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Psychological Contract: The Unwritten Agreements and Expectations That Shape Work Relationships

4 minute read

By Stavy Papasotiriou, Organisational Psychologist and Founder of Work Unlocked.

Imagine an invisible bond that exists between employees and their organisations. This bond is known as the psychological contract. Unlike a formal employment agreement, it operates on an intangible level, which might sound like something out of a Harry Potter novel! But rest assured that psychological contracts are very real and wield immense power in the workplace.

In today's blog, we're embarking on a fascinating journey to explore the realm of psychological contracts. So, grab your wands and let's dive into this enchanting topic!


Psychological contracts form the foundation of trust and engagement within organisations. While formal contracts lay out the terms and conditions of employment, psychological contracts delve into the realm of unspoken expectations, beliefs, and mutual commitments. They have been defined as ‘the expectations of what the employee feels she or he owes and is owed in turn by the organisation’. These expectations can arise from any number of sources such as parental socialisation, previous employment experiences, etc.

A psychological contract has little to do with explicit promises made between the employee and their current employer. It’s more about the unwritten understandings between employers and employees that go beyond formal agreements, encompassing the implicit expectations and obligations that shape the employment relationship. There is a consensus among researchers that psychological contracts involve exchange. In promissory terms, psychological contracts are about conditional promises, or what is typically referred to as reciprocal promises. Put simply, the employer does something for the employee and the employee feels obliged to do something in return.


Psychological contracts have an enchanting effect on organisations and the magical world of culture-building, so never underestimate their power! These invisible bonds weave the fabric of employee-employer relationships and have a spellbinding influence on employee retention. When organisations prioritise fulfilling these agreements, they create an enchanting environment where employees feel valued, engaged, and committed to achieving shared goals. And guess what? It leads to employee retention, loyalty, and those awe-inspiring moments of 'going above and beyond.'

A psychological contract flourishes when nurtured with trust, communication, and fairness. Employees need to trust that their organisation will keep its promises and treat them fairly. Similarly, leaders must summon their trust in employees and communicate openly, ensuring transparency and clarity in expectations. This mutual respect sets the stage for a formidable psychological contract that enhances engagement and job satisfaction, casting a spell of success.

To keep the magic alive, HR professionals and leaders must wield their wands and:

  • Foster an environment of open communication and honesty by conjuring up frequent opportunities for feedback.
  • Regularly assess and align employee expectations with the grand goals of the organisation.
  • Recognize achievements and celebrate milestones with a touch of enchantment.
  • Support the enchanting journey of professional development and provide a clear path for advancement, like a treasure map leading to greatness.


Conversely, breaches of psychological contracts can have adverse effects. When the delicate balance of psychological contracts is disrupted, the consequences can reverberate throughout the organisation. Employees who feel that their organisation has reneged on its commitments may become disengaged, demotivated, and disillusioned.

Likewise, organisations that perceive their employees as uncommitted or untrustworthy might respond with reduced investment in development or growth opportunities. Feelings of disappointment, disillusionment, and a sense of betrayal may arise, prompting employees to reevaluate their commitment and consider alternative options. Ultimately it leads to a dangerous cycle of erosion of trust and a decline in organisational performance.


While breaches of psychological contracts can be tough to handle, organisations have an opportunity to mend and rebuild the trust that has been shaken. Open and honest communication becomes super important in acknowledging the breach, understanding employee concerns, and proactively addressing issues. By showing a genuine commitment to meeting expectations and regaining trust, your organisation can kickstart the process of healing and rebuilding the employment relationship. Navigating these challenges effectively can bring a renewed sense of commitment and pave the way for a stronger and more resilient connection between management and employees.


Psychological contracts may be intangible, but their impact on employee engagement and organizational success is very real. Nurture this bond with trust, open communication, fairness, and flexibility, and watch as your organization transforms into a place where employees thrive, and success becomes the stuff of legends!


About the author

Stavy Papasotiriou is an organisational psychologist and the visionary behind Work Unlocked — a leading HR consultancy on a mission to revolutionise employee engagement, performance, and retention in businesses worldwide. With a profound understanding of HR practices, Stavy leverages psychological principles to unleash the untapped potential of workforces. At Work Unlocked, Stavy crafts bespoke strategies that are grounded in research and tailored to each organisation's unique needs. These strategies are designed to yield remarkable results while requiring minimal resources.

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