This is an essay, written for the LSE Summer School 2013, focused on the comparison and analysis of transactional and relational, Psychological Contracts (PC) and their intreconnection with different working environments. The author tries to keep a deeper eye on the emerging trend of hiring initially on a transactional contractual basis and later on a relational one. The limited scope and academic requirements constrained a more elaborated view on the causes of psychological contract breach and a wider approach on the several PC models have already been developed. The Harvard model is used as a "map of the HRM territory" (Beer et al., 1984) to depict how the HR-policies can empower the two, examined, psychological contract types.

1. LSE ID Number
201235650
Summer School 2013 midsession examination
MG190
Human Resource Management and
Employment Relations
Assessed Essay Question
“Compare and contrast the relational and transactional types of psychological contracts. In what
kinds of work environment do you think each would be most the more appropriate? What kinds of HR
policies can be used to reinforce them? Give reasons for your answer.”
Teacher responsible: Prof. David Mardsen
Lecturers – Prof. Sarah Ashwin and Prof. David Mardsen
Classes – Chiarra Benassi, Bethania Mendes-de-Brito-Antunes, Karin King
Main Text: 1050 words
London, 17-07-2013

2. LSE ID Number
201235650
2
Contents
1. Introduction ....................................................................................................................................3
2. Transactional vs. Relational ............................................................................................................3
3. Working environment – Climbing the Mintzberg’s iceberg............................................................3
4. HR-policies ......................................................................................................................................4
5. Conclusion – Need for change? ......................................................................................................4
Bibliography ............................................................................................................................................6

3. LSE ID Number
201235650
3
1. Introduction
The conceptualisation of psychological
contracts (PCs) started around 60s when
(Argyris, 1960; Levinson, 1962) first
researched how employees and supervisors
relationships shape the implicit expectations
given to each other. (Schein, 1980) and
(Herriot & Pemberton, 1995) extended the
research by integrating a clear two-level
distinction (individual/organisational) and by
introducing self-perception as moderating
factor, respectively.
Does it worth taking seriously PCs (Guest,
1998)? Of course it does, as psychological
contracts are indeed a transaction, but not
formal, not documented and very regularly
violated as (Robinson & Rousseau, 1994) have
already proved. How to perceive the role of
the two main contracting types? The
exchange theory (Blau, 1967) explains how
PCs are structured. Relational contracts are
built on the social exchange theory while
transactional ones rely on the economic
exchange theory. This approach however is
not enough to explain new HR configurations.
This essay thrives to enlighten the
functional traits of relational and transactional
contracts. Paradigms and example cases will
be used to prove the interconnections
between the contract type and the working
conditions. The applicability of Harvard-
model’s HR-policy choices in relation to the
two contracting modes will be further
outlined (table 1). In the end, a conclusive
statement supporting the transition to hybrid
contractual interfaces will be drawn, hoping
to augment the reader’s awareness on the
change dynamics.
2. Transactional vs. Relational
Revising the axiomatic view of (Hage,
1965) on organisations it is recalled how tight
is the connection between the mechanistic
organisation (focus on short-term
competiveness) and transactional contracts,
and between also the organic firm (focus on
long-term adaptability) and relational
contracts.
Transactional contracts do not involve all
parties (especially bottom workers), they are
focused on short-term efficiency and try to
cope with financial obligations. Workforce’s
identity does not play an important role as
work processes are standardised and the
production philosophy is structured on a
performance-ratio reward system. This recalls
us the fast food company case (MG190
Lecture 4, p.11), where only some working
rules (e.g. hygiene) were tailored as core
success drivers.
Relational contracts emphasize broad,
long term, socio-emotional obligations, such
as commitment and loyalty, consistent with
collective interest (Parks & Schmedemann,
1994), and have a pervasive effect on
personal as well as work life.
3. Working environment – Climbing the
Mintzberg’s iceberg
From the one side machine bureaucracy
asking for numerical flexibility and symbolic
job boundaries (transactional contracts) and
on the other side there is the administrative
adhocracy where functional flexibility and
autonomy are the prerequisites (relational
contracts).
It is expected, in working places where
the procedure of delivering results is
prototyped and supported by a large-sized
technostructure, transactional contracting to
be preferred. The tax-office employees
(MG190 Lecture 3, p.1) did not possess any
Valuable, Rare, Inimitable and Organisation-
focused skills (Barney, 1991) thus
transactional contracting was more
appropriate in this job-context.
NEC became the leader in semiconductors
mainly because found out the manner to
operate on more efficient frontiers by unifying
the multiple roles of HR-departments
(Prahalad, 1993; Prahalad & Hamel, 1990) and
becoming from an employee champion, a
change agent without violating its core value1
(Ulrich, 1997).
In addition, transactional contracts imply
higher level of knowledge codification
followed by less customization and more
process standardization, and the opposite
1
‘Grow Your Career with the Winning Team!’
(source:http://www.nec.com.hk/web/nechk/abou
t/career)

4. LSE ID Number
201235650
4
applies for the relational contracts (more
face-to-face knowledge transmission). The
aforementioned view is supported by the
comparison of Dell’ s and HP’s strategy in
(Hansen, Nohria, & Tierney, 1999, p. 6) article.
4. HR-policies
Due to the limited scope of this essay we
will focus on the typical Harvard-model, using
the map of the HRM territory of (Beer, 1984,
p. 16). The box of HRM policy choices consists
of four components which are the following;
 employee influence
 HR flow
 reward systems
 work systems
The next table illustrates what kind of
HRM policies will empower the two examined
forms of contracts (table 1).
5. Conclusion – Need for change?
Is the trade-off finally between
“Reciprocity or whose job is it?” (Coyle-
Shapiro, Kessler, & Purcell, 2004). There is one
way to conceive the path between
bureaucratic (low trust) or participative
(partnering) organizational structuring; to
anticipate the change in the stability. The case
of Consult Co. and ICC where the retention
problem emerged in the end is an indicative
example.
Workforce characteristics (Y-ers), volatile
demand rates, and short-term competition
calls for short-term (initial) contracting. In line
with this assumption is (Hiltrop, 1995, p. 289)
view. Thus HR-departments should get
prepared to re-engineer the psychological
contracting arena realizing speedy the
emerging hybrid contractual typology.
Table 1. Allocating HR-policy choices to psychological contracting types
Contract type
HR-policy choices Relational Transactional
Employee influence Participation in decision-making
Employee voice
- Collective bargaining
(USA)
- Regulatory work
councils (EU)
- Ringi system (Japan)
Networked structure
High mutual reciprocity
Innovative ideas: employee
ideas are given a chance
(Pfeffer, 1996); process
innovations
High managerial authority
(Lockean view; John Lock
believed that property right
was given by God)
Highly hierarchical structure
Top-down control system
Politically biased labour unions
Standardised thinking/products
HR-flow
- Inflow
- Internal flow
- Outflow
Operating core is cross-trained
Functional flexibility
Development of people
Career development workshops
More subjective (inter-
personal) employee evaluation
Effective motivation
Less monitoring
Internal labour market
Commitment-based HR
configuration (Lepak & Snell,
1999)
High investments on Techno
structure & Support staff
Numerical flexibility
Development of routines
Minimize payroll and
processing-costs
Objective (standardised)
employee evaluation
Obligational motivation
‘Stick and carrot’ monitoring
External labour market
Compliance-based HR
configuration (Lepak & Snell,
1999)

5. LSE ID Number
201235650
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Reward system Pay for performance
Innovation for bonus
Nurture outside competition
Intrinsic rewards
Lateral (cross-team) design of
compensation system
Fringe benefits
Profit sharing culture (group
performance)
Scanlon plans
Benchmarking compensation
schemes (Baron & Kreps, 1999,
p. 253)
Pay for skills
Productivity for bonus
Nurture inside competition
Extrinsic rewards
Top-down design of
compensation system
Cost-effective benefits
Piece-rate (individual
performance)
Management by objectives
Tournament compensation
schemes (Baron & Kreps, 1999,
p. 253)
Work system Narrowly defined jobs
Specialisation of employees
Inventory of human capital
Vertical career mobility
Upsizing dynamic capabilities
(Teece, Pisano, & Shuen, 1997)
Life-long employment & Up-or-
Out
Paid outplacement
Termination avoided :
detrimental for both parties
(high transaction costs)
Incentives for late retirement
Status difference eliminated
Broadly defined jobs
Rotation of employees
Inventory of financial resources
Lateral career mobility
Downsizing personnel costs
hierarchically
In-and-Out employment
Lack of outplacements
Termination: possible and
harmful for employee
No retirement incentives
Status symbolism reinforced
through hierarchy

6. LSE ID Number
201235650
6
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