In this series of posts, we are examining the impact of salary negotiations on the formation and evolution of the psychological contract. In the first post in the series (see Part 1: dramatis personae) we looked at the concept of psychological contract, outlined the stages at which salary negotiations take place and also looked at some basic principles in the domain. In the second post (see Part 2: before joining) we examined the interaction between the employer and the employee before the employee joins the company and its impact on psychological contract. In this post, we will turn the spotlight on the interaction between the employer and the employee after the employee joins the company and examine and how these interactions impact the psychological contract.
The salary negotiations that take place during this phase (after the employee joins the organization) are qualitatively different from those during the previous phase (before the employee joins the organization). This is because of the fact that by now a psychological contract has already been formed. The existing psychological contract will have a big influence on the salary negotiations from now on. Of course, the psychological contract can (and does) get modified by the negotiations at this stage. But the changes to the psychological contract at this stage are incremental changes (evolution). Thus, at this stage, the impact of psychological contract on the salary negotiations is much higher as compared to the impact of the salary negotiations on the psychological contact!
In general, the existing psychological contract makes it difficult for the employee to renegotiate the salary – assuming that there is a regular process for reviewing the salaries that is performance linked and market benchmarked. Most of the negotiations happen at this stage because of the ‘imperfections’ in the previous stage (problems/issues that come up because of the interactions during the phase before the employee joins the organization). For example, if an employee has been promised during the interview stage that that his salary will ‘catch up’ with that of the existing employees, once he proves himself in the organization and if ‘catch up’ never happens (or if it takes too long) the employee might feel that his psychological contract has been violated. Like I had mentioned in part 2 of this series, organizations should be more careful and specific when they are making such promises (and the prospective employee should seek clarifications or specific details - like how long it will take and what would qualify as proving oneself - if the organization does not do so).
There is another type of violation of psychological contract that can occur. This can be traced to fundamentals of the compensation philosophy of the organization – does the organization pay the employees based on what they deserve (within the constraints of what the organization can afford) or does the organization pay the employees as little as it can get away with? This comes into play in a situation where there is an industry downturn (making it difficult for the employees to change jobs) but the particular organization is doing well (growing reasonably fast with healthy profits). In such a scenario the organization can afford to give the employees good salary hikes. But it can choose not to do so (or choose to give a very low salary hike) because even without the salary hike it can retain the employees. This certainly provides short term gains. It can also be explained away in terms of salaries being market benchmarked. However, this will violate the psychological contract and will lead to a situation in which the employees (especially very valuable employees) leave the organization as soon as the job market improves (going by the same logic the organization had used, the employees should leave the organization when the market will pay more). No amount of talk about ‘employees being the biggest asset’ and ‘building a great organization together’ will undo the damage that happened to the loss of trust. Some of the IT organizations in India have learned this lesson the hard way!
Another interesting phenomenon observed during this phase is the so called ‘entitlement mentality’. This happens when an employee (or a group of employees) feels that he (they) should get a salary hike (or a promotion) because another employee has been given a salary hike or a promotion. While this is usually interpreted as an ‘attitude problem’ on the part of the employee by many of the organizations, there are significant contributing factors to this from the organization’s side. Often, there is no clearly defined promotion policy or policy/process for ‘out of turn’ salary increases. When the employees are not clear as to why somebody has been given a salary hike or a promotion (and why they haven’t been given the same), it is ‘normal’ (in the statistical sense of the term) for them to feel that their psychological contract has been violated. The organization can counteract this to a large extent by having a clearly defined policy for salary hikes and promotions and communicating the same to the employees (and to the prospective employees). Yes, there could be factors related to employee attitudes (e.g. ‘superiority illusion’) that are also operating here and they need to be addressed at that level (Please see ‘Performance ratings and the above average effect' for details).
Somewhat related to this is the situation where new hires join the organization at a salary higher than that of the existing employees at the same responsibility level. In such a situation the existing employees might feel that their psychological contract has been violated. Unless the organization can clearly demonstrate to the existing employees that there is a valid reason for new hires coming in at higher salaries (e.g. they bring in a particular skillset that is not available within the organization and that that skillset enjoys a higher salary level in in the market), this is bound to happen. This situation will also encourage the existing employees (those among the existing employees with skillsets that are highly sought after in the job market) to renegotiate their salaries.
I am not in favor of frequent renegotiation related to the salary. It puts too much strain on the relationship and on the psychological contract. However, in some of the organizations, it might be culturally acceptable to do so and in those contexts the employee might be able to manage this without damaging the psychological contract too much. I have come across organizations where the best paid person is ‘a great performer who is always on the verge of quitting’. However, my personal opinion is that this kind of brinkmanship creates mistrust and stress and that it is not worth it from a long term perspective.
It has to be noted that existing psychological contract also makes it difficult for the organization (represented by its representative like the managers) to reduce the salary of the employees, to be overly demanding or to terminate the employment. A special situation gets created when there is a change in the manager of the employee as the new manager hasn’t yet formed the psychological contract with the employee. Usually, the new manager does accept at least some part of the existing psychological contract (or at least what the new manager considers to be the existing psychological contract). However, if there is a significant leadership change, with many people in the reporting chain of the employee changing, this might not happen (especially if the new set of managers have been brought in to 'transform the organization' and that transformation involves significant changes to the way people are managed in the organization). Thus, the existing employees might feel hassled as they might feel that their psychological contract has been violated and they don’t have the opportunity to address the violation. On the flip side, this change in managers/leadership also makes it easier of the existing employees to renegotiate their salaries (at least in the case of those employees who are in a position to negotiate)!
In the next post in the series, we will take a closer look at the salary negotiations that take place after the employee submits his/her resignation and explore its impact on psychological contract (and how the psychological contract influences those negotiations).
Please let me know if you have any comments/suggestions at this stage!