Fundamentals of Management, 8th ed

psychological

contract

The overall set of

expectations held by

an individual with

respect to what he or

she will contribute to

the organization and

what the organization

will provide in return

contributions

What the individual

provides to the

organization

inducements

What the

organization

provides to the

individual

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Part 4: Leading

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If both the individual and the organization perceive that the psychological contract is

fair and equitable, they will be satisfied with the relationship and will likely continue it.

On the other hand, if either party sees an imbalance or inequity in the contract, it may

initiate a change. For example, the individual may request a pay raise or promotion,

decrease her contributed effort, or look for a better job elsewhere. The organization can

also initiate change by requesting that the individual improve her skills through training,

transfer the person to another job, or terminate the person’s employment altogether.

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A basic challenge faced by the organization, then, is to manage psychological contracts.

The organization must ensure that it is getting value from its employees. At the same time,

it must be sure that it is providing employees with appropriate inducements. If the organi-

zation is underpaying its employees for their contributions, for example, they may perform

poorly or leave for better jobs elsewhere. On the other hand, if they are being overpaid

relative to their contributions, the organization is incurring unnecessary costs.

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