Performance, Rewards and the New Psychological Contract

1. 1
Performance, Rewards
and the New Psychological Contract
John Shields
Work & Organisational Studies
School of Business
University of Sydney

2. Heaven, Hell and the Late HR Manager
2

3. The Psychological Contract
Perceptions of mutual obligations
by which both parties to the
employment relationship interpret,
act and respond to each other.
3

4. The Psychological Contract (Management Perspective)
4
(Adapted from Denise Rousseau, 1995)
Old Deal – ‘Relational’
A fair day’s work for a fair day’s pay
If you:
 are loyal
 work hard
 do as you are told
We’ll provide:
 a secure job
 steady pay increases
 financial security
And you’ll be part of:
 a dull but safe organisation
New Deal – ‘Transactional’
A flexible, mutually beneficial partnership
If you:
 develop the competencies we need
 apply them in ways that help us to
succeed
 behave consistently with our new
values
We’ll provide:
 a challenging work environment
 development support
 employability
 rewards for your contribution
And you’ll be part of:
 a revitalised, dynamic organisation

5. Typical Negative Psychological Contract (Employee Perspective)
The Real Deal – ‘Diabolical’
More work and more risks for the same pay
If you:
 Stay
 Do your job plus someone else’s
 Volunteer for extra tasks
5
We’ll provide:
 A job if we can
 Gestures that we care
 The same pay
And you’ll be part of:
 An untrustworthy organisation with change
fatigue

6. The Employee Psychological Contract:
6
Determinants & Outcomes
(Adapted from Guest 1998)
State
of the
Employee
Psychological
Contract
(+ or -)
Personal
Determinants:
Prior experience
Values
Expectations
Organisational
Determinants:
Workplace Culture
Leadership style
HR Practices
Work relationships
Attitudinal Outcomes:
Trust
Fairness
Reward Satisfaction
Job Satisfaction
Motivation
Commitment
Behavioural Outcomes:
 Membership
Task performance
Citizenship behaviour

7. Shifting Employee Expectations:
A New Psychological Contract?
7
 Commitment to own career
rather than to organisation
 Employees expecting
greater job satisfaction
 Belief that changing jobs is
necessary for career growth
 Employees assuming
personal responsibility for
career growth

8. 8
Commitment @Work 2003
(Aon Consulting)
Research questions:
 How committed are employees to
their organisations?
 How effective are current workplace
practices in meeting employee needs
and expectations?
 Which practices have the greatest
influence on employee commitment?
 How confident are employees about
their organisation’s current & future
success?
 How effective are HR departments in
taking care of employees?
 How effective are the organisation’s
senior leaders?
Survey methodology:
 Second annual Australian survey
 Conducted in USA since 1997,
Canada since 1999 and UK since
2000
 1,200 phone interviews in May-June
 Randomly selected national sample,
weighted to reflect gender distribution
in each state
 Respondents had to be over 18,
working at least 20 hours per week
and not self employed
 80 questions
 Five point Likert scales:
Disagree/Well Below, through
Neutral/Meets to Agree/Well Above.

9. Commitment@Work: Research Model
9

10. 10
2003 Findings: Commitment Level
(Comparable 2002 figures shown in brackets)
 Productivity: 53% (37%) believed that their co-workers make efforts to improve
their skill, and 55% (40%) agreed that co-workers made personal sacrifices to assist
group success.
 Pride: Although 62% (48%) would recommend their organisation’s products and
services, only 44% (33%) would recommend their organisation as one of the best
places to work.
 Retention: 59% (54%) intended to stay with current employer for several years, but
only 39% (36%) would stay if offered a similar job elsewhere with slightly higher pay.
28% would leave for a 10% pay increase and 58% would leave for 20% increase.
 Responsibility: 78% feel responsible for helping the organisation to succeed and
63% feel responsible for helping their supervisor to succeed.
 Trust: Only 48% share the values of their organisation while just 40% trust its
leaders.
 Overall: Commitment Index up to 94.0 (91.5) but commitment is inconsistent and
polarised, with more feeling responsibility toward the organisation and supervisor
and greater pride in produces/services, but less than half share their organisation’s
values, trust its leaders, would recommend it as a good place to work, or would resist
external pay opportunities.

11. 2003 Findings: Commitment Demographics
11
Groups with lowest overall
commitment levels:
 Workers under 30
 Men
 Workers in production or operations
 Workers with postgrad. degrees
 Workers in organisations with 1001-
4,999 employees
 Workers with 1-5 years of tenure
with the organisation
 Workers working >60 hours per
week
 Workers without onsite child care or
paid maternity leave
 Workers who prefer working alone
Groups with highest overall
commitment levels:
 Workers over 60
 Women
 Senior management/executive
 Workers with PhD
 Workers in small and very large
organisations
 Workers with <1 year or >5 years of
tenure
 Workers working 31-35 hours per
week
 Workers with on-site child care & paid
maternity leave
 Workers who prefer working in team

12. 12
2003 Findings: Commitment Drivers
(Effectiveness =negative response rate <17%; ineffectiveness = negative response rate > 24%)
Safety/Security:
 Expectations met or exceeded regarding: fairly treatment (94% positive), safe secure workplace
(89%), workplace health & safety (89%), work environment free from fear, intimidation & harassment
(81%).
 Expectations not met regarding: stress-free work environment (39% negative), organisation’s concern
about their job security (24%), OHS (23%).
Rewards:
 Expectations met or exceeded regarding: communication of reward package (88%).
 Expectations not met regarding: communication of benefits options (31%negative), pay program’s
encouragement of ownership and loyalty (39%), pay & benefits encouragement of performance
(40%); link between performance and pay (30%).
 Although most organisations do not offer a share plan, 52% of employees say that they would
participate if one was offered.
Affiliation:
 Expectations met or exceeded regarding: trust shown in employees to do what is right for company
(84% positive).
 Expectations not met regarding: employee retention (33% negative), employee involvement in
planning change (33%), open candid communication (25%), people taking responsibility for the
results of their actions (21%).
Growth:
 Expectations not met regarding: personal growth opportunities arising from job and training provided
(28% negative), communication of career opportunities (32%), efforts to create climate of learning
(22%), managing and communicating change (37%), ability to attract new workers (29%), and ability
to retain key staff (29%).
Work/Life harmony:
 Expectations not met regarding: management’s recognition of the importance of personal or family life
(26% negative).

13. Commitment Drivers: Average Success Rates 2002 & 2003
13

14. Implications for HR Practice: A Balanced Psychological Contract?
 Main shortcomings are in the middle-order drivers (rewards, affiliation,
14
growth)
 Don’t neglect lower level needs (safety/security & financial rewards)
 Provide pay and benefits packages that encourage a sense of loyalty and
ownership.
 Dom more to involve employees in meaningful decision-making and change
management.
 Be more effective in linking performance and pay and in communicating the
link.
 Create an organisational work environment that minimises stress.
 Manage and communicate changes in a way that encourages employee
alignment with the organisation’s core values and strategic goals.
 Provide more effective opportunities for in-house learning and growth.
 Recognise the importance of personal and family lives.
 Accentuate strategies designed to address employees’ higher order needs
(personal growth, work/life balance).

15. Aligning Risk Expectations and Rewards
15
Transactional/Risk-Inclined:
 Performance-based salary
increases
 Variable pay
 Equity incentives
 Transferable self-managed
benefits
 Independent self-managed
career (external LM)
 Work/life balance
Relational/Risk Averse:
 Graded pay
 Guaranteed annual salary
 Superannuation
 CPI increased
 Fixed working hours
 Hierarchical career
progression (internal LM)
 In-house competency
development

16. Aligning Reward Practices and Psychological Contracts
16
(Adapted from Denise Rousseau)
Performance- Reward
Highly Specified/High Risk
Link
Unspecified/Low Risk
Short term
Duration of
Employment
Transactional:
Pay based on short term results
e.g. STIs in ‘prospector’ firms
Transitional:
Pay not performance-linked; total pay
static; retrenchment packages
e.g. pay in turn-around firms
Relationship
Long term
Balanced:
Mix of person-based base pay,
STIs and LTIs
e.g. high involvement ‘analyser’
firms
Relational:
Seniority-based pay
e.g. traditional ‘defender’ firms