Resizing The Organization 11 pps

parties results because the exchange is defined by economic terms, a close-ended time frame has been established, and the scope of the obligations is very narrow. In contrast, the relational component emphasizes a socioemotive interaction between the parties. Relational elements revolve around trust, respect, and commit- ment developing over time. A relational exchange exists when both parties expect that this relationship will continue on into the fu- ture; in other words, it is open-ended, dynamic, and pervasive (Rousseau, 1995). Table 5.1 summarizes the types of promises that make up the relational and transactional components of the psychological contract. The conceptualization and measurement of the psychological contract has been the subject of recent debate (Rousseau & Tijori- wala, 1998). Most agree that it is multidimensional, yet its components are discussed in a variety of ways. Some recent research has gone beyond the transactional and relational distinction and identified as many as seven separate contract dimensions (Rousseau, 1998; Robinson, 1996). Turnley and Feldman (1998, 2000) have de- veloped additional items that more fully address the extent to which employees feel they have a good employment relationship. These authors also use scales that capture a full range of potential responses to questions regarding psychological contract fulfillment. RESIZING AND THE PSYCHOLOGICAL CONTRACT 81 Table 5.1. Examples of the Relational and Transactional Components of the Psychological Contract. Relational Transactional (Intrinsic Outcomes) (Extrinsic Outcomes) Opportunities for promotion and advancement Continuing professional training Meaningful and challenging work A job that provides autonomy and control Participation in decision making Freedom to be creative Career guidance and mentoring Competitive salary Pay for performance Benefits (for example, health care, retirement, vacation) Stock options Flexible work schedule Safe work environment TEAMFLY Team-Fly ® 82 RESIZING THE ORGANIZATION In other words, instead of just asking whether a contract obligation was fulfilled, Turnley and Feldman assert that employees should be asked the extent to which it was fulfilled and given the oppor- tunity to report both underfulfillment and overfulfillment. The Changing Nature of the Psychological Contract The employee-employer relationship in the old economy was char- acterized by long-term commitments where growth and compensation came from expanding domestic markets (Kochan, 2001). This psychological contract promoted lifetime employment and loyalty between employee and employer. The new economy is heav- ily influenced by global economies and demanding international competition. This globalization has rendered regional labor ex- pendable and interchangeable. While employees in the past could rely on their employer to provide stable wages, we now have a dra- matically new economy where job security, task assignment, and organizational stability are uncertain (Kochan, 2001). The new psychological contract emphasizes the need for a short-term orienta- tion in the employment relationship (Rousseau, 1995). Modern organizations are resizing themselves in a variety of ways. Mergers, acquisitions, restructurings, outsourcings, and layoffs all play a prominent role in the current employment land- scape. In fact, research has shown that mergers and acquisitions, as well as layoffs, have reached record levels during recent years. Global merger and acquisition activity reached a record $3.5 tril- lion in the year 2000, an increase of almost 700 percent over the $514 billion of reported merger activity in 1995 (“M&A in 2000,” 2001). With regard to layoffs, in the first quarter of 2001 alone, there were 1,664 mass layoff actions resulting in a loss of 305,227 jobs. This is the highest number of layoff events and job loss in any quarter since the government started collecting the data in 1995 (U.S. Bureau of Labor Statistics, 2001). In addition, over 50 percent of employers believe these reductions in force are permanent, and thus the affected workers have little or no probability of being re- called. The consulting firm Challenger, Gray and Christmas reported that during April 2001, organizations announced 165,564 new job cuts, which is the fifth consecutive month with cuts ex- ceeding 100,000 (“Announced Job Cuts,” 2001). During the early 1990s, many experts believed that mass layoffs were a temporary event and eventually employment stability would return to normal. However, each year has seen a constant flow of new layoff an- nouncements. These 2001 figures follow record layoffs in 1999 and 2000, in which all sectors of the economy were represented (manufacturing, retail, service, and now the dot-com companies). The biggest impact that these resizing strategies have on the changing psychological contract is that they undermine perceptions of long-term job security. Because job security does not ap- pear to be a core tenet of the new employment relationship, employees now are focusing more attention on other inducements, such as autonomy, continuous training, and added responsibilities ( Jaffe & Scott, 1998). In general, today’s employees want to be em- powered and expect to retain their marketability in case their current employment relationship is severed. Organizational Resizing and Psychological Contract Breach Morrison and Robinson (1997) define psychological contract breach as the cognition that one’s organization has failed to fulfill one or more obligations comprising the psychological contract. This type of breach can cause the employee to have intense attitudinal and behavioral reactions toward the employer (Rousseau & McLean Parks, 1993; Robinson et al., 1994). When breaches or violations occur within an employee’s psychological contract, a variety of unfulfilled promises can deprive the employee of desired outcomes and benefits (Robinson & Morrison, 1995; Robinson & Rousseau, 1994). From an equity theory perspective (Adams, 1965), individuals try to find an equitable balance between what they receive from the organization and their own contributions. When employees perceive that their employer has failed to fulfill promised inducements, they may withhold their own designated contributions by reducing their performance or refusing to engage in expected organizational citizenship behaviors. In one study, Robinson and Rousseau (1994) found that approximately 55 percent of employees believed their psychological contract had been violated by their RESIZING AND THE PSYCHOLOGICAL CONTRACT 83 84 RESIZING THE ORGANIZATION organization during the past two years. These researchers observed that employee trust and satisfaction were inversely related to violations of the psychological contract. In addition, they found that psychological contract violations were positively related to employee turnover. Finally, their results revealed that careerism moderated the relationship between contract violations and trust, satisfaction, and intentions to remain with the employer. Individ- uals high on careerism “perceived their current employer as an in- strumental stepping-stone up the interorganizational ladder” (p. 249). In other words, the more careerist the employee was, the stronger the relationship was between perceived contract violations and lack of trust in the organization. Robinson (1996) also investigated the relationships between specific types of contract breaches and employee reactions, attitudes, and behaviors. Robinson examined seven types of employer obligations and promises drawn from Rousseau’s measure of psychological contracts (1990). In her research, Rousseau interviewed human resource managers from thirteen engineering, accounting, and manufacturing companies and identified the following seven obligations that are most commonly promised by recruiters and organizations to applicants: (1) promotion and advancement, (2) high pay, (3) pay based on current level of performance, (d) training, (5) long-term job security, (6) career development, and (7) sufficient power and responsibility. Overall, Robinson (1996) found moderate relationships between specific contract breaches and trust, civic virtue, performance, and intentions to remain with the organization. For instance, all of the seven obligations were moderately related to an employee’s intention to remain with the organization. Pay based on performance, training, career development, and sufficient responsibility were associated with trust. High pay, training, and career development were related to organizational citizenship behaviors (civic virtue). Promotion and responsibility were associated with actual turnover, and career development was related to job performance. In the same study, Robinson (1996) found that prior trust in the organization at the time of hiring moderated the association between psychological contract breach and trust eighteen months after employees were hired. Individuals with low prior trust in the organization exhibited lower feelings of trust after a contract breach than did those individuals who had high initial trust in their relationship with their employer. Robinson contended that these findings were consistent with the research on attitude function and cognitive consistency (Eagly & Chaiken, 1993). She argued that individuals with high initial trust are likely to assimilate aspects of an unfulfilled psychological contract into their initial attitude of trust in their employer and thus see a contractual infraction in a positive way. Individuals who have a low level of initial trust are more likely to interpret the unfulfilled promises in an unfavorable manner, thereby confirming their initial attitude regarding the organization. The measure of trust that Robinson used in this study in- cluded items such as, “In general, I believe my employer’s motives and intentions are good,” “My employer is open and upfront with me,” and “I believe my employer has high integrity.” These items address a type of trust that McAllister (1995) labels cognition- based trust. Cognition-based trust is grounded in an individual’s belief about peer reliability and dependability. It differs from af- fective trust in that it is not contingent on an individual having a strong emotional attachment with the other party. The establish- ment of cognition-based trust between employees and organizational leaders will play an important role in the success of resizing strategies, because it will facilitate communication efforts between the two parties. Employee Responses to Psychological Contract Breach The first aspect that is likely to have an impact on employees’ reactions to psychological contract breach is the level of importance they place on the outcomes that have been breached. The ex- pectancy theory of motivation proposes that employees will be more motivated to perform if they value the outcomes they receive when they perform at a high level. This is the valence component of ex- pectancy theory (Vroom, 1964). Building on this theory, it seems reasonable to expect that an employee will be motivated to make more extreme responses to contract breach when the outcomes that have been violated are extremely important to that individual. Lester and Kickul (2001) examined which psychological contract obligations employees perceived as being most important and how well employers were fulfilling these obligations. Their findings revealed that employees rated obligations that were more RESIZING AND THE PSYCHOLOGICAL CONTRACT 85 86 RESIZING THE ORGANIZATION relational in nature (such as open and honest communication, meaningful work, and trust and respect) as most important. Fur- thermore, they found that many of these more important obligations were the same ones that organizations were finding more difficult to fulfill. As expected, discrepancies between the importance placed on an obligation (by the employee) and the perceived fulfillment of this obligation were significantly related to employees’ attitudinal responses. Specifically, larger discrepancies were associated with lower levels of job satisfaction and greater intentions to leave the organization. Employee Attributions for Psychological Contract Breach The types of attributions that employees make when they perceive a psychological contract breach has occurred also may influence their responses to breach. Previous theorists have proposed dif- ferent categories of attributions that individuals may report in the event of a breach. Rousseau (1995) and Morrison and Robinson (1997) suggest three main reasons that psychological contracts go unfulfilled. First, reneging occurs when organizations intentionally and willfully fail to keep their commitments to employees. For example, organizations sometimes engage in layoffs even when they are making sizable profits and members of the top management team are receiving large bonuses. In such cases, individuals are likely to perceive that the organization could have lived up to its prior commitments but chose not to do so. Second, disruption occurs when the organization is unable to live up to its prior commitments due to changing economic or en- vironmental factors. Often, this type of psychological contract breach occurs when the organization is suffering financial hard- ship or unexpected changes force it to alter existing practices. For example, when an organization’s profit margins are shrinking, employees may expect that the organization will implement staff reductions, merge departments, or close units. Third, incongruence occurs when the employee recognizes that there has been an honest misunderstanding regarding the terms or conditions of the employment relationship. In such instances, while employees do not receive what they expected, they recognize the organization perceives that it is living up to its end of the bargain. For example, employees may misunderstand the nature of the organization’s profit-sharing plan. Thus, when the organization fails to make its profit target and bonuses are lower than expected, employees may perceive that they have not received all the compensation they expected. However, they may recognize that the organization did not deliberately mislead them and may attribute the breach to miscommunication or their own lack of dili- gence in finding out exactly what was being offered (Lester, Turn- ley, Bloodgood, & Bolino, 2002). Since the psychological contract is based on an exchange relationship, we believe that it is important to include a fourth category of attributional response. We label this category of response nullification. Remember that employees offer their contributions to the organization in exchange for the inducements they expect to receive. Thus, there may be cases when the psychological contract has been nullified due to the employee’s failure to live up to his or her end of the bargain. Although the self-serving bias makes it unlikely that employees will make this particular attribution very often, it is important to recognize this possibility. When employees perceive that contract breach occurred because their organization intentionally reneged on its promises, we hypothesize that they will respond more negatively. Conversely, if employees indicate that the cause of psychological contract breach was beyond the organization’s direct control, we predict them to be more forgiving of the perceived violation. In an initial study to ex- amine attributions for psychological contract breach, researchers found that employees were more likely to attribute breach to reneging while their supervisors were more inclined to attribute breach to factors outside the organization’s control (Lester et al., 2002). Consequently, it is critical that organizations make necessary and relevant information available to employees so that they understand when psychological contract breach has resulted from environ- mental conditions beyond the organization’s control. Psychological Contract Breach and Employee Perceptions of Justice Other circumstances that may influence responses to breach include an employee’s perception of the underlying reasons and RESIZING AND THE PSYCHOLOGICAL CONTRACT 87 88 RESIZING THE ORGANIZATION considerations taken by the organization when a breach has occurred. Two such factors are procedural justice and interactional justice (Morrison & Robinson, 1997). Procedural justice refers to the fairness of the decision-making processes underlying the allocation of outcomes rather than the outcomes themselves (Thibaut & Walker, 1975). Leventhal, Karuza, and Fry (1980) suggested there are at least six procedural rules that individuals use in judging fairness: 1. Procedures that are consistent across individuals and over time (consistency) 2. Decisions that are grounded on good information and in- formed opinion (accuracy) 3. Opportunities in place that can be used to modify or reverse decisions based on inaccurate information (correctability) 4. Allocation processes that represent the concerns of all important subgroups and individuals (representativeness) 5. Allocation processes that are compatible with prevailing moral and ethical standards (ethicality) 6. No personal self-interest and blind allegiance that may narrow preconceptions (bias suppression) Any violation by a decision maker or an organization can lead to perceptions of procedural injustice. Interactional justice deals with how an individual is treated during the enactment of procedures (Bies & Moag, 1986). This form of justice includes whether individuals believe that the reasons underlying a resource allocation decision were clearly and adequately explained to them (Bies, Shapiro, & Cummings, 1988) and whether those individuals responsible for implementing a decision treated them with both respect and dignity (Bies & Moag, 1986; Shapiro, Buttner, & Barry, 1995). An explanation of why interpersonal treatment influences justice judgments can be found in group value theory (Lind & Tyler, 1988). According to this theory, individuals value their relationships with work groups and organizations. When there is a perception of fair treatment, employees may feel that they have a respected and dignified position within the group or organization, thereby heightening their feelings of self-worth. These feelings may be seen in their working relationships with others where they take pride in being a group or organizational member (Lind & Tyler, 1988; Tyler, 1994; Tyler, Degoey, & Smith, 1996). Organizations are most likely to minimize negative connota- tions associated with resizing efforts when employees perceive high levels of procedural and interactional justice within their organizations. When this occurs, individuals are more likely to accept the explanations and justifications behind the resizing efforts as legit- imate and thereby reason that the organization is reacting in a fair and appropriate manner given the surrounding conditions and circumstances that may be beyond the organization’s control (such as a poor economy). However, the absence of adequate justifications or explanations, combined with the loss of an outcome, may imply that an employee is not worthy of respect and is seen as an insignificant organizational member. The employee, in turn, may have strong feelings of anger and blame the organization for being causally responsible for the downsizing activity. Folger (1993) noted that “exonerating behaviors (ethically re- sponsive and socially desirable) that have no causal implications for outcomes (e.g., advance notice, apologies, timely information, courteousness, considerateness, honesty, and the like; cf., Folger & Bies, 1989) can keep the decision maker from being a target of resentment that increases as the perceived severity of the outcome loss increases” (p. 177). Thus, employees will react more negatively to unfair outcomes when an organization fails to use equitable procedures and conducts itself in an inappropriate manner, that is, when procedural and interactional justice violations have occurred. Individual Differences and Responses to Psychological Contract Breach An interesting avenue for additional research includes incorpo- rating individual difference variables as moderators of the relationships between psychological contract breach and negative employee attitudes and behaviors. One such individual difference variable is equity sensitivity (Huseman, Hatfield, & Miles, 1985, 1987; King, Miles, & Day, 1993; Miles, Hatfield, & Huseman, 1989). The equity sensitivity concept goes beyond equity theory by ex- ploring individual differences in how one perceives what is and is RESIZING AND THE PSYCHOLOGICAL CONTRACT 89 90 RESIZING THE ORGANIZATION not fair. It also examines how these perceptions can have an influence on an individual’s reactions to injustices within the work- place. Huseman and his colleagues (1985, 1987) contend that there are three types of individuals who have varying degrees of sensitivity to equity: benevolents, equity sensitives, and entitleds. Miles, Hatfield, and Huseman (1989) have asserted that the concern for the relationship between the employer and employee and the desire for outcomes differentiates one type of individual from another. At one end of the spectrum are the benevolents, who place their emphasis on the relationship with their employer. At the op- posite end of the spectrum are the entitleds, who believe that personal outcomes are of primary importance in dealing with their organizations. In the middle of both benevolents and entitleds are the equity sensitives, who place the same emphasis on having a good employment relationship and achieving desired outcomes. For the three forms of equity sensitivity, it may be interesting to ex- plore how individuals differ in their reactions when their psychological contracts have been breached and both procedural and interactional injustice are present. Preliminary research suggests that the entitled individual re- sponds more negatively to psychological contract breaches that affect tangible, extrinsic outcomes such as pay and benefits (the transactional component of the contract). Conversely, the benevolent individual tends to react more negatively when promises of autonomy and control, such as relational outcomes associated with a long-term employment relationship, are broken (Kickul & Lester, 2001). Implications for Managing the Psychological Contract When management introduces resizing initiatives, employees fre- quently perceive these transitional periods as highly stressful times. Organizational change often brings with it a sense of apprehen- sion, concern, and uncertainty. This feeling of uncertainty is par- ticularly stressful when employees perceive they have little control over the outcomes that will result from proposed changes or the process that leads to those changes. The rumors that emerge prior to the actual implementation of changes often are far worse than reality, because in the absence of information, employees’ percep- . employees believed their psychological contract had been violated by their RESIZING AND THE PSYCHOLOGICAL CONTRACT 83 84 RESIZING THE ORGANIZATION organization during the past two years. These researchers. up the interorganizational ladder” (p. 249). In other words, the more careerist the employee was, the stronger the relationship was between perceived contract violations and lack of trust in the. receive what they expected, they recognize the organization perceives that it is living up to its end of the bargain. For example, employees may misunderstand the nature of the organization s