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Change Management and the "psychological contract"

The concept of the “Psychological Contract” has been around since the 1960s, but do we really understand its importance and the impact of change in the workplace on the Contract’s dynamic between employer and employee?

In an article published by businessballs.com, the definition of a Psychological Contract, in an employment context, is given simply as the fairness or balance (typically as perceived by the employee) between:

  1. how the employee is treated by the employer, and
  2. what the employee puts into the job.

At a deeper level the concept becomes increasingly complex and significant in work and management – especially in change management and in large organizations.

Here are some interesting excerpts from the article. The full article can also be viewed here.

  1. At the heart of the Psychological Contract is a philosophy – not a process or a tool or a formula. This reflects its deeply significant, changing and dynamic nature.
  2. The way we define and manage the Psychological Contract, and how we understand and apply its underpinning principles in our relationships – inside and outside of work – essentially defines our humanity.
  3. Respect, compassion, trust, empathy, fairness, objectivity – qualities like these characterize the Psychological Contract, just as they characterize a civilized outlook to life as a whole.

The Psychological Contacts Iceberg Model

Psychological contract

Left side of iceberg = employee inputs (and employer needs).

Right side of iceberg = rewards given by employer (and employee needs).

Above the water level: factors mostly visible and agreed by both sides.

Work | Pay = visible written employment contract.

Black arrows = mostly visible and clear market influences on the work and pay.

Red arrows = iceberg rises with success and maturity, experience, etc., (bringing invisible perceived factors into the visible agreed contract).

Below the water level: factors mostly perceived differently by both sides, or hidden, and not agreed.

Left side of iceberg = examples of employee inputs, which equate to employer expectations – informal, perceived and unwritten.

Right side of iceberg = rewards examples and employee’s expectations.

Blue arrows = influences on employee and employer affecting perceptions, mostly invisible or misunderstood by the other side.

Organisational change puts many different pressures on the Psychological Contract.

So does change outside of organisations – in society, the economy, and in individuals’ personal lives; for example ‘Life-Stage’ or ‘generational’ change – (see Erikson’s Life-Stages Theory).

Our ability to understand and manage organisational change increasingly depends on our ability to understand and manage the most important drivers within the Psychological Contract.

Nudge theory offers very helpful ways to understand how and why people think and respond to change-management.

These can vary considerably situation to situation. We need therefore to be able to identify and interpret the nature of change, and other factors impacting on the Psychological Contract, rather than merely referring to a checklist. People’s needs, and their perceptions of their needs, can change quickly, and tend to do so more when they are unhappy.

Organisational leaders naturally see change from their own standpoint. Crucially, to manage change more effectively leaders must now see change in terms of its effects on employees, and must understand how employees feel about it.

Managing change is often seen as merely a process – as in project management for example – but effective leadership style and behaviour – notably alongside a modern appreciation of the Psychological Contract – are also vital for successful change management.

Where a leader’s behaviour is sensitive to people’s feelings, change happens much easier. Where a leader forces change on people insensitively, and without proper consideration of the Psychological Contract, then problems usually arise.

These two approaches extend interestingly in different ways, which we can call a ‘virtuous circle’ or a ‘vicious circle’.


Allegra Consulting acknowledges and pays respect to the past, present and future Traditional Custodians and Elders of this nation and the continuation of cultural, spiritual and educational practices of Aboriginal and Torres Strait Islander peoples.