Chapter One The Psychological Contract

Chapter OneThe Psychological Contract The Psychological Contract: Violations and Modifications Denise M. Rousseau, Ph.D Putting People First For Organizational Success Jeffrey Pfeffer John Veiga

About the AuthorsDenise M. Rousseau, Ph.D • A.B., M.A. and Ph.D. from the University of California at Berkeley with degrees in psychology and anthropology • H.J. Heinz II University Professor of Organizational Behavior and Public Policy at Carnegie Mellon University's H. John Heinz III College and the Tepper School of Business • Founder of the Evidence-Based Management Collaborative, a network of scholars, consultants, and practicing managers to promote evidence-informed organizational practices and managerial decision making

Author, Denise M. Rousseau, PhD • A two-time winner of the Academy of Management’s award for best management book. • Published over a dozen books and 160 articles in some of the most prominent management and psychology journals • Recognized in particular for developing the theory of the psychological contract and is regarded as an expert in this area.

ABOUT THE AUTHORS • Jeffrey Pfeffer, Ph.D : • Thomas D. Dee II Professor of Organizational Behavior at the Graduate School of Business, Stanford University where he has taught since 1979 • Received his B.S. and M.S. degrees from Carnegie-Mellon University and his Ph.D. from Stanford • Has won the Richard I. Irwin Award presented by the Academy of Management for scholarly contributions to management and numerous awards for articles and books. • The author or co-author of thirteen books a collection of 27 essays about management topics, as well as more than 120 articles and book chapters

ABOUT THE AUTHORS • John Veiga, Ph.D : • Board of Trustees Distinguished ProfessorNortheast Utilities Chair in Business EthicsManagement Department with the University of Connecticut ,School of Business. • B.S., and M.S.,Gannon University, D.B.A., Kent State University

THE MENTAL MAP A term coined in the 1940’s by Kenneth Craik, Scottish Psychologist. How we in our own thoughts carry the images, assumptions, and, experiences of ourselves, others and the institutions around us.

We create mental maps in our minds concerning: • Psychological Contracts • Theories of Management • Learning Styles • Human behavior • Ethics and Values These mental maps are created from an “emic” and/or “etic” perspective.

1980’s – period of substantial organizational downsizing. • Dr. Rousseau observed the mistreatment of employees and the violation of the agreement between the employee and the employer. • Employees had a Mental model contract of what they understood they should receive from their employers and the breakdown of this psychological contract with the organization.

THE PSYCHOLOGICAL CONTRACTAs Defined by Denise M. Rousseau, PhD • 'an individual's subjective belief in the reciprocal nature of the exchange relationship between himself/herself and a third party, based on the promises made or implied in their interactions'. Examples are: Accepting lower pay and being guaranteed job security and then being fired. Promised one job, but given another job

The results are a breakdown in a Psychological Contract which are our beliefs, promises, acceptance and reliance, shaped by our exchange agreement between ourselves and the employer/organization. • Facts relating to contract violations are: • Contract violations are commonplace • Violated contracts lead to adverse reactions by the injured party, e.g., lawsuits • Failure to fulfill a contract need not be fatal to the relationship

WHAT IS A CONTRACT VIOLATION? In the most strictest sense – a failure to comply with the terms of a contract. Psychological contracts however are subjective in nature. People interpret their own psychological contract and the violations thereof differently.

The Three Forms of Violations • INADVERTENT – Both parties are willing and able to keep the agreement, but divergent interpretations made in good faith lead to a break in the contract. • Example: Misunderstanding as to the time of the meeting • DISRUPTION – Both parties are willing, but one is unable to fulfill the obligations of the contract. • Example: Natural disaster forces the closing of a plant • Example: Employee has a car accident and does not make it to work on time • BREACH OF CONTRACT – occurs when one side reneges or refuses to uphold the agreements of the contract even when they are capable of doing so. • Example: Person leaves a high stress job to what is promised to be at a low stress job to be home more with family. This is understood by the new employer but shortly after accepting new position a highly demanding marketing campaign begins which requires the manager to be there and away from his family. He is stuck.

SOURCES OF CONTRACT MAKERS AND CONTRACT VIOLATIONS • Recruiters • Unfamiliar with actual job • Overpromise/oversell the position • Managers • Do as I say, not as I do • Co-workers • Failure to provide support • Mentors • Little follow-through • Few interactions • Top Management • Give mixed messages

Other Sources of Contract Makers and Contract Violations • Systems: • Compensation • Changing criteria • Reward seniority, low job security • Benefits • Changing coverage • Career Paths • Dependant on ones manager • Inconsistent application • Performance Review • Not done on time • Provide little feedback • Training • Skills learned not tied to job • Stated procedures at odds with actual performance

When Are Violations Most Likely? • History of Conflict/low trust in the relationship. • Social distance between the parties so as to not understand the perspective of the other. • External pattern of violations exists. • Incentives to breach contracts or when the perpetrators feel there is no recourse. (organizational crisis) • When one party places little value in the relationship.

THESE PSYCHOLOGICAL VIOLATIONS CREATE A SENSE OF : • MISTRUST • ANGER • ATTRITION • CHANGE IN PEOPLE BEHAVIOR AND INTERACTIONS • DECLINED CORPORATE LOYALTY • INCREASED LITIGATION • EMPLOYEE COMMITTMENTS

What are the types of responses used in Contract Violations? Four General Types of Responses: • Exit • Voice • Loyalty • Neglect

INDIVIDUAL CHARATERISTICS AND SITUATIONAL FACTORS ON ADDRESSING CONTRACT VIOLATIONS Equity-Sensitives: • More men than women in this group. • Tend to gauge their response with others very carefully. Beneficent: • More women than men in this group. • Other-oriented. • Comfortable with exchanges that benefit others over themselves.

Situational Factors For Handling Contract Violations Social Learning and Behavioral Role Models: • If one employee decides to leave the organization following the violation, others will follow them. • If one employee complains about their treatment and is viewed as being treated fairly, then others will also be inclined to complain. Bureaucratic Organizations: • Stifles communication/deviant behavior • Promotes more neglect and disloyalty Communal Organizations: • May foster more overt complaints • By communication with others, attempts to repair violation

Four Main Types of Responses To Contract Violations 1. EXIT Response: (Active and Destructive) • Voluntary termination of relationship • Employer – employee tardy, absent, careless, etc • Employee – employer untrustworthy, unreliable, provides no training, support • Occurs more frequently with transactional terms of employment, e.g.., temporary agencies, short-term and monetary gain employment. • More potential jobs or employees are available • Relationship is relatively brief • Other people are also exiting • Attempts to remedy the violation have failed

2. Voice Response : ( group - stayers) • File grievance • Complain to boss or human resources • Voice attempts to reduce hostilities, losses, and restore trust. • Talking with supervisors is the most frequent type of voice. • In a negative response situation, voice is associated with whistle-blowing, unionization. • Voice is most likely when: • There is a positive relationship and trust • Channels for voice exist • Other people are seen to use voice response • People believe they can influence the other contract party

3. Silence : (group – stayers) • Form of non-response • Form of loyalty- wait for conditions to improve • Form of avoidance • Willingness to accept and endure contract violations • Pessimism, party believe they have no recourse • Silence is most likely when: • No voice channels exist • No established methods for complaining or communicating violations • No alternative opportunities exist outside of the organization.

4. Neglect (group – stayers) • Complex form of response • Passive Negligence Behavior: • Poor customer service • Work slowdowns • Investing in other employees while ignoring others • Erosion of relationship • Active Destruction Behavior: (more active behaviors) • Vandalism • Theft • Interpersonal aggression (workplace violence)

Violations Do Not Have To Be The End Of The Contract • Robinson and Rousseau’s survey indicates contract violations within the first two years of employment • 59% said yes, 73% said violations had been corrected • People respond based on the violators motives and scope of loss incurred: • Losses seem greater (all or nothing) • There exists previous history of a breach or conflict • Violation was voluntary (not inadvertent, accidental, or due to forces out of the violators control • No good faith effort exists for avoiding the violation (irresponsibility or neglect is perceived by the victim)

Valuable Lessons To Be Learned By Managers and Workers • Perceptions are facts to the person who holds them. • In a successful worker-manager relationship, these perceptions must be taken into account. • Taking steps to communicate changes or the status-quo can prevent perceived violations and incorporate a well-managed employment relationship • Find out what people interpret to be the organizations commitment to them. • Know how to effectively change a deal or create a new one. • Good Faith can be restored when issues are dealt with directly and through a joint problem-solving process. • Joint agreements foster commitment and respect for the people involved.

PUTTING PEOPLE FIRST FOR ORGANIZATIONAL SUCCESS • THE APPLE STORY: • Founded 1976 by Stephen Wozniak and Stephen Jobs. • 1986, Macintosh Operating System introduced. • Desktop publishing, network connectivity ahead of its time. • Cult-like mentality in recruiting employees, they were there to change the world. • Recruited only the highly talented, highly creative, highly innovative individuals • Apple’s employee handbook emphasized: • Importance of people to the firms success • Management accessibility • Open communication • Mementos of significant company events, • Celebrations of important life events of employees • Bagels and cream cheese on Friday mornings.

1985- Stephen Jobs was ousted from Apple and John Sculley remained and laid off 20% of the workforce to cut cost due to sales not meeting company expectation. • Apple’s new philosophy was not to promote job security but rather to develop their employees with challenging job assignments to make them job ready for the market. • Apple referred to individuals not by name, but rather “A”, “B”, or “C” employee groups. They only wanted the “A’s”. • Employee cuts continued through the years. • High end employees took their talents elsewhere. • Those who remained spent time discussing rumors and sharing complaints. • Poor service, high accident rates, increased turnover and absenteeism adversely affected sales, profits and costs. D. Kirkpatrick, "The Second Coming of Apple," Fortune (November 9, 1988):90

1996- Stephen Jobs returns to Apple as CEO. • Philosophy on cutting costs with cutting people mentality has changed. • Stephen Jobs told Fortune magazine that innovation has nothing to do with how much Research and Development dollars you have, but rather it’s about the people, how you lead and how much you get that fact. • Apple was in a death spiral and since his return has had a rebirth. • Go Stephen Jobs and Apple D. Kirkpatrick, "The Second Coming of Apple," Fortune (November 9, 1988):90

The Point of The Apple Story • Putting people first • Strong connection between how firms manage their people and the economic results achieved. • High Performance Work Practices produce economic results and high involvement, high performance, high commitment between manager and worker: • High Performance Work Practices promote: • Team working • Functional flexibility • Empowerment • Employee development • Counseling • Appraisal • Performance related pay

A one standard deviation increase in the practice of high performance management is associated with a 7.05% decrease in turnover and a $27,044/employee increase in sales and $3,814 more in market share and profits. • Similar results are seen in companies outside the U.S. who use High Performance Management Practices.

Why Does High Performance Management Practice Work? • People work harder because: • Increased involvement • Increased commitment • More control and say over their job • Work smarter due to encouragement to build skills and competency • More responsibility is placed in the hand of the worker farther down in the organization.

The Seven Practices of Successful Organizations • Employment Security • Selective Hiring • Self-Managed Teams and Decentralization (Organizational Design) • Comparatively High Compensation Contingent on Organizational Performance • Extensive Training • Reduction of Status Differences • Sharing Information

Employment Security • Is fundamental even in today’s competitive world, to the practice of high performance management practices • Builds commitment and loyalty in the workers • Fosters an employee partnership • Layoffs by firms during the first signs of financial difficulty constitutes a long-term cost to the firm by: • Costs associated with hiring • Costs associated with training • Costs associated with development • Puts highly skilled workforce in the hands of the competition

Selective Hiring • Companies who wish to be profitable through people, recruit the right people. • Southwest Airlines example: • Receives approximately 98,000 job applications • Interviews 16,000 people • Hired 2,700 people Some companies view this process as an unnecessary expense, they view it as a necessary first step • Steps in the recruitment process: • Be clear about what are the most critical skills and attributes needed. • Skills and abilities need to be carefully considered and consistent with the job requirements and the organization’s approach to the market. • Screen applicants on important attributes that are difficult to change through training. • Applicants should match the attitudes, values and culture of the organization. Studies indicate that by doing so, job performance is improved and turnover is lowered.

Self Managed Teams and Decentralization As Basic Elements of Organizational Design • Team-based control of work used as substitutes for Peer-based control of work. • All people in the firm feel responsible and accountable for success. • Increased responsibility promotes more initiative and effort on the part of everyone involved. • Layers of hierarchical control removed. • Reduces cost by removing the specialist whose sole purpose is to watch people who watch other people do the work.

Whole Foods Market As An Example Of A Team Based Organization • Attributes success on the basis of self-managed team organizational design. • 1991-1996 – sales growth of 864 percent and net income growth of 438 percent which is attributed to a team-oriented philosophy. • Everyone who works at Whole Foods is a Team member. • Teams pool ideas for a more creative solution to problems. • Teams more readily help on another and freely share knowledge. • Savings in management overhead. D. Kirkpatrick, "The Second Coming of Apple," Fortune (November 9, 1988):90

Comparatively High Compensation Contingent on Organizational Performance • Is high compensation the result of the person who drives the success? • Is high compensation only possible for firms who have limited competition? • John Whitney – Pathmark (large grocery store chain in the southeast. ) 90 days to bankruptcy when he took over. • Found 120 store managers were severely underpaid and were vital to the success of the stores. • Gave managers a 40-50 percent raise, attributes this to the turnaround and success of Pathmark. • Managers were able to focus on performance, rather than worrying and complaining about their pay.

Home Depot • Despite operating in a highly competitive market, pays staff comparatively well for a retail industry. • Hires more experienced people with building industry experience. • Expects a higher level of customer service • Contingent Compensation • Important in high performance work systems • Takes many forms: • Gain sharing • Profit sharing • Stock ownership • Pay for skill • Individual and team incentives • Wal-Mart, AES Corporation, Southwest Airlines, Whole Foods Markets, Microsoft all use contingent compensation • When employees are owners, they act and think like owners • Contingent compensation works best when paired with other organizational practices, e.g., training, information sharing, and delegation of responsibility.

Extensive Training • Training general viewed as a frill, generally first to go in economic strife. • Knowledge and skill are critical to success • Training is essential to high performance work systems: • Frontline employees skills, identify and resolve problems, initiate changes in work methods, take responsibility for quality. • Training is a competitive advantage. • Training provides a connection between people and profits. • Motorola invests $170 million in training and states for every dollar invested in training, they receive a three dollar return. • The Men’s Wearhouse • Suits University, Fremont, California, 35,000 sq/ft training center • Credits the superior customer service and continued annual training to their increased growth rates and net earnings of 400 percent in a four year span.

Reduction of Status Differences • Utilized by high performance management systems. • Taps the ideas, skills, and effort of all of their employees. • High management systems reduce status distinctions in two ways: • Symbolically, e.g., language, labels, physical space, dress • Substantively, e.g., degree in wage inequity, particularly across levels (senior management and other employees) • Sam Walton, founder and chairman of Wal-Mart, noted as one of the most underpaid CEO’s in the United States. • Having executive salaries rise and fall along with their employees, has a different effect on the employees who see layoffs while the executive are receiving large bonuses and substantial salaries.

Creating People Centered ManagementAchieving Profits Through People • MANAGERS ARE ENSLAVED BY SHORT-TERM PRESSURES • Not an easy task • Competitive advantage that separates high performance businesses. • Short term financial pressures, shareholder value (one year or less). • Immediate problems drive out long-term planning. • Managerial opportunism – managers are rewarded for appropriating the ideas of their subordinates or improving the bottom line in the short run and then they move on to other positions before long-term implications are felt.

MANAGERS DON’T DELEGATE ENOUGH • Requires trust/willingness to allow others or self-managing teams to actually manage themselves. • Requires letting go of two social psychological processes: • “Faith in Supervision” effect : companies fail when they implement teams but continue to have the same level of supervision over the team. • Self-enhancement bias – managers, supervisors, workers, who view themselves as superior in skill, intelligence, honesty, reliability, etc vs. their peers. Results in the belief that more supervision results in better performance results vs. less supervision

Perverse Norms About What Constitutes Good Management • Two perverse norms in management that are growing in acceptance: • 1. Good Managers are mean and tough • Able to make difficult choices e.g., laying thousands of people off • Act on ideas decisively • 2. Good Managers are good analysis • Distinction between good math and good managers • Emphasis on analysis takes away from issues such as motivation, commitment, and morale • Also acts in a tough fashion

Newsweek article stated “firing people has gotten to be trendy in corporate America” • Fortune magazine regularly runs articles entitled “American’s Toughest Bosses”,and predicts that toughness will become more prevalent. • Global competition and turmoil spreads, tough management too will spread. • Future management predictions: • Super demanding • Steely • Unrelenting • Sometimes abusive • Sometimes unreasonable • Impatient • Driven • Stubborn • Combative

Good Manager = Good Analyst ? • Emphasis on mathematical analysis as cornerstones for effective management embraced by business schools, e.g., Carnegie Mellon and business, e.g. Ford Motor Company. • Analysis while it has it place, as the focus takes away from: • Emotion • Leadership • Building a vision • Substitutes data for judgment and common sense Emphasizing analytical skills over interpersonal, negotiating, political, and leadership leads to errors in management selection, development and what is important for the organization.

How management views their people is the key. • Negative View: • Are people costs to be reduced? • Are people opportunistic, untrustworthy? • Do people need to be closely monitored? • Are people expendable, costly and should be contracted out to save on labor costs? • Positive View: • people are intelligent. • people are motivated • people are trustworthy • people are the most strategic assets the company has. • people are viewed as where the company’s success rests. • the company’s people are what separates them from the competition? With the right perspective, all things are possible.

Chapter One The Psychological Contract