New hire perceptions of their own and their

employer's obligations: A study of psychological

DENISE M. ROUSSEAU Kellogg School of Management, North western

Submitted by:
Bautista, Sanderson S.
201510760
 ABSTRACT

Psychological contracts are individual beliefs in reciprocal obligations between

employees and employers. In a sample of 224 graduating MBA students who had recently

accepted job offers, beliefs regarding employment obligations were investigated. Two types of

obligation were demonstrated empirically: transactional obligations of high pay and career

advancement in exchange for hard work and relational obligations exchanging job security for

loyalty and a minimum length of stay. These types of obligations are connected with two forms

of legal contracts: transactional and relational. Relational contract obligations for employers

correlated with employee expected length of stay with the firm. Transactional contract

obligations were associated with careerist motive on the part of new recruits. The relationship

between these and other motives of new hires was also investigated.

INTRODUCTION

Contracts are a mainstay in employment relations, establishing inducements and

contributions basic to membership in an organization (Barnard, 1973). Whether written or oral,

contracts are promises made in exchange for some compensation or return, and are enforced

or at least recognized in law (Farnsworth, 1982; Murray, 1974). The decline in unionization in

the United States reduces the number of employees affected by formal, written contracts of

employment. Increasingly, however, non-written or implied contracts arising out of the

employment relationship have been the subject of litigation (Heshizer, 1984; Koys, Briggs and

Grenig, 1987) and practitioner concern (Dunahee & Wangler, 1974). The purpose of this study

is to investigate the emergence of employee-employer obligations by exploring an initial phase

in the creation of psychological contracts. This research examines the relationship between new

hire perceptions of their own and the organization's obligations. It also investigates the relations

between perceived obligations and the career motives and intentions of new hires.
Background of the Study

Psychological contracts are an individual’s beliefs regarding reciprocal obligations.

Beliefs become contractual when the individual believes that he or she owes the employer

certain contributions (e.g. hard work, loyalty, sacrifices) in return for certain inducements (e.g.

high pay, job security). As perceived obligations, psychological contracts differ from the more

general concept of expectations in that contracts are promissory and reciprocal. Promises of

future behavior (in this case on the part of the employer) typically are contingent on some

reciprocal action by the employee. Company policies stipulating that employees who

successfully complete a 90-day or 6-month tria.1 period are to be designated ‘permanent

employees’ promise job security in exchange for satisfactory performance as a newcomer. In

the case of contractual expectations, the promise of reciprocity in exchange for some action or

effort is the basis of the contract.

Promises need not be made explicitly. Weick (198 1) argues that when two parties can

predict what each other will do in an interaction, (based upon both inference and observation of

past practices) a contract to continue these behaviors into the future emerges and structures

their future relationship. Thus, expectations formed during interactions regarding future patterns

of reciprocity can constitute a psychological contract for an individual who is a party to the

relationship. More generally, we argue that when individual employees believe they are

obligated to behave or perform In a certain way and also believe that the employer has certain

obligations toward them, these individuals hold a psychological contract.

Statement of the Problem

As perceived obligations, psychological contracts differ from the more general concept of

expectations in that contracts are promissory and reciprocal. Promises of future behavior (in this
case on the part of the employer) typically are contingent on some reciprocal action by the

employee. Company policies stipulating that employees who successfully complete a 90-day or

6-month tria.1 period are to be designated ‘permanent employees’ promise job security in

exchange for satisfactory performance as a newcomer. In the case of contractual expectations,

the promise of reciprocity in exchange for some action or effort is the basis of the contract.

Objectives of the Study

We postulate that distinct patterns of employment relationships are evidenced in

employee-employer obligations and commitments to each other:

(1) The first hypothesis of this study is that (la) recruits’ perceptions of employee and

employer obligations will be interrelated, and (1 b) that this pattern of interrelationship is

consistent with the terms of two distinct types of contracts: Transactional and relational.

Psychological contracts arise in the context of a relationship (which can be relatively

short termed or of long duration). Relationships are interactions and exchanges with expectation

of some continuity into the future. Whether individuals joining an organization anticipate working

there for a short time or for life should correlate with the obligations they believe exist between

themselves and the employer, therefore:

(2) Expected tenure or length of stay in the organization is positively related to a

perceived relational contract with the employer. Employees who view their employment with a

particular organization as a stepping stone to better jobs elsewhere are adopting more of a

transactional view regarding their employment, thus we postulate that:

stepping stone to other firms, is negatively related to the new hires’ belief in a relational contract

and positively to the transactional contract with the employer.

In contrast, those recruits who actively seek out ajob with a specific organization should

value having a relationship with that employer, therefore:

(4) The new hire’s desire for employment in a particular organization is positively related

to perceived relational contract obligations.

Conceptual Framework

Significance of the Study

Relationships and relational issues such as obligations play an increasingly important

role in economics and organizational behavior (Williamson, 1979). Landlords often do not raise
the rent on long-standing tenants. Employers pay senior employees more than junior ones

doing the same work. Each demonstrates the influence of relationships on economics and

behavior. A key issue in the formation of employee-employer relationships is emergence of

psychological contracts regarding what each party owes the other.

REVIEW OF RELATED LITERATURE

MacNeil (1985) argues that there exist two types of contracts, anchoring opposite ends

of a continuum underlying contractual arrangements within and outside of organizations (Figure

1). Transactional contracts involve specific monetizable exchanges (e.g. pay for attendance)

between parties over a specific time period as in the case of temporary employment or

recruitment by ‘buy’-oriented firms (Miles and Snow, 1980). Such transactional contracts involve

acquisition of people with specific skills to meet present needs (e.g. high tech firms, temporary

employment agencies). Highly competitive wage rates and the absence of long-term

commitments are characteristic of transactional contracts. Relational contracts, in contrast,

involve open-ended agreements to establish and maintain a relationship involving both

monetizable and nonmonetizable exchanges (e.g. hard work, loyalty and security). Such

arrangements are often found in what Miles and Snow (1980) termed ‘make’-oriented firms

which typically hire people at entry levels and develop them over time to meet future needs (e.g.

IBM and other service-oriented companies). Inducements for membership in these firms

characteristically include training and development opportunities and a long term career path

within the firm.

Prevailing trends in employment and management practice suggest that the employee-

employer relationship in undergoing many changes and can take a variety of forms. The

increasing reliance on a service-orientation to establish an organization’s competitive advantage

has led to many firms emphasizing a strong value-oriented corporate culture (Peters and

Waterman, 1982; Deal and Kennedy, 1982). Strong cultures are characteristic of firms that have
stable employment, low turnover, and promotion from within (Cooke and Rousseau, 1988).

Such organizations typically make substantial commitments to their employees, including long-

term employment, in exchange for loyalty and a ‘buy in’ to the organization’s culture and values.

In contrast, an increasingly competitive environment has led to some firms seeking to maintain

maximum flexibility in work force utilization by avoiding commitments, as in the case of many

high tech firms.

Note that hypothesis 1 is framed in terms of how the same individual perceives both his

or her obligations to the employer and the employer’s concomitant obligations to the employee.

Two parties to a relationship, such as employee and employer, may each hold different beliefs

regarding the existence and terms of a psychological contract. Consistent with Schein’s (1980)

formulation, psychological contracts exist in the eye of the beholder and it is at that (individual)

level that beliefs in psychological contracts are postulated to affect both attitudes and behavior.

Mutuality is not a requisite condition.

The present study focues on the employee5 perspective. Psychological contract will be

operationalized with two sets of terms: employee-focused obligations (i.e. to be fulfilled by the

employee) and employer-focused obligations (i.e. to be fulfilled by the organization). Note each

set of obligations is from the employee’s perspective. Employees with beliefs conforming to the

predicted pattern of a relational contract are expected to report employer- and employee-

focused obligations that would reflect a long-term relationship (such as loyalty on the part of the

employee and job security provided by the organization). Another pattern of employee- and

employerfocused obligations is expected to be consistent with a transactional view (e.g. hard

work by employee and high pay by the organization).

Rousseau (1988, In press) differentiates individual-level psychological contracts from

implied contracts that exist at the level of the employee-employer relationship. In this

framework, psychological contracts are individual beliefs regarding obligations and implied
contracts are patterns of reciprocity observable at the relational level. The focus of the present

study is on the individual-level psychological contract.

METHODOLOGY

Subjects

Graduating full-time masters students from a major Midwestern U.S. management

school were the subjects of this study. In this population, the average age at graduation was 28;

97 per cent had prior work experience. Females comprised 35 per cent of the population,

minoritie; 9 per cent, and foreign nationals 10 per cent. Major industries chosen by graduates

include investment banking/ brokerage/securities 17 per cent, food! beverage/ tobacco 14 per

cent, commercial banking 14 per cent, consulting 8 per cent, consumer products 8 per cent and

other 21 per cent. Functional areas graduates were placed in include investment banking 22 per

cent, brand management 21 per cent, consulting 15 per cent and other 8 per cent. Salary

ranged from $24,000 to 90,000 with a median of $43,500.

Only those students who had accepted full-time employment following graduation were

eligible to participate. A survey was administered three weeks prior to graduation. At that point

in time placement office records indicate that 260 students out of a total of 480 had accepted

full-time jobs. Students with offers they had not yet accepted were excluded from this study. The

survey was administered to students through campus mail. As an incentive to participate,

students were offered the opportunity to participate in a lottery (with school memorabilia offered

as prizes) upon return of the completed questionnaires. A total of 224 students returned

completed questionnaires, yielding a response rate of 86 per cent.

The management school’s placement program is an elaborate one, involving extensive

oncampus recruitment by major U.S. and foreign employers. Recruitment typically starts at the

beginning of the calendar year in which graduation occurs. The placement office develops and
maintains contacts and relations with employers. The school has a national reputation as a

major source of highly qualified graduates in business (Business Week, 1988).

Instrument

The questionnaire participants completed contained questions regarding their recruiting

experiences, their perceptions of the recruitment/ selection process, intentions, and motivations.

Using a 1 to 5 scale (from ‘strongly disagree’ to ‘strongly agree’) participants responded

to a series of items asking them to describe their perceptions of their new employer and their

relationship with it. Items were randomly ordered throughout the questionnaire. Each of the

following scales was developed for this study. All were developed apriori based on specification

of the underlying concept to be measured. Scales were subject to a principal factor analysis with

varimax rotation, available upon request, which supported the independence of the factors

underlying these scales.

Careerism

Expecting to change employers many times during one’s career, was assessed using

these items:

I took this job as a stepping stone to a better job with another organization.

I expect to work for a variety of different organizations in my career.

I do not expect to change organizations often during my career. (reverse scoring) There

are many career opportunities I expect to explore after I leave my present employers.

I am really looking for an organization to spend my entire career with. (reverse scoring)

These items yield an alpha reliability of 0.78.

Specific company
 The extent to which the recruit wanted a job with this specific organization at the outset

of recruiting, was measured by:

I specifically set out to get a position with this organization.

I really wanted a job with this particular employer. These items yielded a scale reliability

of 0.80.

Expected tenure

Participants were asked to indicate how long they expect to remain with this organization

and in the specific job or position for which they were hired using the following scale: (0) less

than a year (I) 1 year (2) 2 years (3) 3 years (4) 4 years (5) 5 years or more.

0bligations

Recruits were asked to indicate what they believed to be their obligations to the

particular employer whose job offer they had accepted, the employer’s obligations to them, and

any stipulations made by their future employer during recruitment. The measure designed to tap

terms of the employee’s psychological content involves expectations of what the employee feels

she or he owes and is owed in turn by the organization. This assessment is phrased in terms of

obligations in the sense that obligations bind an actor ‘by promise or contract’ to a course of

action (Oxford English Dictionary 197 1). To determine what factors were plausible types of

obligations emerging during recruitment, personnel and human resource managers from over a

dozen firms (e.g. engineering, accounting, manufacturing) were interviewed in person or on the

telephone. Several of these managers were participants in advanced executive programs, some

were graduate students in a part-time evening program, and the remainder were research/

consulting contacts. All were asked to describe the kinds of promises and commitments their

firms sought from recruits during the selection process and what promises the firms made to the

new hires. The responses elicited form the basis of the list of obligations assessed here. When
recruits were asked open-ended questions at the end of survey regarding what they believed

they owed their employer (and vice versa) the types of obligations indicated reflected the kinds

of categories used here.

Employer obligations were assessed (using a I to 5 point scale ‘not at all’ to ‘very highly’)

by asking recruits to what extent they believed the particular employer whose job offer they had

accepted obligated or owed them: Promotion; high pay; pay based on current level of

performance; training; long-term job security; career development; support with personal

problems.

Employee obligations were assessed using the same 1 to 5 scale. Respondents

indicated the extent to which their obligations to that employer included: Working extra hours;

loyalty; volunteering to do non-required tasks on the job; advance notice if taking a job

elsewhere; willingness to accept a transfer; refusal to support the employer’s competitors;

protection of proprietary information; spending a minimum of two years in the organization.

Because the construct of contractual obligation involved interrelated obligations the two

sets of obligation items wert: subjected to a canonical factor analysis identifying the empirical

factors characterizing the relationship between perceived employee and employer obligations.

Canonical factor scores are used in subsequent analysis involving measures of obligation

(described below).

Stipulations made by the future employer were also assessed, including: The

employee’s obligation upon leaving the organization; commitments to stay with the firm for a

specific period; giving notice if taking ajob elsewhere; agreeing to give employer all products or

services developed during employment.

Recruits responded ‘yes’ or ‘no’ to each stipulation, indicating whether any such

stipulation had been made.

Canonical correlation analysis was conducted to determine the underlying pattern of

relations between specific employee and employer obligations. Canonical analysis yields two

factor scores for each canonical function it produces: each factor score combining one set of

variables into an optimally weighted correlate of the other set. The resulting pattern of weights is

used to test hypothesis 1. All subsequent hypotheses are tested using canonical factor scores.

Since obligations are mutual and contingent, this study derives its measures of psychological

contract obligations through canonical factor scores weighting employee obligations in terms of

perceived employer obligations (and vice versa). Statistically derived measures of obligation,

using canonical analysis, build upon empirically observed relations between employee and

employer obligations. Zero order correlations were computed to assess the interrelations

between variables investigated here and to test hypotheses 2, 3, and 4.

DATA AND RESULTS

The associations between specific employee and employer obligations perceived by the

new hire provide information on the type of relationship fostered during the recruiting process.

Canonical correlational analysis of the sets of employee and employer obligations new hires

perceive yielded two significant canonical functions (Table I). The first function (canonical

correlation 1 0.37, p < 0.01) demonstrated the link of a set of employee obligations (to work

overtime, to engage in voluntary, extra-role activities, and to give notice before quitting, along

with the absence of an obligation of company loyalty) on the one hand with a set of perceived

employer obligations (for high pay, for performance-based pay, for training and development) on

the other. The second function (canonical correlation 0.35, p < 0.05) revealed a relationship

between employee obligations for loyalty and a minimum length of employment with employer

obligations to provide job security. The first function reflects essentially an empirical relationship

between hard work on the part of the employee in exchange for high extrinsic returns (e.g. pay
and career development) consistent with the terms of a transactional contract. In contrast, the

second function suggest that loyalty and continued membership are exchanged for job security.

These patterns consistent with the notion that employment can be characterized not only by

transactions or discrete exchanges of extrinsic factors, but also by relational issues involving the

creation and maintenance of a relationship between employee and employer, in other words, a

relational contract. These results suggest that distinct types of employment relationship can be

discerned from patterns of employee and employer obligations, supporting hypothesis 1.

Consistent with hypothesis 2, the new hire’s perception regarding his or her relational

obligations to the employer is positively related to expected organizational tenure ( ~ 0 . 2 7p, I

O.OOl), though tenure is unrelated to the perception of the employer’s relational obligations ( ~

0 . 0 2n, . s.). Expected organizational tenure is unrelated to either employer or employee

transactional obligations. It is the new hire’s belief in his or her own relational obligations that

relates to expected length of stay in the firm. Though no specific relationship between expected

stay in first job and perceived obligations was postulated, results indicate significant negative

correlations with both employer transactional and relational obligations (r = -0.12 p 5 0.05; r =

-0.13, p 5 0.05, respectively). Employee relational obligations are positively related with

expected job tenure (r = 0.13, p 5 0.05). These results suggest that when an employee

perceives himself or herself to be obligated to a relational agreement, that is, committed to

being loyal and maintaining the employment relationship, a long-term relationship with the

employer is anticipated, along with an extended stay in the first job or position with the

company. New hires who perceive that their employer has made either transactional or

relational commitments to them anticipate a more rapid move out of the first job or position than

those recruits perceiving no such commitments.

Beliefs regarding employee and employer obligations evident following recruitment

appear to be linked with the new hire’s career motivations and intentions to stay with the

recruiting organization. A person desiring long-term employment with a firm is likely to be party

to a different set of commitments to the employer and to perceive himself or herself party to

more relational obligations than someone viewing employment as a stepping stone to another

job. Whether the hiring process takes the form of a transaction or establishes an enduring

relationship can influence the obligations new hires perceive.

Previous research on expectations formed prior to beginning employment has focused

upon realistic expectations, that is, whether the recruit has received accurate information

regarding the new job (e.g. Reilly, Brown, Blood and Malatesta, 1981; Reilly, Tenopyr and

Sperling, 1979; Wanous, 1980). Such expectations differ from the terms of a psychological

contract in that expectations are more general beliefs regarding conditions of employment,

including intrinsic and extrinsic rewards. All expectations are not obligations. An employee

expecting interesting work, only to find the job boring, may be disappointed but does not

necessarily believe a promise has been broken or a deal reneged upon. However, it is likely that

when a perceived obligation is unmet, a more emotional reaction results. This presumed

consequence of unmet obligation has not yet been investigated and remains a critical issue in

research on psychological contracts. Evidence from the present study does, however, justify a

number of hypothesized features of psychological contracts, including the relationship between

perceived employee and employer obligations. Results suggest that psychological contract is a

construct relevant to employment and likely to be distinct from the more general set of

expectations focused upon in previous research.