Changing Psychological Contract Implications for HRM

The Changing Employer-Employee Relationship and Implications on HRM Organizations now operate in a rapidly changing world. Changes in consumer behavior, increased competitive pressure, technological advancements, as well as regulatory shifts in the last few decades have generally compelled organizations to adjust their strategies, objectives, policies, and actions in an attempt to enhance organizational efficiency and profitability (Freese, Schalk & Croon, 2011; Ulen, 2015; Abu-Doleh & Hammou, 2015). In fact, the ability to accommodate change has been marked as a vital ingredient of success in the constantly evolving operational environment (Wellin, 2007).

Whereas its importance cannot be overemphasized, adapting to change has had a significant impact on the psychological contract, which essentially denotes the intangible employer-employee relationship, particularly exemplified by mutual expectations between the employer and the employee (Smissen, Schalk & Freese, 2013). The shifting psychological contract has consequently presented a significant challenge for organizations, specifically their human resource management (HRM) function. The challenge relates to maintaining and improving employee motivation, commitment, and job satisfaction, which tend to be crucial drivers of both individual organizational productivity and performance (Smissen, Schalk & Freese, 2013).

It is imperative for organizations to acknowledge the shifting psychological contract, and create new contracts that are favorable to both the employer and the employee. With reference to literature in the area of organizational behavior and HRM, this paper explores the changing employer-employee relationship and its implications on HRM. First, a comprehensive definition of the notion of psychological contract is offered.

Attention is then paid to factors responsible for the changing employer-employee relationship, possible consequences of the new relationship, and the actions HRM can resort to, to create contracts that resonate with the modern work environment. The Changing Employer-Employee Relationship and Implications on HRM The notion of the psychological contract is not new. It has dominated organizational behavior HRM discourses since the 1960s (Wellin, 2007). Though there is no universally accepted definition, the notion generally denotes the unwritten agreement that define the relationship between an organization (employer) and its employee (Sims, 1994).

It refers to the beliefs, perceptions, or expectations employers and employees perceive concerning their obligations to one another (Robinson, Kraatz & Rosseau, 1994). Essentially, by investing in employees, employers expect certain outcomes, and vice versa (Ishaq & Shamsher, 2016). For instance, by providing competitive remuneration, job security, and professional development opportunities, an organization often expects to get loyalty and commitment from employees in return. Equally, by demonstrating commitment to work, employees usually expect their employer to reciprocate by offering financial and/or non-financial benefits.

Dissimilar to formal contracts between employers and employees, psychological contracts are essentially perceptual in the sense that there may be varying interpretations of the expectations employers and employees have one of each other (Freese, Schalk & Croon, 2011). The employer-employee relationship has experienced tremendous shifts in the last few decades (Ulen, 2015). This has been due to a number of factors. First and foremost, the operational environment has become more competitive than ever before (Freese, Schalk & Croon, 2011).

Organizations are now more focused on maximizing profit margins and driving stock prices up at all costs. This largely explains why restructures, mergers, acquisitions, and corporate downsizings have become more widespread since the 1980s than earlier (Wellin, 2007). Organizations in diverse sectors and industries have increasingly dismissed workers, reformed their structures, acquired or merged with competitors, and shifted corporate strategy, all in an attempt to enhance organizational efficiency and improve financial performance.

The pressure of competition has been further compounded by unanticipated economic events such as recession, changing consumer behavior, globalization, technological advances, as well as adjustments in the regulatory environment (Sims, 1994; Abu-Doleh & Hammou, 2015). While such shifts in organizational strategy and policy may have improved profitability, they have considerably reformed the employer-employee relationship.

Today, in an effort to optimize personnel costs, organizations are ever more preferring short-term contracts, unlike in the past where employees were contracted on a long-term basis and gradually trained on the job to perform more demanding and complex tasks (Smissen, Schalk & Freese, 2013). In essence, there has been a tendency of hiring employees on a need basis, and releasing them when the organization no longer requires their skills. This has somewhat eliminated job security and reduced commitment.

As a result, employees have become more focused on immediate needs of the job such as networking opportunities, personal growth, and developing transferable skills (Freese, Schalk & Croon, 2011). The shift to short-term contracts has in turn, meant more demanding and complex tasks, longer work hours, faster job turnover, as well as the tendency of holding more careers at the same time.

Indeed, as put by Cooper (2002), most organizations in the future are more likely to have a small number of permanent employees working from a traditional office, but a larger portion of part-time, temporary workers, perhaps working from home via the internet. On the positive, short-term contracts will largely induce the flexibility organizations need to thrive in a rapidly dynamic world, but more importantly grant employers greater control over their work life, ultimately resulting in better work-life balance (Cooper, 2002).

More importantly, organizations may see a substantial decrease in personnel costs, which often constitute a huge portion of their overall expenditure. Nonetheless, the perception of job security is likely to become obliterated soon (Smissen, Schalk & Freese, 2013). This may, however, not be a significant concern for modern and future employees as work-life balance may be their single-most treasured aspect. Workers today increasingly desire jobs in which they can achieve a healthy balance between their work and personal lives.

Further, lack of job security will change the character of the employer-employee relationship. In the past, the employer-employee relationship was relational in nature, exemplified by aspects such as loyalty, respect, and trust (Wellin, 2007). However, with job security increasingly becoming an outdated notion, the relationship has become increasingly transactional. A transactional relationship simply implies that employers unequivocally guarantee to provide precise financial rewards for specific tasks executed by the employee (Wellin, 2007). In essence, the relationship becomes more self-centered as opposed to mutually beneficial.

With such a relationship, it may be quite difficult for trust between the employer and the employee to develop. Lack of trust may further be detrimental to motivation, satisfaction, commitment, and loyalty, which may ultimately hamper both individual and organizational productivity and performance (Smissen, Schalk & Freese, 2013). Literature has extensively demonstrated the negative consequences that may arise because of changing psychological contract, especially in terms of creating undesirable employee behaviors (Robinson, Kraatz & Rosseau, 1994; Abu-Doleh & Hammou, 2015; Maia & Bastos, 2015; Tomprou Rosseau & Hansen, 2015; Ishaq & Shamsher, 2016).

Organizational change is not entirely to blame for the shifting employer-employee relationship. Employees have also contributed to the shift (Smissen, Schalk & Freese, 2013). As more and more baby boomers retire, and more Generation X's and millennial's dominate the job market, job expectations will continue to change. Compared to older generations, the modern worker demands increased flexibility, more autonomy, meaningful work experiences, and greater rewards (Smissen, Schalk & Freese, 2013). In addition, the values and beliefs of the modern worker differ significantly from those of older generations (Wellin, 2007).

These shifts have meant changes in employee's perceptions of their employer's obligations to them. Though the merits and demerits of the traditional employer-employee relationship versus the new employer-employee relationship remain a highly debatable topic, it is imperative for organizations to adjust their psychological contracts to fit the changing the operational environment. To achieve this, it is first important to understand what the modern worker wants.

With a better understanding of the contemporary worker's preferences and worldview, HRM practice can be adjusted to suit their needs, values, beliefs, preferences, and priorities (Abu-Doleh & Hammou, 2015). This specifically entails offering rewards that are more attractive, better work-life balance, a climate of respect and recognition, and a sense of fun in the workplace. It also involving employees in change management, communicating the need for change, and helping employees makes sense of the new employer-employee relationship (Wellin, 2007).

According to Sims (1994), HRM has a particularly important role in clarifying the new employer-employee relationship. While adjusting HRM practice is important for redefining the psychological contract, the desired outcomes may not be achieved if the overall management style does.