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How to retain valuable staff by meeting the small print in the "Psychological Contract"

Part 3 of 5 In our Retaining Valuable Staff series

In this article, we will define the concept of a ‘Psychological Contract’, from the perspective of employees and consider how this can be utilised by employers to best activate and retain valuable staff.

What is a Psychological Contract?

We often think of a contract at work as being written and orally agreed, often as terms of employment with some negotiation. Resulting in a signed contract, an explicit contract. It is also important to recognise that in these same relationships, additional terms and expectations are formed through tacit means, which we refer to as implicit contracts.

These terms are observable and enforceable in law. This is important to recognise, as the very existence of this recognised distinction shows that regardless of what is written in a formal contract — individuals have their own ideas, perceptions and expectations of what their relationship with an organisation will deliver (Rousseau & Parks, 1993).

These tacit means, include past experience in similar roles and other organisations, conversations at interview, perceived promises in the role and expectations based on reward or effort. They also go both ways:

  • an employee may expect a day off when they work long and hard for 2 weeks on a project, as this was mentioned or seen for other staff.

  • an employee may expect a promotion after 5 years in their role, as this was implied at interview or common to their professional progression route.

  • an employer may expect enduring loyalty if they invest heavily in training a staff member

  • an employer may expect staff members to have ideas and to solve problems, after a period of induction.

These psychological contracts are subjective on both sides. They can, and do, change over time… and over time the employer and the employee may be out of sync and may not even agree about the contract between them. Much of this can be unknown, unexplored and unsaid.

It is understood that such contracts tend to be transactional in nature (exchanging effort for reward) or relational (characterised by evaluations of trust and commitment). It is understood that they are on a continuum, i.e. being more transactional means being less relational. This is relevant when considering the needs of staff, in relation to their perceived contract with the organisation.

Some examples of the types of themes that may be covered within this perceived contract include:

  • Job security and progression OR ability to spring into new posts with leadership backing.

  • Professional development via organisational investment in the person.

  • Perceived fairness of pay and benefits across the organisation and against effort.

  • Support within the organisation from the manager or other systems.

  • Recognition of effort — perceived value based on work done and impact created.

  • Involvement in decisions.

You can access further examples by simply thinking about what your own employer (or past) provided for you that motivated you to stay or leave. Some of this will be written in the original contract, but much of it will be your own perceptions of the organisation against the reasons you chose to work there, your experience in the organisation and your evolving values over time.

The relevance for your staff retention

Staff retention needs to be understood through two lenses in any organisation:

  • the turnover of staff over time.

  • the motivation and engagement of staff, as expressed by their behaviours at work.

Employers can lose staff who walk out of the door and through the loss of performance in the people that stay, both can be considered as retention issues (Flowers & Hughes, 1973).

Therefore, any retention plan you create must try to motivate people to stay for the right reasons. Succeeding in people who don’t want to really stay, or even worse are frustrated or jaded, is a worse outcome than losing them.

When framed this way, we can understand that Psychological Contract is the very soul of activated and engaged staff. It refers to the ‘deal’ that has been struck between the employer and the employee, and a breach of this deal can negatively affect job satisfaction, commitment, performance, and increase turnover intentions.

In many cases, it is difficult to avoid these breaches as the world can change, economic challenges can surface and demand can outstrip capacity. In these contexts, staff need to be taken along with the organisation in terms of knowing the realities the business is experiencing, teaming towards solutions and embracing a narrative that the future will create opportunities to meet the Psychological contract. A promise that must be kept and a priority in terms of the business strategy.

But what can be done, in the context of aiming at meeting the entire perceived contract of staff and ensuring that employer and staff contracts do not reach disagreement?

Retention strategies informed by this theory

Understand Diversity

It is important to start with the recognition that we are in a climate of appreciation in respect of diversity. Organisations are waking up to the reality that diversity is a strength and that recruitment needs to aim at encouraging diverse teams to form.

In respect of Psychological Contract, this perspective is paramount. It is important to recognise that diverse people carry diverse experience, perceptions, desires and expectations. For example:

  • A job for life vs a career portfolio

  • A buoyant office space vs working from home options

  • Clear working commitments vs flexitime

  • Direction vs autonomy

  • Reward vs community

  • Goals vs innovation

Beyond ensuring fairness in terms of the transaction, be careful to not consider psychological contract as transactional for all staff. This is where we can trip up if we extend the explicit formal contract approach to psychological contract development. Feeling valued, supported, heard, included, invested in etc, are softer relational obligations that are less obvious, but for many — key to retention.

Actively build relational obligations in a world that promotes transactions

In the current national recruitment and retention crisis, there is a surfacing need to re-evaluate the Psychological contracts with staff and new recruits.

Conversations with potential and current staff need to explore their experience at work and their perceived fit with the organisation, alongside what they hope to get from the organisation.

It is important to address:

  • the brand of the organisation — and how staff relate to it and the wider mission, particularly their part in it.

  • management style — exploring how to give a voice to the employee in 1 to 1s (perhaps through management training in coaching skills). Developed managers can act as a conduit in terms of understanding the perceptions and needs of staff.

  • development and/or progression — invest in career progression through promotion plans, role development and training. One-third of UK employees were unsatisfied with their career progression in 2017, an alarming statistic just ahead of current retention challenges being experienced.

  • expectations vs reality — an open dialogue between staff about what they expect and what is feasible, against the true challenges of the organisation.

  • attitudes — measure staff attitudes regularly and act on feedback, to create engagement. Consider an anonymous suggestion box that is available for all staff, and seriously reviewed.

Make these conversations regular components of 1 to 1s with staff.

Rethink Retention

It is important to understand the psychological contract your organisation naturally offers to staff and the type of people you hope to attract. This can be at the level of individual managers and how they lead their individual staff members.

Is it explicit that your implicit contract is transactional (e.g. flexible, short-term, monetary employment relationships — effort brings reward both ways)? Or does it tend to lean more towards the relational contract (traditional, long-term, relational employment — effort brings loyalty both ways)?

Or put another way, which do you subscribe to as a leader and through your organisational behaviours?… and what is communicated through the behaviours of your leaders, to their reports?

In working with a valued staff member, try to ascertain their preference in terms of their employment — transactional vs relational. What drives them and is their expectation in line with the contract you offer?

Be prepared to consider being flexible with your own perception of what you need to provide to staff, even if (in some cases) this includes accepting that a valued staff member may perceive the role as short-term in the context of rewards and opportunities elsewhere. Recognising that loyalty for some is dependent on income and investment, can provide a clear route to retention. Recognising that for others, a fractured team dynamic and uncertainty is not solved by a pay rise.

I heard a case recently of a chef who was poached with a mammoth pay rise — as a reference to poor team culture. This example of course ignoring that for many people, a mammoth pay rise may fit their own idea of a psychological contract. In other examples, headhunters have failed to snatch a skilled professional who feels loyal and central to a team.

Don’t forget job design & teams

The psychological fit of people to jobs is a huge factor in retention. We’ve written more about this in our article on social identity theory and retention. The bottom line, bringing people into a tribe and building a role that meets their needs alongside linking them into a community is a powerful method of developing a contract that goes beyond employer — employee, to include a wider social system.

It is for this reason that our team focus on team functioning, where we know that poor team dynamics can be a huge motivator to leave — as a failed contract between the employee and the team, or the organisation (who failed to fix the team / lead it well).

Wellbeing, retention, performance, innovation rates have all been tied to team functioning — which in itself can result out of mass breaches of psychological contract, or as the cause of it when a breach is left unresolved and spreads through team communication and gestalt group processes.


There is incredible value in understanding retention as mediated by the perception of the contract, beyond a rudimentary and often limited formal paper-based contract. Purposeful exploration and evolution of this psychological contract, on both sides, is paramount if retention is to be achieved — this being engaged and performing staff, not the number of people who stay.

Be sure to look at what staff needs against what you value and may unconsciously offer, through the behaviours of leaders. Valued staff often require adaptations of the offer made, explanations of why the offer is as it is (expectations management) and inclusion in organisational design to encourage adoption of the business values and methods.

The psychological contract can be considered the shy story in teams, but the boastful narrative when people leave or become jaded.

Learn to enquire and to be reflexive in your response to what you hear.

In our next article, we will explore further psychological models that integrate well with this concept of retention, staff engagement and motivation.

Previous parts 1 (job design psychology) and 2 (social identity and tribe formatio).


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