What happens when an organization violates its psychological contract
by Henry J. Lindborg
In December 2018, General Motors (GM) stirred a hornet’s nest of angry stakeholders when it made public its strategy to improve profits, cut costs and respond to changes in the passenger car market by discontinuing models such as the Chevrolet Volt and Impala, stopping production at five U.S. and Canadian plants, and reducing its salaried workforce by 15%.
The automaker’s CEO, Mary Barra, was called upon to explain to Congress, workers and communities why the organization—in which the nation had invested hope and financial support in the dark days of the Great Recession—could be so unmindful. The short answer: Well, that’s the “new GM” strategy.
For workers and communities whose economic and social lives will be deeply affected, there is a yawning gap between their expectations and corporate strategy. Whatever they knew of disruptive change, the organization’s history or career survival in the 21st century, they reacted with outrage when psychological contracts (the mutual beliefs and informal obligations between an employee and employer) were violated. These are perceptions of a reciprocal relationship: The belief that if I (or “we,” in cases of community) make contributions (hard work, loyalty, financial assistance), the corporation will honor such support in return. However, in the absence of formal contracts, no such obligation exists.1
To observe psychological contracts in action, tune in to the recently revived television show “Deal or No Deal.” In hopes of winning up to $1 million, a contestant chooses one of the 26 numbered cases held by female models. After the case is opened, the amount it contains (from a penny to $1 million) is taken out of play. In the first round, six cases must be opened, with amounts still in play displayed on an illuminated wall.
Subsequent rounds require the contestant to choose fewer cases, but after each selection, the “banker”—a silhouetted figure in a booth above—makes an offer to buy the contestant’s case—“deal” or “no deal.” “No deal” requires the contestant to open more cases. Do you accept the offer or gamble on your case containing a higher amount? Essentially, the game is simple, but it reveals not only a contestant’s appetite for and understanding of risk, but also how he or she frames psychological contracts.
The contestant doesn’t stand alone. He or she is accompanied by friends and relations who offer counsel and support. The audience, too, plays a role, applauding, signaling and hooting. Even the identically dressed young women who open the cases are sympathetic. The host interacts with everyone, highlighting the contestant’s background and character. The contestant and his or her companions may begin to act out their resentment of the stingy banker, who appears to stand for fate, obstacles, the boss or maybe the gods. Some contestants refuse lucrative offers in a downward spiral from hundreds of thousands to a few dollars.
Beyond simple greed and poor risk assessment, why do these contestants persist against the odds? Because they are told or exclaim that they are good people who have faced adversity. Because they are strong and have worked hard. Because they have family and friends. Why wouldn’t these be reciprocated by success in the game?
At heart, each element of the psychological contract—by its very nature, one-sided—is a value: work/labor, family/belonging, mutual support, honesty, loyalty and self-confidence. Contestants and the audience are drawn by these and encouraged to take risk, often at the expense of other values, including rationality. Naturally, there are important differences between this television morality play and places where the stakes are real, though we do experience many of the same dynamics in organizational life.
Returning to GM, consider the organization’s GM Family First discount program, advertised on TV around the time its new corporate strategy was revealed.2 Smiling children announced that they were members of the “Chevy family” that offered employee discounts to the public. Clearly dissonant with the organization’s practice in December 2018, “family” implies those primary bonds of relationship at the center of our lives. We don’t expect members who are “first” to be dropped with a product line.
Of course, appeals to such values are intended to reinforce psychological contracts and enhance trust. We see them in mission and value statements, and other corporate symbolism. When they clash with reality, however, organizations risk their reputations.
GM’s disappointed stakeholders are left to reassess their views of the corporation, which has lost significant intangible assets, resources built on internal and external relations, reputation and infrastructure. This “relational wealth” requires commitment to stakeholders that sees beyond temporary transactions and acts as a stabilizing factor in rapidly changing environments.3 It’s informed quality thinking from the beginning. In different ways, W. Edwards Deming also communicated messages that stable relationships undergird improvement, “constancy of purpose” first among them.
We all—even disciplined realists—harbor our own psychological contracts and must cope with others’ perceptions of commitments, whether we are supervising, leading teams, managing projects or designing programs, products or corporate strategy.
Recognize it or not, we and others imagine promises and reciprocal relationships that exist only in our heads, binding us to nothing, but creating cynical fodder for the comic strip “Dilbert.” What are some antidotes? We could develop a soul-crushing regimen of rules to stamp out unrealistic expectations, or we might focus on real, grounded relationships. Do we know what others expect? (Consider the extensive research on generational differences.) Are we explicit in our promises and commitments? Do we communicate fully enough to close those white spaces where rumor and psychological contracts prevail? Do we invoke values as convenient rhetoric or real priorities? Do we build our own careers realistically?
Asking the questions is a start.
References and Notes
- A principal investigator of psychological contracts is Denise M. Rousseau. See her book, Psychological Contract in Organizations: Understanding Written and Unwritten Agreements, SAGE Publications, 1995.
- General Motors (GM), “GM Family First,” www.gmfamilyfirst.com.
- For more information, read Rousseau’s book, Relational Wealth: The Advantages of Stability in a Changing Economy, Oxford University Press, 2000.
Henry J. Lindborg is executive director and CEO of the National Institute for Quality Improvement in Fond du Lac, WI. He holds a doctorate from the University of Wisconsin-Madison and teaches in a leadership and quality graduate program. Lindborg is past chair of ASQ’s Education Division and of the Education and Training Board. He is a past chair and current member of the Institute of Electrical and Electronics Engineers Career Workforce Policy committee.