Psychological Contract Theory in Employer-Employee Expectations
Most business leaders think about employment contracts in legal terms—salaries, benefits, and job descriptions. But there’s another, more subtle agreement at play in every workplace: the psychological contract—the set of unwritten expectations between employers and employees.
These unspoken agreements shape trust, engagement, and retention, and when they’re violated, they can have serious consequences—ranging from disengagement and reduced productivity to high turnover. At Founded Partners, we help founders and leadership teams navigate these hidden dynamics, ensuring that company culture and strategic goals align with employees’ expectations.
What is Psychological Contract Theory?
Denise Rousseau (1995) introduced the psychological contract theory to describe how employees form beliefs about their relationship with their employer based on promises (explicit or implied) regarding job security, career progression, recognition, and work conditions. These expectations are not written in formal contracts, yet they play a crucial role in employee motivation and workplace culture.
Watch Denise Rousseau’s Psychological Contract Theory video for an overview:
Psychological contracts can be fulfilled or breached, and research shows that perceived breaches have a strong impact on workplace relationships.
A landmark review by Conway & Briner (2009) looked at 50 years of psychological contract research and found that breaches often lead to:
Decreased trust in leadership
Lower job satisfaction and engagement
Increased turnover and workplace cynicism
If employees feel their employer has failed to deliver on promises—whether related to career growth, work-life balance, or leadership support—disengagement follows.
The Four Types of Psychological Contracts
Rousseau (2001) categorizes psychological contracts into four types, each shaping employer-employee expectations differently:
Relational Contracts – Built on long-term loyalty and mutual commitment. Employees expect career growth, job security, and personal investment from leadership.
Transactional Contracts – Short-term and economic-based. Employees expect clear rewards for performance but have little emotional attachment to the company.
Balanced Contracts – A mix of relational and transactional, with long-term growth opportunities tied to performance.
Transitional Contracts – Exist during organizational instability, such as during layoffs or restructuring, where employees feel uncertain about their future with the company.
Want to assess your own psychological contract? Download the Psychological Contract Inventory (PCI) and complete the exercise:
How to Score the Psychological Contract Inventory (PCI)
The Psychological Contract Inventory (PCI) is a self-assessment tool designed to measure the nature of your psychological contract with your employer. Below is a step-by-step guide on how to score your responses and interpret the results.
Step 1: Complete the PCI Questionnaire
Rate each statement on a 1 to 5 scale (1 = Strongly Disagree, 5 = Strongly Agree).
The questionnaire is divided into categories based on different types of psychological contracts and whether you are evaluating your own expectations (employee obligations) or what you perceive from your employer (employer obligations and fulfillment).
Step 2: Organizing Your Scores
Once you've answered all the questions, group your responses into four psychological contract types:
Relational (long-term, trust-based employment relationship)
Transactional (short-term, task-based expectations)
Balanced (a mix of stability and performance-based rewards)
Transitional (temporary, uncertain, or unstable work arrangements)
Step 3: Identifying Discrepancies
Compare the Employee Obligation Scores with the Employer Obligation Scores:
If there is a large gap (4+ points difference) between what you expect and what your employer provides, this indicates a psychological contract breach.
If both scores are aligned, it suggests mutual understanding and fulfillment of the psychological contract.
Step 4: Understanding Your Psychological Contract Type
If your highest score is Relational: You expect a long-term, trust-based relationship with your employer.
If your highest score is Transactional: You prioritize clear, short-term agreements with well-defined rewards.
If your highest score is Balanced: You seek a mix of job security and performance-based incentives.
If your highest score is Transitional: Your work situation is unstable, and you may feel uncertain about your future with the company.
Step 5: Interpreting a Breach
If you notice a significant gap between what you expect and what you feel your employer delivers, you may perceive a breach of psychological contract, which could affect your engagement and trust in leadership.
If your scores are close, it suggests a well-aligned employer-employee relationship with mutual understanding.
By completing and scoring the Psychological Contract Inventory, you can gain deeper insights into your expectations at work and how well they align with your organization’s practices. If you notice significant misalignment, it may be time to re-evaluate communication and expectations with leadership—something we at Founded Partners help organizations navigate.
What Happens When Psychological Contracts Are Breached?
A psychological contract breach happens when employees feel that the employer hasn’t fulfilled its perceived obligations. This doesn’t necessarily mean a written promise was broken—it could be as simple as:
A lack of recognition for extra work
Unmet expectations for career growth
A shift in company culture without explanation
Research shows that breaches don’t just affect individual employees—they impact the entire workplace, leading to low morale, disengagement, and higher turnover.
At Founded Partners, we often work with leaders who sense disengagement in their workforce but struggle to pinpoint the cause. Psychological contract breaches are often at the root of these problems, and many leaders don’t even realize it.
How Can Leaders Repair & Strengthen Psychological Contracts?
If you’re noticing signs of disengagement, it may be time to rebuild trust and align expectations. Here’s how:
Clarify Expectations from the Start
Ensure employees have a clear understanding of their roles, career paths, and performance expectations.
Be realistic about what the company can offer—overpromising leads to future breaches.
Communicate Openly and Frequently
Employees need to know where the company is headed and how it impacts them.
Be transparent about organizational changes and why they’re happening.
Follow Through on Commitments
If leadership makes a commitment, employees expect it to be honoured.
If circumstances change, explain why and offer alternatives.
Create a Culture of Feedback
Foster psychological safety so employees feel comfortable voicing concerns without fear of retaliation.
Regular check-ins can prevent small issues from becoming major breaches.
Acknowledge and Address Breaches
If a contract breach has already occurred, own it. Apologize if necessary and work to rebuild trust.
Employees respect leaders who recognize mistakes and take corrective action.
How Founded Partners Can Help
At Founded Partners, we help founders and leadership teams navigate complex organizational challenges like psychological contract breaches. Our advisory work focuses on:
Identifying hidden misalignments between leadership expectations and employee experiences.
Developing clear, transparent communication strategies to strengthen trust.
Building sustainable cultures that foster long-term engagement and retention.
If your company is struggling with disengagement, trust issues, or unclear employer-employee expectations, let’s talk.