Of salary negotiations and psychological contract: Part 1(dramatis personae)

“I feel cheated. If I had known this, I would not have joined this company”, said the frustrated employee. “We had given you a good hike over your previous salary. We had also explained the details of your compensation and benefits when we gave you the offer letter. Once you have signed the employment contract, it is not appropriate on your part to raise issues about it so soon. What somebody else get paid is none of your business”, replied the HR Manager.

This is a scene that gets enacted quite frequently across organizations – with unpleasant consequences for both the employer and the employee. I have often wondered what can be done about it. Based on my experience in the domain (from both sides of the fence!), I think that an exploration of the terrain from multiple perspectives is required to find a reasonable solution to this puzzle. This series of posts is an attempt in that direction. I also feel that while the ‘best solution’ is likely to be context specific, some general guidelines can be formulated.

In the first post of this series, we will begin by taking a closer look at the concept of ‘psychological contract’. We will also conceptualize salary negotiations in terms of the key stages in the ‘employee life cycle’ in which salary negotiations take place.

The psychological contract is a set of mutual expectations held by the employer and employee that might not be captured in the formal employment contract. While the psychological contract is ‘not on paper’, it is very much real and significant as it impacts how the employer-employee relationship evolves. It also influences the key decisions made by the employees like the decision on whether or not to put in discretionary effort and whether or not to leave the organization. Hence maintaining the psychological contract is critical for enabling positive employee relations. Please note that in the case of reasonably well-managed organizations (where a breach of the legal employment contract is unlikely to happen), employee exits almost always happen because of the perceived violations in the psychological contract. Repeated violations of the psychological contract can also prompt the employees to form unions to protect their interest.

Salary negotiation is not the only factor that influences the formation and evolution of the psychological contract. Psychological contract might have other dimensions like organization climate and culture, degree of empowerment, career growth, learning opportunities etc. However, salary negotiation is a very significant factor in terms of the degree of impact on the psychological contract.

For our exploration here, we will use a broad definition of the term 'salary' – to include not only the cash part of the compensation but also the benefits and perquisites. Hence our focus in this series of posts will be on those parts of the psychological contract that have something to do with expectations the employees have regarding the salary (including variable salary), benefits & perquisites and the expectations that the employer has on what the employees need to do to earn the same. They also include mutual expectations regarding how (how fast, by how much and based on what) these (salary, benefits & perquisites) will change during the employment relationship. Mutual expectations regarding if, when and how these can be (re)negotiated will also be included. We will assume that the 'employer' is represented by the managers of the employee (people in the reporting chain of the employee and also the HR managers).

Salary negotiations happen at multiple points during the tenure of an employee. However, for the purpose of our discussion here, we will conceptualize the same in terms of the salary negotiations at the following stages

1. Before the employee joins the company (when the ‘employee’ is still an outsider)

2. During the tenure of the employee (from the time the employee joins the organization till he/she submits the resignation)

3. After the employee submits the resignation (when the company is trying to keep the employee back by making a counter offer)

Of course, this is a simplified picture. For example, if stage 3 is successful, the game goes back to stage 2. After that, stage 2 & 3 can (and often do) get repeated later. Also, an employee can indicate his/her intention to quit without formally submitting the resignation.

We will explore each of the stages in detail in the subsequent posts in this series. We will also look at some interesting phenomena observed in this land like 'batch parity' and 'entitlement mentality'. In addition to this, we will look at some other dimensions of psychological contract not related to salary and their implications. For the time being, let us look at a few basic principles.

a. When it comes to forming expectations (psychological contract), what was left unsaid is often more important than what was said during the interactions between the employer and the employee. Psychological contract is unwritten, broad and implicit as compared to the employment contract which is written down, specific and explicit. Hence there is much more room for misunderstanding and misinterpretation.

b. Employees often carry assumptions from their previous employment experiences. Hence they might assume (without any input on the part of the new employer) that something will exist or will not exist in the new organization. Similarly employers (based on the behaviors of existing employees) might assume (without any input on the part of the employee) that the new employees will do or will not do something (See ‘Appropriate metaphors for organizational commitment’ and ‘Passion for work and anasakti’ for more).

c. Keeping in mind (a) and (b) above, it makes a lot of sense on the part of both the employee and the employer to surface and validate as many of the possible expectations and assumptions as possible (See ‘On what good looks like’ for details). However, this might conflict with the need to strike a deal quickly (e.g. to get the employee to accept the offer or to get the employer to make a job offer). It has to be noted that any shortcuts employed here can lead to long term pain even if they provide some short term gain.

d. The self image of the employee (and the self image of the manager) can have significant impact on the creation and evolution of the psychological contract. Interactions with the colleagues and team members also impact the psychological contract.  
e. When it comes to psychological contract, ‘perception is reality’. Breach of psychological contract may occur if employees perceive that the company (or any of its agents like the managers), have failed to deliver on what they perceive was promised. It can also happen when the employer (manager) perceives that the employee hasn’t kept his/her end of the bargain. Since psychological contract was ‘not on paper’, often the parties don’t initiate a discussion immediately to check whether the perceived breach of the contract really took place. Usually the issue remains ‘underground’ for quite a while and by the time it surfaces it would have gained a lot of negative momentum.

f. Once the breach of the psychological contract occurs, it is often very difficult to repair. Hence prevention is much better than cure in this case!
g. On the positive side, psychological contract provides an excellent opportunity for the organization to engage with (and retain) the employees on multiple dimensions - transactional and relational. It can create a deep alignment between the employee and the employer and provide a sense of meaning a purpose to the employees. Hence it makes sense (for both the employers and the employees) to do whatever they can to actively shape and manage the psychological contract!


In the next post in the series, we will turn the spotlight on the interaction between the employer and the employee before the employee joins the company.

Please let me know if you have any comments/suggestions at this stage!