Psychological Contract and Employee Retention: The Role of HR

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Understanding the individual and organizational consequences of breach of psychological contract justifies continuing research into the phenomenon. The global competition which has altered business environment has engineered the need for organizations to devise new ways to survive, enhance performance, retaining skilled employees and ensure healthy and progressive relationship between employers and their employees. Today, the biggest challenge that organizations are facing is not only managing its human resource but also retaining them. Securing and retaining skilled employees play an important role for any organization, because the knowledge and skills of employees have become highly important in gaining competitive advantage. It is against this backdrop that this paper explored the concepts of psychological contract and employee retention, the of impact psychological contract on employee retention and HR practices that influences the state or nature of the psychological contract and employee retention. The paper also peeps into the effect of covid-19 on psychological contract and employee retention. The paper adopted qualitative research design as it relies on secondary data collected from documentations through books, internet sources and journal articles and were content analyzed in relation to the scope of the study. The paper concludes that a significant important should be accorded to the informal contract of employment to ensure fulfillment of obligations and expectations to retain competent and skilled workforce. Thus, the paper recommends among others that Organizations should encourage flexible working arrangements such as telecommuting and prevent discrimination and exclusion relating to Covid-19 pandemic.

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Introduction Human resource professional and practitioners have come in terms with the reality that employment relationship in contemporary organization is undergoing fundamental changes which have implications for the attraction, motivation, retention and performance of talented employees in the organizations [1; 2; 3]. During past few years, organizations have endured substantial changes in order to compete in the marketplace. Operating within a complex and competitive work environment has changed the internal work arrangements as well as modified the nature of psychological contract that exists between the employer and employees. To succeed in today’s competitive environment, employers need to understand what employees expect from the organization and must pay attention on fulfilling their expectations to fulfill organization’s side of contract [4]. Psychological contract evaluates the reciprocal relationship among rights, duties and obligations of the employees as well as the employer [5; 6]. Thus, it should be noted that in today’s competitive business environment, the retention of skilled employees which is based on a well-articulated human resource management system is very crucial for the growth and survival of the organization. However, Rousseau [7] argued that for retention management to be effective, the creation of an optimal portfolio of human resource practices is not sufficient. They noted that managing employees’ expectations is important in order to create a deal that is mutually understood by both parties; as work in organizations entails an exchange relationship between the employee and the organization [8]. In an employment relationship, a balanced psychological contract is necessary for a continuous and harmonious relationship between the employee and the organization. However, the breach of psychological contract brings about distrust, job dissatisfaction, low organizational citizenship activity and high turnover [9]. Similarly, Armstrong [2] posits that the violation of the psychological contract can signal to the participants that the parties no longer share common set of values or goals. The strained relationship may affect the performance and retention of the employee in the organization. Therefore, this paper explore the concept of psychological contract with a view to verifying the dynamics of psychological contract in regulating workplace interaction, especially in Nigeria, the concept of employee retention, the of impact psychological contract on employee retention and HR practices that influences the state or nature of the psychological contract and employee retention. The paper also peeps into the effect of covid-19 on psychological contract and employee retention. Finally, the paper averred that the HR plays an active role in assisting organization to retain its employees. Methodology This paper adopted qualitative research design as it relies on secondary data collected from documentations through books, internet sources and journal articles and were content analyzed in relation to the scope of the study. That is, a systematic review of extant literature on HR practices that influences the state or nature of the psychological contract and employee retention. The Concept of Psychological Contract The concept of psychological contract is described as the unwritten agreement that elucidates the expectations between the employers and employees [10]. It is a belief about the reciprocal obligations between two parties engaged in an exchange relationship [11]. Similarly, Rousseau [12] sees psychological contract as a belief based upon promises expressed or implied, regarding an exchange agreement between an individual and the employing firm and its agents. Therefore, it is a mutual obligation existing at the level of the relationship between employees and employers. Guest [13] views psychological contract as the perceptions of both parties to the employment relationship, organization and individual, of the reciprocal promises and obligations implied in that relationship. According to Griffin [14], the psychological contract defines the assumptions that employers and employees have about their relationships. Guest and Conway [15] defines psychological contract as perceptions between the employer and the employee with regards to their mutual obligations towards each other. Both definitions express the expectations of the parties to the employment relationship in respect of what the employee will get from the organization and what the organization will also get from the employees. The psychological contract therefore explains the employee’s interpretations of inducements influencing the decision to leave or stay. In the context of this paper, we consider psychological contract as the recapped joint expectations in which both parties anticipate some benefits. According to Conway [15], the concept of psychological contract is used to explain behaviour through considering the extent to which the employee believes that the employer has kept the promises the employee perceived were made to him. They noted that as in any relationship, if promises are kept, then satisfaction and a desire to remain in the relationship are likely consequences. If, on the other hand, promises are broken, negative emotions and the urge to withdraw in that relationship may follow. Schein [11] cited in Umar and Ringim [16] emphasized the importance of psychological contracts as they suggested that the extent to which employees work effectively and remain committed to the organization depend on: i. The degree to which their own expectations of what the organization will provide them and what they own the organization in return match that organization’s expectations of what it will give and get in return; and ii. The nature of what is actually to be exchange (assuming there is some agreement) - money in exchange for time at work; social need satisfaction and security in exchange for hard work and loyalty; opportunities for selfactualization and challenging work in exchange for high productivity, high quality work and creative effort in the service of organization goals; or various combinations of these and other things. However, empirical studies and evidence suggest that the psychological contract breach results to reduced psychological well-being [15], reduction in job satisfaction [17; 18; 19; 20], low level of motivation [21], distrust [22; 23], dissatisfied customers and uncertain opportunities for promotion [24;25], decrease in organizational commitment [26; 27; 28], decreased employees’ organizational citizenship behvaiour [29; 16; 30]. Also, previous studies findings suggested that non-fulfillment of psychological contract is associated with counterproductive or deviant and unethical behaviours by employees in workplace [31; 32] The study conducted by Delcampo, Rogers and Jacobson [33] suggests that breach of psychological contract by employer is positively related to employee perception of discrimination in workplace. Therefore, psychological contract breach occurs when employees perceive that their organization has failed to fulfill its obligation or promises implied [34]. Therefore, psychological contract breach is an important trigger of employees’ workplace dissent, absenteeism, increased turnover intention and actual turnover. Types of Psychological Contract The dynamics and varying nature of psychological contract has provided scholars the leverage to categorize the concept into two distinct kinds of contract that define the employee and employer relation. Rousseau [35] categorized psychological contract into two types. First, is transactional contract, which refers to monetary exchange such as rapid advancement, high pay and merit pay? Rousseau [12] argued that transactional psychological contracts include such terms as narrow duties and a limited short-term employment. He added that employees with transactional contract tend to adhere to its specific terms and to seek employment elsewhere when conditions change or when employers fail to abide by their agreement, and second, relational contract, which encompass long-term job security, career development and support with personal problems. Dipankar [36] explained that in relational contract, the employee is obligated to remain in employment with the organization and carry out his duties as specified, exhibits loyalty to support the aims and objectives of the organization, while the employer fulfills its part of the obligation by ensuring the well-being of the employees and their families. Rousseau [12] stresses that employees favour organizations who offer them relational psychological contract as opposed to the more limited transactional type; employers are likely to offer relations contracts to particularly values employees than to employees who are non-performers in the organization. However, since any psychological contract is not purely transactional or relational, recently two additional forms have been identified. These are balanced psychological contract and transitional psychological contract. Balanced psychological contract has the same characteristics as relational psychological contract, but also contains financial elements and transitional psychological contract is form in the period of a crisis or when a company is undergoing some radical organizational change [20]. The most important issue from the employees’ perspective is whether their expectations are fulfilled. If that is not the case, their psychological contract is, actually, breached. Some scholars insist on a distinction between two terms - breach and violation of psychological contract. According to Morrison and Robinson [37], perceived breach refers to the cognition that one’s organization has failed to meet one or more obligations within one’s psychological contract in a manner commensurate with one’s contributions. Therefore, perceived breach represents a cognitive assessment of contract fulfillment, based on an employee’s perception. On the other hand, the term violation refers to the emotional and affective state that may, under certain conditions, follow from the belief that one’s organization has failed to adequately maintain the psychological contract [37]. Perceived psychological contract breach may occur for many reasons, but two main causes are identified. These are reneging and incongruence [37]. Reneging refers to the situation when organizational agents knowingly fail to meet their organization’s promises towards an employee. It occurs either because the organization is unable to fulfill given promises or because it is unwilling to do so. Incongruence, on the other hand, is a situation when an employee and agents of the organization have different understanding about the mutual obligations and promises. These different perceptions usually appear due to the complexity and ambiguity of reciprocal obligations and expectations, bad communication between employees and organizational agents and disparity in cognitive schemata they pose [20]. Concept of Employee Retention Employee retention is a deliberate and systematic effort by employers to create and foster an environment that motivates current employees to maintain employment relationship with the employers by having policies and practice in place that address their diverse needs and interest [38]. According to Das and Bauah [39], retention is a process in which the employees are motivated to continue in a working relationship with the organization for long period of time or until the end of the project. It is becoming very vital to secure, manage and retain competent human resource as the most valuable resource of any organization, because of the need for effective and efficient delivery of services by organizations, whether in the private or public sector. Fitz-enz [40] recognizes that employee retention is not influenced by a single factor, but that there are hosts of factors such as compensation and rewards, job security, training and development, supervisor support culture, work environment and organizational justice; e.t.c. Walker [41] identifies seven factors that can enhance employee retention: i. Compensation and appreciation ii. Provision of challenging work iii. Chances to be promoted and to learn iv. Invitational atmosphere within the organization v. Positive relations with colleagues vi. A healthy balance between the professional and personal life and vii. Good communication. Other factors that can enhance employee retention include participation in decision-making, flexible working hours, team building, trust, organization value and beliefs, job content, status and recognition. Perceived future opportunities from employers as well as perceived extent to which employees’ expectations will be met are also key factors for employee retention. Theoretical Framework While there are several theories which might prove appropriate for a discourse of this nature, the social exchange theory present us with a heuristic tool for interrogating the main issues of this study. Social exchange theory is the most commonly used theoretical framework for understanding psychological contract (breach and fulfillment) and employee retention. The theory developed by Blau [42] suggests that when an individual enters into employment relationship, he does not only consider the economic benefit (e.g. pay) but also the socio-economic benefits such as esteem and care [43]. Therefore, the development of positive employment relationships is dependent on both employees and their employers abiding by rules of exchange. These exchange according to Blau [42] can be economic (e.g. money, goods) or more social in nature (e.g., respect, care and encouragement). When individuals receive benefits they feel obliged to reciprocate, and this norm of reciprocity is central to social exchange theory. For instance, if employees feel that their employer has not reciprocated, they may perceive the psychological contract as breach and attempt to restore the balance by lowering their organizational trust, loyalty or commitment. But when employees feel that their psychological contract is fulfilled, it leads to higher work engagement and low turnover intention, stimulate their working psychology and job involvement, produce more emotional dependence on organization, enhance employees’ sense of responsibility to and intention to stay with the organization for a long time. The relevance of this theory to the research study is based on its ability to justify the role of psychological contract in determining employees’ intention to leave or remain in the organization for the maximum period of time. Impact of Psychological Contract on Employee Retention A fulfilled psychological contract plays a significant role in employee retention. Robinson [44] argues that a feeling of psychological contract breach negatively impacts on the employee’s desire to stay with the organization. Guest and Conway [15] confirm that a positive psychological contract induces commitment, satisfaction and willingness to stay with the organization by the employee. The violation of a psychological contract results in a decline in willingness to contribute to and intentions to stay in an organization [45]. Similarly, Robinson [44], CoyleShapiro [46], Nwokocha [9] and Kudanayi et al. [25] noted that psychological contract breach impacts negatively on employees’ willingness to contribute to the organizational growth and his or her desire to stay. The overriding implication in this context is that when management trust is eroded, it will inflame employees’ passion resulting to exhibition of ‘goal blockade’ with eventual effect on retention, performance and productivity. In contrast, when employment relationship is built on trust and upheld, it will stir employees’ sense of responsibility to innovate and contribute to the growth of the organization. This emphasizes the need for the understanding of psychological contract that will incite a faithful, fruitful and fulfilled work team [9]. Psychological Contract and Employee Retention: The Role of HR According to Aggarwal and Bhargave [24], HR practices have their impact on psychological contract in two ways. First, HR practices shape employees’ skills, attitudes and behaviours, which in turn influence organizational performances. Second, HR practices impact organizational performance by creating structural and operational efficiencies. This is why Guest and Conway [15] affirmed that the extent to which employers adopt people management practices influences the state or nature of the psychological contract. Armstrong [2] posits that psychological contract usually develop over time, it is basically implicit by nature, is not developed by means of single transaction and it might also be developed in an unintentional way with unexpected consequences, anything that management does or is perceived as doing, that have an effect on the interests of employees will alter the state of the psychological contract, the actual or perceived behaviour of employees and employer’s concept of the contract. The major HR functions such as the provision of training and development opportunities, employment security, promotions, reduced status disparities, reasonable rewards and inclusive communication and involvement in decision - making process will contribute to the development of positive psychological contract [15]. They also noted that the development of a positive psychological contract significantly contributes to higher commitment in the organization, better employee satisfaction and improved employment relations which consequently underpin the benefits of implementing a set of progressive HR practices. Guest and Conway [29] also underline the importance of communication in determining the psychological contract during recruitment and induction stage. This suggests that in order for organization to maintain a psychological contract and retain top talented employees in the organization, there is the need for management to commit themselves to effective communication in decision processes between the employees and management. This is because, a strong culture and effective psychological contract that are aligned with the vision and strategy of the organization can elicit the support, performance and retention of talented employees in the organization [47], organizational citizenship behaviours and commitment [21]. According to Okolie and Umemezia [38], retention starts at the top. Securing, hiring and retaining motivated employees are the responsibility of the company’s governing board and HR department. Securing and retaining skills employee’s demands focused, recognized and comfortable policies and procedures that make retention a prime management outcome. Gberevbie, 2008 cited in Okolie and Umemezia [38] asserts that if appropriate employee retention strategies are adopted and implemented by organizations, employees will surely remain and work for the successful achievement of organizational goals. He further argues that an organization’s inability to formulate and implement strategies capable of recruiting competent employees and retaining them to achieve organizational goals and objectives is one of the main challenges facing organization in the area of performance. In the view of Das and Baruah [39], the HR department plays an active role in retaining employees in the organization. It’s makes policies for employees’ betterment such that employees would be satisfied with the organization and stay with her for a longer time. This shows that retention of employees with a positive psychological contract translates into retention of valued skills. In the view of Singh [48], organizations that provide a workplace culture with the psychological conditions of meaningfulness (job enrichment, work - role fit), safety (supportive management and co-workers) and availability (resource available) are more likely to have engaged and committed employees and therefore employees’ retention. Securing and retaining skilled employees should become a critical part of HR policy and strategy if it is to truly get the best from the organization’s personnel without leaving them unsatisfied, burnt - out and unfulfilled. Denton, 2000 cited in Okolie and Umemezia [38] is of the view that employees who are happy and satisfied with their jobs tend to be more dedicated and would always put in more efforts to improve their organizational customer’s satisfaction. These also are more likely to remain with the organization for considerable length of time. It is not only important to carefully determine the persons that would be employed to work in an organization; the organization should also of necessity adopt strategies of how to retain them. Thus, managing and retaining promising employees are an organization’s fundamental means of achieving competitive advantage. Besides, hiring new employees is costlier and more difficult than keeping the current employees in the organization [49]. Therefore, organization must utilize an extensive range of human resource management factors to influence employee commitment and retention [39]. Kaliprasad, 2006 cited in Okolie and Umemezia [38] corroborates this view and asserts that an organization’s ability to retain its employees completely depends its ability to manage them. He went further to outline four interlinked processes that can be utilized for an effective HRM system: the motivational, interaction, visioning and learning processes. Therefore, after recruiting the right people, it is HR’s most important role to take responsibility for the success of their employees including leading people towards performance goals and targets. Thus, strategies of retention, which are based on developing HRM systems such as improving communication process and their HR policy and practices, should be implemented in order to avoid high rate of turnover and its negative consequences. In short, more effort should be exerted to improve employee retention by taking into consideration the many factors like better recruitment efforts, job satisfaction, good compensation practices, training and career development, work-life balance, organizational commitment, job security, counseling of leavers, policies for turnover, working environment, job flexibility, skill recognition and respect, constant review of job content, employees’ participation in decision-making, promotion and organizational support. It is needless to say that these efforts should be conducted by HR professionals [38]. This is necessary to ensure healthy employment relationship that will ignite employees’ emotional stability and fulfillment of expectations in the workplace and create a feeling of obligation for the employees to remain with the organization and contribute to the overall success of the organization. Effect of Covid-19 on Psychological Contract and Employee Retention The Coronavirus (Covid-19) pandemic has spread with alarming speed, infecting millions and bringing economic activity to a near-standstill as countries imposed tight restrictions on movement to halt the spread of the virus. The outbreak of Covid-19 in Wuhan city of China in December, 2019has turned out to be a global health crisis without precedent in living memory. It has triggered the most severe economic recession in nearly a century and is causing enormous damage to people’s health, jobs and well-being. As the health and human toll grows, the economic damage is already evident and represents the largest economic shock the world has experienced in decades. Today, Covid-19 is not only a pandemic with widespread impact, it is changing the way we view and approach different aspects of our lives, businesses, psychological contract, employee retention and economic order. In the area of employer-employee relationship, we are seeing changes in compensation and benefits practices mostly targeted at ensuring continuity. Interestingly, the changes are diverse and unprecedented, just like the Covid-19 itself. The changes depend on the type of business, industry, country, extent of Covid-19 spread and economic disruption. One thing that is clear is that there are changing preferences and there is an emerging new normal. The full impact of Covid-19 pandemic on the Nigerian economy and labour market cannot be determined now, but there will be more insight into it as situation unfolds. However, as federal and state governments are taking decisive action to respond to the emerging health threat of Covid-19, companies’ directors and HR mangers need to demonstrate resilience and empathy in decision-making as their actions today will define employee and public perception of their businesses in post Covid-19. Thus, recognizing the impact of Covid-19 on the people (employees) that drive the organization is essential. Resilient HR managers fund the perfect balance between empathetically walking in the shoes of employees and hard decisions to protect financial performance of the organization. Beyond the urgent concerns about the health of employees and their families, the Covid-19 pandemic and the subsequent economic shocks impact the world of work in three major areas: (i) The quality of jobs (both underemployment and unemployment) (ii) The quality of work (e.g., wages and access to social protection) and (iii) effects on specific groups who are more vulnerable to adverse labour market outcomes. Protecting employees and their families from the risk of Covid-19 infection needs to be a top priority to HR managers. Also, demand-side measures to protect those facing income losses because of the infection or reduced economic activity are critical to stimulating the economy. In times of crises, International Labour Standards provide a strong foundation for key policy responses that focus on the crucial role of decent work in achieving a sustained and equitable recovery. These standards, adopted by representatives of governments, workers’ and employers’ organizations, provide a human-centred approach to growth, development and job satisfaction, including HR proactive policies that stimulate demand for products and protect employees and organizations. Therefore, the retention of employees is associated directly with the policies made and implement by the HR Department of an organization. It is compulsory for an organization to provide their employees the means to satisfy their needs professionally and ethically. According to Elsafty and Ragheb [50], the retention of employees during Covid-19 pandemic increased with their motivation. They further posit that motivation is a driving force that enables an employee to become proactive, efficient and productive during hard time such as pandemic. Eliza, Wong and Kin, 2020 cited in Elsafty and Ragheb [50] identified workplace guideline and support, access to information and updates on pandemic with financial benefits, health related quality of life and effective communication with employees working remotely from home as the major motivational factors for employee retention during medical-based pandemics and financial crisis as shown in the figure below. Fig. 1. Conceptual Model on HR practices and employee retention during Covid-19 Pandemic. Source: Vandaele and Verbruggen [51] In order to achieve the above-mentioned motivational factors and help their organizations recover stronger, HR managers must be able to manage three times frames in parallel. Fig. 2. Responding to Employment Challenges in Unprecedented Time/crisis. Source: Elsafty and Ragheb [50] The following are the steps of managing staff costs and engagement, new ways of operating to adapt to the environment and virtual world in the face of business disruption. Table 1 Managing your human capital through Covid-19 RESPOND RECOVER THRIVE Align HR policies on home working. Ensure employees are equipped with the right tools and techniques to enable remote working Focus on well-being and constant engagement. Install a workforce redeployment trust in the organization, despite potential hits and decisions. Build and roll out rapid and transparent communication plant to inform employees on recent developments. Measure impact on psychological contract through pulse surveys and continuous listening Redesign organization structure. Set up new fit-for-purpose HR programmes. Support learning needs, possibly with integrated HR tool. Develop an employer value preposition. Align leadership in how to move forward and be loyal to the organization mission. Identify core capabilities for medium and long term. Access talent in place and talent gaps. Set up workforce transition planning. Align performance management with identified capabilities Accelerate digital strategy. Steer towards a more datadriven decision-making. Set up strategic workforce planning. Launch organization agility programmes. Train employees to support future of work impacts that have been accelerated. Ensure employee and ecosystem engagement Set up or review succession planning. Assess leadership in the organization of tomorrow. Assess future capability demands and plan for it Re-assess current organizational values. Define new employee experience Source: Vandaele and Verbruggen [51] Therefore, organizations that are able to adapt themselves quickly to the new normal will come out stronger and HR managers that take rational decisions and are loyal to their core values while managing Covid-19 crisis will shape the foundations of the future success of their purpose-driven organizations. It is obvious that some businesses will fold up, while others will thrive and grow from the opportunities that Covid-19 presents, employee jobs and pay will not be spared. However, organizations and their employees should brace for an impact of some sort. A lot depends on the length and effectiveness of containment measures, the impact of government policies, handling of a possible resurgence and HR policies of organizations. Conclusion and Recommendations This paper concludes that a significant important should be accorded to the informal contract of employment to ensure fulfillment of obligations and expectations to retain competent and skilled workforce. The paper showcased the significant implication of the fulfillment of psychological contract in the employment relationship vis-à-vis retention of skilled employees. The paper also reveals that an employee psychological contract fulfillment constitutes a positive impact on employee behaviour in the workplace, job satisfaction, organizational commitment and involvement and therefore employee retention. Hence, retaining a well-trained, skilled and contented workforce can lead an organization to greater heights while not doing so can hamper its growth. Besides, it has been observed that employee attrition rate is becoming a challenge which costs a lot of money and efforts. Therefore, every resignation prevented is money earned. The key role of HR as far psychological contract and employee retention is concerned is to understand the critical issues of psychological contract and employee retention, integrate them into the organization’s HR policy and champion retention programmes. Protective measures at the workplace and across communities should be introduced and strengthen, which requires large-scale public support that will guarantee employment retention and psychological contract. Communication needs to be transparent, regular and empathic. The tone at the top and demonstration or organization-wide impact of decisions should focus on inspiring employees to support ongoing reforms and recover plans from Covid-19 pandemic. Based on the conclusion reached, this paper recommends as follows: 1. Organizations should encourage flexible working arrangements such as telecommuting and prevent discrimination and exclusion relating to Covid-19 pandemic. 2. Organizations should provide access to collective financial health services for all, including uninsured employees and their families during the Covid-19 pandemic. 3. Organizations should expand access to sick leave and parental/core leave to ensure income security for those who suck, quarantined or caring for the children or other family members. HR policies should cover psychological contract, employee retention, health related and quality of life, access to information and updates on the Covid-19 pandemic with financial benefits, workplace guidelines and support and effective communication to employees working remotely from home during Covid-19 crisis.

About the authors

Ugo C. Okolie

Delta State University

Author for correspondence.
ORCID iD: 0000-0002-0448-2938

PhD, Lecturer of the Department of Political Science

P.M.B 1, Abraka, Nigeria

Jude N. Memeh

Dennis Osadebe University

Lecturer of the Department of Business and Management Asaba, Delta State, Nigeria


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