It can be argued (and it is) that the relationship between an employer and employee really does not affect performance. The employer exchanges pay for the performance of specified work, and that is all that is necessary. As in a legal agreement, one party contracts for specific services of the other party. Recent research suggests that employees perform better when they work in a situation with mutual investment, or even overinvestment by the employer, than they do in a legal agreement situation. The implication is that the employee-organizational relationship does matter and should be chosen carefully. Many employees seem to respond favorably in performance and attitude when organizations are willing to commit to a mutual relationship.

The Psychological Contract

The long-term economic health of most organizations depends on the efforts of employees with the appropriate knowledge, skills, and abilities. One concept that has been useful in discussing employees’ relationship with the organization is that of a psychological contract, which refers to the unwritten expectations that employees and employers have about the nature of their work relationships. Because the psychological contract is individual and subjective in nature, it focuses on expectations about “fairness” that may not be defined clearly by employees.

Traditional psychological contract

In the “good old days,” employees exchanged their efforts and capabilities for a secure job that offered rising wages, comprehensive benefits, and career progression within the organization. But as organizations have downsized and cut workers who have given long and loyal service, a growing number of employees question whether they should be loyal to their employers. The transformation in the psychological contract mirrors an evolution in which organizations have moved from employing individuals just to perform tasks, to employing individuals expected to produce results. Rather than just paying them to follow orders and put in time, increasingly employers are expecting employees to utilize their skills and capabilities to accomplish organizational results. According to one expert, the new psychological contract rewards employees for contributing to organizational success in the competitive marketplace for goods and services.

Loyalty

Studies suggest that employees do believe in these unwritten agreements or psychological contracts, and hope their employers will keep their sides of the agreement. When employers do not, employees feel a minimal necessity to contribute to the organizational productivity because they no longer trust the company. Thus, employees’ loyalty has been affected negatively. Not everyone feels that a decline in employee loyalty is a problem. However, more employers are finding that in tight labor markets turnover of key people occurs more frequently when employee loyalty is low, and they have concluded that a loyal and committed workforce is important.