Why Psychological Contracts With Employees Are Key To Profits
In uncertain times, employees look for consistency, clarity, and follow-through—meeting these expectations can protect trust and performance, reducing costly turnover and inefficiency.
BONN, GERMANY - JULY 04: In this photo illustration a man is stressed by work. (Photo Illustration ... More by)
It should come as no surprise that trust in business leaders is crumbling. According to the Edelman Trust Barometer 2025 report, there was an unprecedented global decline in trust between employees and their employers over the past five years, with roughly 25% of Americans distrusting their bosses. There is an overwhelming sense of dissatisfaction amongst workers (especially younger workers) whose expectations of what it means to have a career are not being met. The Australian employment marketplace SEEK found in 2024 that only 50% of Gen Z workers are 'happy' at work, compared to 61% of baby boomer respondents. While the tangible costs of poor legal contract management—such as unexpected renewals and unnecessary expenses—are well-known, the costs of poor psychological contract management are often overlooked.
Unmet expectations about roles and experiences lead to a loss of trust, bringing increased attrition, decreased productivity, and ultimately, a negative impact on the company's bottom line. Understanding and managing your organization's psychological contracts is crucial for maintaining a high-trust environment and ensuring long-term success.
Psychological Contracts: Your Employees' Expectations
Psychological contracts are the expectations employees have about working in your organization. These contracts are formed from recruitment through offboarding and cover aspects like salary, job responsibilities, working conditions, training, time off, and company culture.
When these expectations are not met, workers feel a deep sense of having been wronged. Companies that suddenly change their policies around return-to-office, for example, lead their workers to feel a sense of betrayal and transgression. RTO anger is not just about where employees do their work: it's about the agreements workers thought they had with their employers that are now being unilaterally changed.
Each employee's psychological contract can be unique, influenced by their interactions and experiences throughout their working time. While some expectations are explicit, many are implicit. For example, Edelman's research shows that over 85% of employees believe their employers should provide good-paying jobs and upskilling opportunities—regardless of whether these were explicitly promised.
The Costs of Poor Psychological Contract Management
Failing to meet employee expectations (even unwritten ones) erodes trust and impacts organizational performance:
How Managers Can Improve Psychological Contracts
Managing psychological contracts is a leadership responsibility, not an HR issue. The more you leave unsaid, the more assumptions employees will make, leading to distrust and attrition. Here are five things to keep in mind when managing psychological contracts:
Managing psychological contracts is essential for a productive (and profitable) work environment. When employees feel happy and secure, they treat customers well, boosting satisfaction and positively impacting the bottom line.
When security isn't possible, transparency is key. By being open about company strategies and challenges, you empower employees to make informed decisions, maintaining their trust and respect even in uncertain times. Ultimately, effective management of psychological contracts is crucial for sustaining a high-trust, high-performance organization.
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