Psychological Contract

Managers have a broad array of tools at their disposal for increasing the engagement and motivation of workers. One tool for increasing employee engagement and performance is the psychological contract. It builds on the famous management by objectives insight that involvement of workers in goal formation increases buy-in and mutual understanding many times over. Whereas the original MBO efforts focused on formal and documented aspects of joint goal setting.
Psychological contracts are unwritten understandings about mutual needs, goals, expectations, and procedures. Such agreements go beyond employment contracts, which typically specify salary, benefits, modes of feedback, and working hours; it can be said that psychological contracts begin where formal employment contracts leave off. These informal understandings improve the fit between individuals and the organization, and better fit is associated with increased motivation and reduced turnover.
Psychological contracts are potentially far-reaching (any issue is fair game), but they are usually limited to highly valued concerns. Psychological contracts increase engagement by allowing managers to better understand the needs of individual employees, by helping to provide rewards and conditions that address individual needs, and by ensuring clarity about roles and expectations.
Establishing psychological contracts is an approach that helps get agreement and alignment among group members and, hence, helps motivate workers.

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