In the era of globalization, restructuring and
downsizing,  psychological contracts are
becoming ever more indispensable in contemporary employment relations. In this
ever-changing situation, the traditional long-term job security contract in exchange
for hard work and loyalty may no longer be valid (Sims, 1994). Very important
issue is the violation of the psychological contract whose probability has
increased in recent times due to sudden changes. The lack of a stable contract
and instead the constant change of it can lead to the possibility of
misunderstanding the agreement by employees and employers, thus perceiving a
non-effective violation of the contract. Given this perception of violation of
the contract of labor it is relevant to understand this phenomenon. Aim of this
essay is to understand the meaning of psychological contract and implications
of its potential violations. The importance of ethical approaches to HRM and
its way to maintain a positive psychological contract will also be addressed
through the deepening of HRM related issues.

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1. Psychological contract

The relationship between employers and employees is
defined by two different types of employment contract: the psychological
contract and the legal contract. The employment contract (technical-legal
contract) can not contain all the elements that characterize a work
relationship. It is incomplete and implicit, especially as regards the
management of the company-employee relationship. For this reason it is
important to manage in the best way what has been defined the psychological

The psychological contract has been defined by Rosseau
(1989) as ‘an individual’s beliefs regarding the terms and conditions of a
reciprocal exchange agreement between the focal person and another party’ (p.
123). This type of contract differs from the formal employment contract because
it is referred to “a set of unwritten reciprocal expectations between an
individual employee and the organization.” (Schein, 1980) (expectations of
support and stimulation of individual skills and professional potential). The
psychological contract is about “the perceptions of employee and employer, of
what their mutual obligations are towards each other” (CIPD, 2012), including
informal arrangements, mutual beliefs and perceptions between the two parties.

The psychological contract, unlike the legal contract,
has a much more fluid nature and evolves over time in relation to social and
cultural changes. Furthermore the content of the psychological contract evolves
constantly based on communication, or the lack thereof, between the two parties
of the contract, employee and employer. Such contracts are deemed to be
voluntary, subjective, informal and dynamic (Hiltrop 1996), with elements being
added and deleted over time as employee and employer expectations change
(Robinson et al. 1994; Herriot 1995). Promises over promotion or salary
increases, for example, may form part of the psychological contract. Taken
together, the psychological contract and the employment contract define the
employer-employee relationship.

1.1. Psychological Contract Breach and Trust

In addition to differing from the legal contract for
all the points explained above, the psychological contract differs from the
legal one for a really important aspect: 
procedures followed in the event of a breach of contract. Unlike the
violation of a legal contract, in which the aggrieved party may seek
enforcement in court, such recourse is not offered in case of violation of a
psychological contract; in this case the aggrieved party may choose only to
withhold contributions or to withdraw from the relationship (Spindler 1994).
Psychological contract breach is a subjective experience, referring to one’s
perception that another has failed to fulfill adequately the promised
obligations of the psychological contract (Rousseau, 1989). Being a subjective
experience, relevant is the perception of a psychological contract breach which
is based on an individual’s perception of employer’s actions or inactions
within a particular social context. Thus the experience of psychological
contract breach should depend on social and psychological factors specific to
the employment relationship in which it occurs (Morrison and Robinson, 1997).

One such factor of a particular importance is the
trust in one’s employer. Trust is the basis of relationships and contracts,
influencing each party’s behavior towards the other and one’s own
interpretation of social behaviors within a relationship. Trust is thus likely
to play a significant role in this situation: Trust in one’s employer may
influence an employee’s recognition of a breach, his or her interpretation of
that perceived breach if it is recognized, and his or her reaction to that
perceived breach (Roderick M. Kramer, 2006).

Perceived breaches of the psychological contract can
severely damage the relationship between employer and employee, leading to
disengagement, reduced productivity and in some cases workplace deviance.

1.2 Fairness
and justice of PC

Fairness is a significant part of the psychological
contract, bound up in equity theory – employees need to perceive that they are
being treated fairly to sustain a healthy psychological contract. In the next
paragraph will be addressed issues of inequity cases.

The psychologist Adams was a pioneer in applying the
principle of fairness in the workplace. Adams (1965) maintains that employees
prefer conditions of equity in relations with the working environment, and if
there are injustices, tension is created which consequently is de-motivating
for the worker. With fairness Adams means: – there is fairness when, the
perception of the individual on the relationship between what he brings in the exchange
and what happens in the exchange coincides with the analogous relationship in
another person taken as an object of comparison (1965). According to the
theory, in order to ensure a strong and productive relationship with the
employee and consequently to maintain a positive psychological contract it is
necessary to find a fair balance between the inputs of an employee (hard work,
skill level, acceptance, enthusiasm and so on) and the outputs of an employee (
salary, benefits, intangible assets such as recognition and so on). The respect
of the equity will lead to a series of benefits such as happy and motivated

Organisational justice theory (Greenberg, 1987)
focuses on perceptions of fairness in organisations, by categorising employees’
views and feelings about their treatment and that of others within an
organisation. Literature identifies three different types of organizational
justice theory (Greenberg, 1987; Folger and Cropanzano, 1998). The distributive
justice which has at its base the perceptions about the outcomes of decisions
taken (Homans, 1961, Leventhal, 1976). Procedural and interational justice,
often treated as one in the literature, are based on perceptions about the
processes used to arrive at, and to implement, these decisions (eg Cropanzano
and Greenberg, 1997). Procedural justice focuses on employees’ perceptions of
the fairness of procedures used to make decisions (Thibaut and Walker, 1975).
On the other hand, interactional justice focuses on employees’ perceptions of the
fairness of the interpersonal treatment received during implementation (Bies
and Moag, 1986). These perceptions can influence attitudes and behaviour for
good or ill, in turn having a positive or negative impact on employees
performance and the organization’s success and consequently on the respect of
psychological contract (Baldwin, 2006). Having well-designed systems of
organizational justice lead to positive aspects for both parties, the
individual, who will be satisfied for having been treated fairly and the
organization which will keep control over potential challenges and threats from
its staff.


2.  HRM related issues

Often the notion of justice become more relevant and
tangible when perceived injustices occur, such as unequal pay for men and woman
doing the same job,  performance reviews
being conducted by someone with whom the employee has had little previous contact,
the use of personality inventories to select new staff, arbitrary dismissals. In
this paragraph will be addressed two HRM related issues and the way that an
ethical approach to these practices can help maintain a positive psychological


When employees perceive that they are not being
treated fairly, equity value of psychological contract is violated by

Legal scholars theoretically concur that
discrimination involves the disparate treatment of similarly situated
individuals because of their sex, race, color, national origin, religion or
some other protected characteristic (Belz 1991; Blumrosen 1993, p. 50). Discrimination
in the workplace violates the principle of fairness that should be guaranteed
to all employees, obviously this is illegal but in practice it is very
difficult to identify the boundary between what is fair and what is not. If a
particular behavior or practice is considered discriminatory it is subject both
to the dispute and to the change (Burstein 1990, 473). Employees must be informed
about their rights under the EEOC laws by their employers who must ensure that
all employees are free from retaliation if they submit a discrimination complaint.
There are different forms of discrimination:

Nepotism concerning the practice of hiring family
members regardless of their qualifications. when the hired employee is
qualified to perform the job for which he is hired this practice can be less
harmful, despite the employee advantage , unlike the opposite case which could
be counterproductive influencing the company’s profitability.


Cronyism is the act of hiring friends regardless of
qualifications. This creates workplace conflicts and can result in the loss of
qualified personnel.


Direct discrimination occurs when someone is
discriminated because of a protected characteristics such as age disability,
gender, sexual orientation.


Indirect discrimination occurs when an employer’s
policy applies to all by not taking into account the different protected characteristics
of some subject, disadvantaging them (a same height
limit for both male and female).


Contemporary ‘real world’ example and ethical approach

Example of a direct discrimination is the gender pay
gap. A contemporary ‘real world’ example of this tipe of discrimination is the
45.5% median gender pay gap reported by EasyJet. Women employees of the airline
company receive almost half of the male employees salary. Nearly 90% of staff
in the EasyJet highest pay quartile are men (a pilot average salary is £
92,400), while 65% of the lowest bracket are women (cabin crew and
administrative and management staff earned on average £24,800 and £53,700).

EasyJet has committed itself to eliminating this gap
by setting itself the target of increasing the number of female pilots by 2020 (Gordon,

The anchoring to ethic values, such as fairness, equal
opportunities, trust and correctness in order to avoid discrimination, helps
maintain a positive psychological contract and becomes a guarantee of a correct
and transparent behavior (which is already very much these days), but also the
solid base on which to build an involving and motivating organizational context
and a sustainable competitive advantage. Employers through guidance to their
staff about which ethical standards they should respect in their work can
create and sustain an ethical culture and avoid misbehavior. Furthermore the
respect of high standards of ethical values from both parties helps to respect
what is agreed within the psychological contracts maintaining a ‘happy’ and
‘satisfied’ workforce and it contributes having positive workplace relations
through improving the morale and perceptions of equity among employees and
demonstrating the company’s role in supporting social justice issues.

2.2 Remuneration
and Reward Strategy

Relationships at work are also influenced by another
important key factor that is the remuneration system. Compensation systems are
the basis on which organizations reward employees for their individual
contribution, skills and performance.

The two main categories of pay systems are the basic
rate system with a fixed hourly, weekly or monthly rate pay without any
additional payment related to results or benefits; and systems with pay, or
part of it, related to performance or profits, it can also be based on the use
of additional skills or expertise. This type of system stimulates workers who
will be induced to give their best in order to increase the salary. The choice
of an organization’s pay system is often decided by negotiation between
management and employee representatives.

Many workers in the United Kingdom are paid by the
simplest system to use that is the basic rate. Workers receive a fixed rate per
hour, week or month which by law can not be less than a minimum national wage
established by the “National Minimum Wage Act 1998” and renamed (and increased)
lather in 2006 as “National Living salary”. The hourly rate changes in
relation to the age and if the worker is an apprentice. Rates are changed every
April and as showed the GOV.UK website from April 2017 the minimum wage per
hour for 25+ aged workers is £7.50.

Contemporary ‘real world’ example and ethical approach

A “Financial Time” 8th December article reports that
260 employers have been “named and shamed” by the Government for failing
to meet minimum wage rules, due to staff of £ 1.7 million in back pay. Among
these 260 underpaying employers there are two of the biggest brands in UK
discount retailing. The first one well known company is Primark Stores Limited,
failed to pay £231,973.12 to 9,735 workers and Sports Direct failed to pay
£167,036.24 to 383 workers. The most common reasons for this remuneration issue
highlighted by the BEIS are failing to pay workers travelling between jobs, not
paying overtime and deducting money for uniforms (Financial Times, 2017).

Pay is not the only factor that
could produce improved performance. The workers fair pay for the work they do
is essential but there are also other non-monetary ethical factors that are
relevant as well, having a considerable effect on the efficiency of any
organization, on the morale and productivity of the workforce and which can
help to maintain positive psychological contracts.

Reward system, the employee
compensation for his or her service for an organisation, is an example of ways
to help maintain a positive psychological contract. This goes beyond the mere
money rewards with non monetary compensation really important in order to have
a good workplace, such as favourable interpersonal relationship inside the
organization, the challenge and sense of achievement, preferable growth
opportunities but also motivation is another function of reward. Really
important in the HRM approaches and strategies is an effectively total reward
strategy the use of ‘incentive’ payments in order to motivate employees.
Introducing total reward strategy probably improves not only employees’ work
efficiencies, job satisfaction and job performances but their psychological
contract and organizational citizenship behaviours (Z Jiang, ?2009).

Thanks to this effective management method the
personnel can keep positive attitude towards the organizations, might being
less stressful or fairly treated or some else. Schemes based on individual
performance, such as weekly or monthly production bonuses or sales commissions,
profit sharing and share-sharing plans can contribute to generating a long-term
interest in workers for the success of the organization.Other important factors
are intrinsic safety at work the reward systems clearity and simplicity so that
workers can easily know how they are affected.

In addition to the labor-related factors mentioned
above, all additional payments, non-contributory pension schemes and non-casual
benefits such as cars, life insurance and childcare (eg childcare / crèches in
the workplace) may play a role. The results, came out from incentives, of
productivity and efficiency increases can be shared between employer and
workers for mutual benefit.



A strong anchor to ethical values is of fundamental
importance in business today. Without it, in fact, tend to prevail behaviors
which privilege objectives to be pursued at any cost, even at the cost of
violating the community’s laws, while, if the corporate culture is firmly built
on the ethical values of integrity, management correctness and transparency information,
the company is protected from the dangers of anomie and opened to the values of
legality. Today’s society, to which companies belong, expects a certain level
of behavior from these. Stakeholders want to be associated with responsible organizations.
Being treated fairly, honestly and consistently is of value to a business’s
customers, suppliers, investors and employees. It builds trust. (O’Donohue, Nelson, 2009)

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