Reduce employee turnover by preventing psychological contract breach

Employee turnover comes at a great cost to organizations. Not only the costs of hiring and training of a new employee, but also the loss of productivity during the absence of the employee, and the slower productivity until the new employee is acclimated to their job, make employee turnover cost about 21% of an employee’s annual salary.

A common reason for employee turnover is cracks in the “psychological contract” between the employee and the organization. 

The goal of this post is to give you a deeper understanding of how employees shape these implicit contracts they have with their organization, and what will happen when they feel that the employer is not holding to their end of the deal.

Specifically we will take a close look at:

  • The mechanism that underlies psychological contract breach,
  • The consequences on job-performance, and
  • How to prevent psychological contract breach from happening–including clarifying the psychological contract, creating an open workplace, and increasing transparency

This post is based on over 30 papers on employee turnover, psychological contract breach, organizational climate, and organizational identification pulled from psychology and behavioral economics.

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What is a psychological contract?

In essence the psychological contract is built out of promises between the employee and the organization. The psychological contract forms a mental map that an employee uses to make sense of his/her daily work environment. Its purpose is to help the employee monitor his/her progress towards attaining personally relevant goals (i.e. a promotion, developing skills, job security, etc..). 

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It is important to note that there are two kinds of promises, explicit and implicit. Explicit promises typically result from employee interpretations of verbal and written agreements, such as when HR might tell you that in return for putting in a lot of effort, you can earn additional commissions and make quick advances in your job.

Implicit promises, on the other hand, refer to interpretations of repeated patterns of exchange with the organization. In other words, an employee may incorporate their interpretations of interactions with supervisors, recruiters, mentors, and colleagues into their psychological contract. For example, a co-worker might tell you that every Friday during times of low work-load, he leaves a half-hour early. You might interpret this as an added benefit for being flexible in terms of work-hours, and add this to your psychological contract.

The consequence of this is that the psychological contract is a subjective perception that is not necessarily shared with the other party. That is, the employee and the organization may have different views on the terms of their psychological contract and the degree to which they believe each party has fulfilled their obligations.

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Contract breach and employee turnover

When the employee feels that they are not receiving something they feel the organization is obligated to give, the employee may perceive psychological contract breach.

For example, imagine an employee thought he would receive a promotion after completing 5 mandatory training modules, but three months after completing the training modules he still hasn’t received a promotion. He may believe the organization is failing to meet its obligations to him. 

These perceptions of breach are likely to trigger an emotional response, especially if the particular obligation is important to him.

According to Social Exchange theory and the norm of negative reciprocity, when the organization fails to deliver what was promised, the employee will reciprocate by either passively (i.e. withholding promises, such as working overtime, help colleagues with high workload, etc.), or actively (i.e. try to harm the organization) rebalancing the relationship. 

Moreover, if these withheld promises remain unaddressed, these feelings of violation may translate into changes in attitudes and behaviors, such as reduced commitment, job satisfaction, job performance, and employee turnover intention.

Aside from negative organizational effects, psychological contract breach has also been found to have negative effects for the employees’ physical, mental, and emotional health, with studies showing positive links to burnout, insomnia, and anxiety. Here are some more resources on preventing burnout and burnout recovery.

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How to deal with psychological contract breach

To prevent employee turnover from happening it is important to know how to manage psychological contract breach when it occurs, and create an environment which helps prevent psychological breach from happening. 

In order to do this, we need to:

  • Be aware of the psychological contract of our employees
  • Create an open and safe culture
  • Be transparent and engage in clear communication

Clarify and be aware of the psychological contract of your employees

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As mentioned earlier, the psychological contract is subjective, and idiosyncratic to the employee, meaning that the employee can have a different perspective on the contract than the organization.

Moreover, any promise made by an actor the employee regards as the organization (e.g. supervisor, CEO, HR, and even co-workers) can become part of the psychological contract. It is therefore important to check up with employees to get a feel for their perspective on the psychological contract.

Knowing your employees expectations will not only help reduce employee turnover from the employees’ perspective, but also help to update your own expectation of the employee. 

Make expectations clear from the start. As much as possible,start early and make the psychological contract explicit even before a new employee enters the company. Be as honest as possible in recruitment literature and during interviews. Clarify what kind of roles you want them to fill, and how their careers will be managed. Make realistic promises, and try to make every expectation as concise as possible. In other words, and this holds true for all communication, be careful with declarations of intent as they will become part of the psychological contract, even if you didn’t intend them to be.

Pay extra attention to new hires during the first months of employment, as this is a critical period during which new employees gather information to form their psychological contract. Plan monthly meetings to talk about:

  • How it is going on the job
  • How they feel within the company/team
  • What struggles they might be experiencing
  • How the job is matching up to their expectations

Initiate ongoing, informal and formal communication. Make it part of your routine to talk to your employees. Informally, aim to keep a “finger on the pulse” (i.e. water cooler talk) by having laid-back chats whenever possible. It is important to save heavy loaded questions (i.e. career development, salary) for assessment meetings, and just ask how an employee is doing/feeling. Are there any complaints, or things that they need help with? Are there any wishes, or things that they feel are missing?

More formally, treat every assessment meeting as a new intake conversation to see whether you are still on the same page, or that the psychological contract has evolved with new expectations.

In sum, you can’t prevent employee turnover from happening if you don’t prevent breach, and you can’t prevent breach if you don’t know what there is to break. So increase the honesty and regularity of communication with your employees, by making

  • Realistic promises in recruitment and socialization processes, and  
  • Reassessing the employees’ expectations during informal chats, performance appraisals or routine meetings


Create an open culture

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Another helpful tool to reduce employee turnover is to create an open and forgiving work climate. What this means is to have a workspace in which employees are able to voice their concerns and needs, and are allowed to make mistakes. 

The effects of psychological contract breach on well-being are less when there exists a mentality for forgiveness. Moreover, having employees voice their concerns and needs will also help you become aware of issues in a psychological contract that might need addressing.  Issues that otherwise would have escalated to psychological breach without you even knowing. Additionally, having a forgiving culture in which mistakes can be made will also allow employees to be more forgiving when you, either intentionally or unintentionally, break a certain promise.

It is therefore important to foster this climate by providing employees with support from the beginning of the employment relationship, and provide employees with opportunities to discuss and vent their emotions with supervisors. This is especially true during times of high job demands, as breach is more likely to be perceived when demands are high. You might:

  • Set up a weekly lunch-meeting with the workgroup in which you can openly discuss problems at work. Make mistakes acceptable by openly talking about failures (and potential solutions).
  • Create a monthly Fuck-Up award, in which the most hilarious fail will get a trophy that will change hands every month. Make it something worth winning, so that people will feel open to acknowledge failure. 

Most important is to lead by example. Acknowledge your own mistakes, be thankful when others acknowledge their mistakes, and provide constructive feedback–rather than only punishment–when mistakes happen.

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Be transparent and engage in clear communication

Sometimes it might be impossible to prevent breach from occurring. You may have promised an employee a promotion, or a pay raise as a reward for their hard work, but are not able to follow through due to a sudden change in the budget for your department. Or you might have assigned a mentor to a new employee to help them get acquainted with the job, but due to high work-load, or sudden illness, the mentor is unable to provide any guidance to the new employee.

In cases like this it is important to be transparent and provide clear explanations (with evidence when needed) about the reasons for the breach. Creating awareness about the situation will help alleviate the feelings of breach. 

But explanation may not be enough if the broken upon agreement is important to the employee. It is therefore important to provide a timeframe for the employee in which the breach will be remedied. Consider:

  • What is important to the employee? Can you help them achieve this despite your breach?
  • When can you realistically address your failure? How will you update them if a specific time is not possible?

Research has shown that supervisors who act as mentors can help employees make sense of a breach event. They can also minimize the strength of their reactions towards the event, by providing context and clarification. A good mentor listens to the concerns of the employees and gives them the feeling that they are being heard, by looking at alternative ways to reach important goals.


Recap of reducing employee turnover by preventing psychological contract breach

Psychological contracts play an important part in an employees’ day-to-day work-life. Repeated failure to meet the perceived agreements can wreak havoc on an employees’ morale and job-performance, and eventually lead to employee turnover, so awareness is key to prevent serious damage. 

If you want to reduce employee turnover, it is therefore important to be aware of the psychological contract that is held by your employees by:

  • Making realistic promises in recruitment and socialization processes, and  
  • Reassessing the employees’ expectations during informal chats, performance appraisals or routine meetings

Create an open culture, and foster forgiveness by:

  • Providing space for employees to voice their concerns and needs 
  • Setting up a weekly lunch-meeting with the workgroup in which you can openly discuss problems at work. 
  • Creating a monthly Fuck-Up award so that people will feel open to acknowledge failure. 

When psychological contract breach is inevitable, be sure to be transparent and engage in clear communication by:

  • Providing credible explanations with evidence about the reasons for the breach
  • Providing a time frame within breach will be remedied
  • Communicating in a transparent and consistent way 

Please take a look at our retention playbook for more tips on reducing employee turnover, and for a specific tool on how to map the psychological contract during job-interviews and assessments, and how to  provide a realistic job preview for future-employees.