in
the social exchange relationship. In a state of such positive
imbalance, employees may attempt to reciprocate by
increasing their contributions to the firm 61. On similar lines,
engagement literature suggests that when employees receive
resources from their organisation, they bring themselves
more fully to work roles and devote greater amounts of
cognitive, emotional and physical resources. Therefore, we
need to examine whether increased employee engagement is one
of the positive outcomes of perceived positive imbalance. In other
words, does PC in a state of positive imbalance lead to engagement?
Although literature suggests that as a response to receiving
organisational resources, employees choose to engage
themselves to varying degree, it is silent on the degree of
engagement. In other words, what needs to be addressed is:
How much engaged will an employee be on receipt of unexpected
benefits from the organisation? What is the relationship between
the degree to which an employees expectations are fulfilled and
the degree to which s/he feels engagement with the job/
organisation?
Additionally, can an employee whose expectations have not
been fulfilled (that is, the employee experiences PC breach)
be cognitively and emotionally engaged? Perhaps not. That is
to say that PC is a predictive variable of EE. PC is a necessary,
if not sufficient condition of employee engagement. We
therefore argue that an employees psychological contract
fulfilment antedates/predates employee engagement.
In the literature, perceived organisational support (POS) is
recognised as the predictor as well as moderator of
psychological contract fulfilment and employee engagement.
It has been suggested that if employees feel unsupported by
their organisation or supervisor62 it may result in a breach of
psychological contract. Saks63 identified POS as an antecedent
of job and organisation engagement. Besides POS, literature
on PC suggests that procedural justice moderates the
relationship between breach and outcomes. Interestingly
procedural justice also predicts organisation engagement of
an employee.
Given the strong correlation between the two psychological
constructs, we posit that there is a need to examine the strong
IIMB Management Review, September 2007

HR practices determine to a large

extent the relationships between
employers and employees, and play
a significant role in shaping
employee psychological contract.
The formation of the exchange
relationship begins during the
recruitment and selection process
and continues throughout the
employees tenure in an
organisation.
relationship between PC and EE to differentiate the merit of
independence of the two constructs.

Role of HR Practices on Employee

Psychological Contract and Employee
Engagement
Having studied the inter-relationships between PC and EE it
would be interesting to examine how human resource
practices significantly influence PC and EE and whether they
are the common link between the two constructs.

HR Practices and Psychological Contract

HR processes and practices determine to a large extent the
relationships between employers and employees, and play a
significant role in shaping employee psychological contract.
Numerous studies64 have examined the link between HR
practices (HRP) and psychological contract. The formation
of the exchange relationship begins during the recruitment
and selection process and continues throughout the
employees tenure with an organisation. These studies have
shown how recruitment, training, performance appraisal,
compensation and benefits can encourage the formation or
elaboration of a psychological contact. A common thread
running through the studies examining HRP and PC is that an
organisations human resource practices can change the
psychological contract status and influence work related
outcomes.
How different human resource practices can shape and
influence the interpretation of psychological contracts of
employees has been highlighted below.
319

Studies suggest that during these

competitive times the greatest
contribution HR can make in the
changing employment scenario is in
the area of evaluation and appraisal.
The contract making features of
performance management include
understanding of the job role,
fair, timely and accurate evaluation
of performance and fair distribution
of pay.
Psychological Contract and Recruitment
The recruitment and selection process involves identifying
potential employees, making offers of employment to them
and trying to persuade them to accept those offers. The roots
of psychological contract formation lie in the recruitment
process. During recruitment employers make promises to
their prospective employees, which the new employees expect
them to uphold. In case an employer fails to do so, the
employees may believe that their psychological contract has
been violated. Employees may react in a way that will go
against the interests of their employers65.
The literature suggests that recruiters tend to present jobs in
favourable terms. Therefore chances of psychological
contracts being breached are high as many of the expectations
are unrealistically high. Studies indicate that one of the ways
of fostering PC at the recruitment stage is the use of a realistic
job preview66 which tries to ensure that newcomers have
accurate expectations about their new job and employer and
thus avoid the experience of feeling short-changed thereafter.

Psychological Contract and Performance

Management
Studies suggest that during these competitive times the
greatest contribution HR can make in the changing
employment scenario is in the area of evaluation and
appraisal67. The performance appraisal (PA) process involves
employers setting performance standards and providing
employees with feedback about their level of performance.
The contract making features of performance management
include understanding of the job role, fair, timely and accurate
320

evaluation of performance, fair distribution of pay and

development opportunities and provision of feedback to
employees68.
When an employer gives feedback to employees about their
performance, it signals to the employees whether or not they
are contributing to the employment relationship. Appraisal
discussions also provide employers the chance to ask whether
their employees are satisfied with the inducements provided
and remedy the situation if necessary. Appraisals therefore
are used as a stage in the contract making process to ensure
that the parties involved are fulfilling their psychological
contracts towards each other.

Psychological Contract and Training and

Development
With changing circumstances, employees are replacing job
security with the promise of developing skills which would
make them employable in the external labour market. Since
employees are expected to define their own career progress,
they will have definite ideas about the skills needed to make
them employable and definite expectations regarding the
organisations contributions in developing such skills.
Concomitantly, training and development has become a
valued part of the psychological contract of employees69.
Training is important in the make-up of psychological
contract, not only in terms of employer expectations who
consider the development of highly trained workers with
firm specific skills a major factor for securing competitive
advantage70, but also because it acts as inducement for
employees to maintain their commitment to the organisation.
The more employees perceive violation of organisational
obligations with regard to providing skills and career
development, the less satisfied they will be with their jobs.

Psychological Contract and Reward

Management
Employee benefits are an important part of the psychological
contract defining the relationship between employers and
employees71. Rewarding employees according to their own
perceptions of their needs and expectations can motivate
them better, therefore the reward system usually has the most
influence on employee behaviour72.
The compensation and benefits that employers provide
employees can have a major influence on their conception of
their employment relationship. Rousseau and Hos study73
suggests how employees conceptions of their employment

The Relationship between HR Practices, Psychological Contract and Employee Engagement

relationships are likely to lead them to expect certain types of

compensation. The study provides ideas of how the
compensation system is a part of the HRM strategy aimed at
establishing specific types of employment relationships.
To conclude, human resource practice significantly impacts
employee development as well as assessment of psychological
contract fulfilment. When employees are recruited, when
they go through performance appraisals, when they evaluate
their benefits packages or receive recognition for their efforts,
they interpret the experience and that interpretation will
influence how they react to it. The failure of a company to
comply with its obligations (as perceived by an employee)
can erode the employment relationship and the injured
employees belief in the contract, thereby altering what the
employee feels obligated to offer in return74.

HR Practices and Employee Engagement

As discussed in the section on similarities between PC and
EE, the two constructs are shaped by some common factors.
From research, it emerges that HR practice is one of the
most important factors influencing the psychological contract
of the employee. However, the impact of HRP on EE and the
relationship between the two still remain unexplored; this
could perhaps be because studies on the antecedents of EE
are at a nascent stage. By including EE and PC in a theoretical
framework (model), we would be in a position to address the
existing gap in the literature on predicting the direction of the
relationship between HRP and EE and its subsequent impact
on outcomes. Additionally, although there is accumulating
evidence of the impact of HRP on organisational outcomes75,
the impact of HRP on individual employees has not been
examined76. The relationships at organisational level do not
necessarily reflect similar trends at the individual level77. In
other words, although HRP results in positive organisational
outcomes, it may not have the same relationship with
individual outcomes. In this paper we have attempted to
examine the impact of HRP on PC and EE, which can be
considered as two such individual-level idiosyncratic
constructs.
Job characteristics encompassing challenge, variety and
autonomy are more likely to provide psychological
meaningfulness, a condition for employee engagement. Job
characteristics are defined by the human resource practices
of an organisation, the latter being an important predictor of
PC. For example, when a frontline customer care executive
is made part of a cross-functional team working on a
complicated project, he starts finding meaning in the task as
IIMB Management Review, September 2007

The impact of HRP on EE and the

relationship between the two still
remain unexplored; this could be
because studies on the antecedents
of EE are at a nascent stage. By
including EE and PC in a theoretical
framework, we could address the
existing gap in the literature on
predicting the direction of the
relationship between HRP and EE and
its subsequent impact on outcomes.
it provides him variety and challenge, thereby affecting his
level of engagement.
Similarly, the performance management processes which
focus on roles and responsibilities provide conditions for
employee engagement when the implied identities in these
roles are psychologically appealing to the employee78. For
example, a person responsible for a routine administrative
role might get psychologically attached to the implied identity
of status and power when he or she is required to interact
with powerful people as part of the job. This identity also
involves a feeling of being valuable to the organisation which
in turn helps in engaging the employee.
Training and development is another important area in HRP
which contributes to employee engagement. Learning new
skills may trigger renewed interest in such aspects of the job
which had not been meaningful earlier. For example, a
software developer who acquires skills in an area of his own
interest might get engaged in projects and assignments
requiring him to use the new skill. Or a manager when made
aware of the power of emotions through sustained training
and coaching starts focusing on relationships with his team
members and peers and might experience hugely satisfying
reciprocal behaviours. These experiences are bound to make
him connect better with his co-workers and foster higher
engagement. In recent times, with talent retention becoming
a critical priority for businesses, managers are getting trained
on retention competencies in order to foster higher
engagement and thereby retention among their team
members79.
Rewards management, another very significant human
321

resource practice is said to have a major influence on the

employees conceptions of their employment relationship.
In the mind of the employee, rewards, which are not always
monetary in nature, are often a reflection of his/her value
within the organisation and also in the external job market.
In recent times, organisations have started adopting
innovative ways of rewarding employees (segmenting the
workforce on the basis of functions or skills, introducing
variable pay etc). In the given economic conditions wherein
employees may be disengaged but still remain, these tactics
of reward management are meant to enhance engagement
and retention.
As evident from the above discussion, it emerges that HRP
can garner conditions for employee engagement. HRM can
play a significant role in inducing employee engagement. We
may therefore suggest the need to explore if HRP has a
significant impact (antecedent/moderator/mediator) on
employee engagement.
Exhibit 1 illustrates the integrative framework between
human resource practices, psychological contract and
emotional engagement, as suggested in this paper.

Implications for Managers

It has been widely asserted that human resource practices,
including selectivity in staffing, training, and incentive
compensation, are positively related to perceptual measures
of organisational performance80. This paper contributes

Exhibit 1

towards the better understanding of the more relevant

measures of effectiveness of human resource practices. Often
researchers and practitioners alike try to derive complex
metrics for measuring effectiveness of HRP which are not
very meaningful unless they also measure how effective the
practices are in terms of fostering higher engagement among
employees.
Given the need for pro-social behaviours, human resource
practices which endeavour to align with organisational
strategies without igniting the full potential and talent of the
employees are unlikely to achieve sustained competitive
advantage. It is this aspect of the human resources which
makes them inimitable and difficult to substitute. It is therefore
suggested that besides measuring HR effectiveness through
organisational productivity measures, satisfaction index or
HR audit scores, practitioners need to focus on the
effectiveness of HRPs in keeping the employees engaged
cognitively and emotionally. Satisfied employees without the
energy to push the organisation forward will fall short of
sustaining competitive advantage.
The findings of the proposed model will have implications on
all aspects of individual and organisational performance,
particularly on managing and retaining talent81.

Conclusions
The paper establishes that PC and EE are both important
psychological constructs gaining strength in academic and

Human Resource Practices-Psychological

Contract-Employee Engagement: An Integrative
Framework
Psychological
Contract
Attitudes
Behaviour
Talent
Utilisation and
Retention

Human
Resource
Practices

Employee
Engagement

External
Environment
The dotted lines indicate the proposed relationships

322

The Relationship between HR Practices, Psychological Contract and Employee Engagement

practitioner literature. We suggest that though these constructs

are closely related, nonetheless they are not the same. We
need to investigate the direction of relationship between PC
and EE. Research on antecedents of employee engagement is
still in the embryonic stage; however HRP appears to be the
key antecedent of PC as well as EE. In other words, human
resource practices help in the formation of the psychological
contract of an employee and also create conditions for
employee engagement. Research would need to explore if
HRP moderates the relationship between PC and EE and
consequently has a bearing on organisational outcomes. Based
on a literature review we propose that employee psychological
contract, engagement and human resource practices need to
be looked at as an integrative whole. We conclude that HRP
is the linchpin between PC and EE which can be important
strategic tools for talent utilisation and retention.

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