Rethinking Psychological Contracts in the Context of Organizational Change

Abstract

The employee–employer relationship is said to be affected by extensive workplace transitions, and yet little is known about how employees make sense of these changes while deciding on their responses to them. Our study investigated two factors, social comparison and the nature of the exchanges, as moderators of the effects of psychological contract (i.e., employee beliefs regarding the terms of exchange between the employee and the organization) and psychological contract fulfillment (i.e., employee beliefs regarding the extent to which the employer is fulfilling these terms of exchange) on employee performance. Analysis of data before and after organizational change showed that unfavorable social comparison is associated with lower employee performance for transactional, relational, and balanced psychological contracts. Employees’ perception of the social nature of exchange was associated with lower performance in response to relational and balanced psychological contract fulfillments.

Keywords

organizational change psychological contract psychological contract fulfillment social exchange social comparison

A common refrain about current workplace context is that change and uncertainty are fundamentally redefining the relationship between the employee and the employing organization (Ghoshal & Bartlett, 2000; Kickul, Lester, & Finkl, 2002; Rousseau, 1996; Shore et al., 2004). Theory and research in this field have progressed along two somewhat distinct streams.

First, organizational change literature has identified individual-level characteristics such as change readiness (Walinga, 2008), openness to change (Wanberg & Banas, 2000), and resistance to change (Oreg, 2003) that predict responses to organizational change. A seminal review by Oreg, Vakola, and Armenakis (2011) summarizes theory and research related to antecedents of change recipients’ affective, cognitive, and behavioral reactions to organizational change that in turn predict their work-related and personal outcomes. Nevertheless, the role of exchange relationships in shaping employee responses to organizational change has received minimal attention in organizational change literature. This gap in organizational change research means that we do not know whether employees’ perception of give and take with the employer helps change recipients’ understanding and, therefore, the way they respond to an organizational change event.

Second, organizational behavior researchers mostly treat organizational change as an event that results in the breakdown of the exchange relationship between employee and employer (Ghoshal & Bartlett, 2000; Kickul et al., 2002). Psychological contract (PC) has been referred to as the schema of employment relationship and is said to serve an interpretive and inferential function to help employees recalibrate their own contributions in response to perceived shift in employer contributions. Research in this area gives credence to the premise that an employee’s belief regarding the extent to which the organization is meeting (or not meeting) its obligations shapes that employee’s work-related attitudes and behaviors (Conway & Coyle-Shapiro, 2011; Dabos & Rousseau, 2004; Hui, Lee, & Rousseau, 2004). However, the literature lacks understanding and empirical evidence of PC and its fulfillment in the organizational change context.

Although emerging research provides some evidence about the evolving nature of the terms of exchange (Freese, Schalk, & Croon, 2011), there are many questions unanswered; specifically, we do not know what aspect of the exchange is attended to by the employee in the event that the organization initiates a change program, what the employer is obligated to provide, or what the employer is in fact providing. Moreover, the “how” question remains. In other words, the factors that shape employee responses are not well understood or articulated beyond the contention that they are subjective in nature. This is a critical gap in the literature as the success of organizational change hinges on how well the exchange relationship can be revised while keeping the organization’s most valued stakeholders—its employees—productive (Rousseau, 1996; Shore et al., 2004). The primary purpose of this study is to address this lacuna in research by investigating key mechanisms salient in the organizational change context that influence employee responses to revisions in the exchange relationship with the organization.

We use two distinct yet related constructs that are established frameworks of exchange relationships between employee and employer: PC, defined as employee beliefs regarding the terms and conditions of the exchange agreement with the organization, and PC fulfillment (PCF), that is, employee perceptions of the extent to which the organization provides its part of the agreement as part of the exchange relationship (Conway & Coyle-Shapiro, 2011; Dabos & Rousseau, 2004; Rousseau, 1995). The universality of these constructs as a framework for predicting employee workplace attitudes and behaviors is evidenced by the large empirical base of research (e.g., Conway & Coyle-Shapiro, 2011; Hui et al., 2004). Inclusion of both PC and PCF in this research allows us to address the following question: Are employee responses shaped by alterations in what the organization owes the employee (PC) or what the organization actually provides to the employee as promised (PCF) against the backdrop of organizational change.

As the terms psychological contract and psychological contract fulfillment suggest, these constructs focus on psychological aspects of the exchange relationship, that is, perceptions of reality rather than a so-called objective reality shape how employees evaluate the deal, as well as how they react when they believe the deal is being honored or not (McLean Parks, Kidder, & Gallagher, 1998; Shore et al., 2004). Nearly all judgments and evaluations are made on some sort of relative basis (Greenberg, Ashton-James, & Ashkanasy, 2007; Masters & Keil, 1987; Wood, 1996). This is especially true of exchange relationships as these involve subjective cost–benefit analysis to assess what they really get out of the relationship (Homans, 1958). Furthermore, as Festinger (1957) noted, when objective information is not readily available, individuals resort to subjective evaluation based on cues obtained from the environment. Organizational change is typically characterized by uncertainty and ambiguity and, thus, accurate and timely information, although highly sought, may not be readily available. We contend that two aspects of the exchange will be salient in such contexts: the level of exchange and the mode of exchanges (Homans, 1974). By level of exchanges, we refer to the ratio of the benefits one receives (i.e., outcomes) relative to the contributions (i.e., inputs) one has made as compared to the corresponding ratio of a referent other (Greenberg et al., 2007). The importance of comparative processes in understanding exchange relationships is highlighted by research in a variety of areas. Experimental research in social psychology has found that social comparisons rather than general expectations are stronger predictors of employee attitudes and behaviors (Austin, McGinn, & Susmilch, 1980). Research on job offers has demonstrated that when considering independent job offers, individuals are more likely to accept a lower paying job that pays other employees the same amount than a higher paying job that pays other employees even more (Bazerman, Schroth, Shah, Diekmann, & Tenbrunsel, 1994). Despite evidence of social comparison as an important mechanism shaping assessment of the exchange relationship, research investigating comparison processes in the event of organizational change has been mostly neglected. We aim to address this gap in research by investigating how employees’ social comparison related to the level of exchange influence employee responses to revisions to the terms of the exchange (PC) or the fulfillment of these terms of exchange (PCF).

We also examine the mode of exchange, that is, the nature of exchanges with the organization as the second mechanism in shaping employee responses to revisions to PC and PCF wrought by an organizational change event. Employees are said to regard employing organizations as actors with whom they have entered into a relationship, and for a state of equity to be perceived in the exchange relationship, they must receive some normatively appropriate rate of return in the form of a social exchange (Adams, 1965). Social exchanges are modes of exchange that are characterized by socioemotional resources, such as interpersonal support and attachment (Shore et al., 2004), that are said to buffer against any negative changes to the employment relationship (e.g., Dulac, Coyle-Shapiro, Henderson, & Wayne, 2008; Morrison & Robinson, 1997). However, a counterargument suggests that employees drawing socioemotional sustenance from their employment relationship may view their reciprocal exchanges to be continuous and steady irrespective of the context. However, these expectations can possibly be unrealistic during the organizational change process, resulting in disappointment and, therefore, negative reaction to the new contract terms as well as to the revisions in what the organization can provide (Bal, Chiaburu, & Jansen, 2010; Rousseau, 1995). In light of these competing perspectives, our investigation of the role of social exchanges as the key modes of exchange in the context of organizational change takes on added significance as it is of theoretical as well as practical interest to understand whether social exchange would buffer or intensify employee responses to alterations in PC as well as PCF.

PC and PCF Framework

PC, defined as “individual beliefs, shaped by the organization, regarding terms of an exchange agreement between individuals and their organization” (Rousseau, 1995, p. 9), is not a monolithic construct. Certain terms of exchange tend to cluster together, resulting in the emergence of PCs that are distinct from each other based on underlying dimensions such as the scope of the contract (narrow vs. broad) and time frame (short-term vs. long-term). A conceptual framework developed by Rousseau (1995, 2000) provides a classification of three types of PCs: transactional, relational, and balanced. Transactional contracts are characterized by well-specified benefits and contributions that are economic and short-term in nature. In contrast, relational contracts are defined in terms of long-term arrangements that are founded on mutual trust and loyalty. Balanced contracts combine features of both transactional and relational contracts such that the terms of exchange consist of in-role behavior by the employee that is well specified yet open-ended to enable the organization to achieve competitive advantage. Although the three forms of contract have mostly been used in the study of PC construct (e.g., Dabos & Rousseau, 2004; Hui et al., 2004), we also examine whether these three forms of contract are applicable as a framework of PCF. This allows us to investigate whether revisions to what the organization provides to the employee has differential outcomes depending on whether the revisions occur to the transactional, relational, or balanced aspects of the contract fulfillment.

PC and PCF in the Context of Organizational Change

The study of PC as a mental model or schema of the exchange relationship is relevant in the context of organizational change (Rousseau, 2001). The term schema refers to the systematic organization of elements conceptually related to a topic. For example, PC schema may include employee understanding of what the organization is obligated to provide (e.g., job security) and what the organization expects in return (e.g., loyalty). These mental models serve an important function by providing a sense of order, as employees rely on their cognitive models rather than seeking outside information to plan their behavior. The stability of schema implies that employees, unlike new recruits, are not motivated to scan for information and that, when confronted with a novel or ambiguous piece of information (e.g., change in leadership), there is tendency to use preexisting schema to interpret that information. However, change events that cannot be understood by the existing mental models serve as triggers that signal the employee that it is time to seek information (Louis & Sutton, 1991; Rousseau, 1995). These triggers are characteristics of the event such that it is perceived to be out of the ordinary or discrepant to the extent that it deviates from the norm (Chaudhry, Wayne, & Schalk, 2009). This leads to a process of social construction to understand first “how it affects me’ and then ‘how do I respond?”

It has been argued that an organizational change event is more likely to result in employee perceptions that the organization is reneging on some of its promises and/or providing less than what it used to provide prior to the change context (Ghoshal & Bartlett, 2000; Morrison & Robinson, 1997; Rousseau, 1995). However, an alternative scenario can be suggested: Consider the case of a tenured employee who is offered an unexpected promotion while the company undergoes restructuring. This offer can be viewed as a discrepancy between what is expected and what is offered as part of a change event and yet is likely to have a positive impact on one’s perceptions of what is provided by the organization as part of the PC.

We contend that employees may view revisions to their PC and PCF due to an organizational change event as positive or negative. However, how employees choose to respond to those revisions will be determined by other factors (Chaudhry et al., 2009; Weick, 1995). As Ho (2005) notes, even after an individual has made some assessment of his or her organization’s fulfillment of its obligations, he or she is still likely to look to social referents to seek additional information that helps the individual assess his or her own standing vis-à-vis others. Take the case of an employee who believes that the revised terms are better as compared to prechange contract terms, and yet, if he or she believes that these terms are inferior to a referent other, the employee may respond negatively.

Our hypothesized model incorporates both constructs, PC and PCF. Each has been regarded as a valid framework for understanding the employee–employer exchange relationship. Although these constructs share a common theoretical basis, social exchange theory, PC and PCF are distinct in the following two aspects. First, PC focuses on the obligation–benefit (i.e. what the organization owes that is beneficial to the employee) aspect of the relationship, whereas PCF focuses attention on the receipt–promise (i.e. what the organization provides relative to what was promised to the employee) aspect of the relationship (Ho, 2005; Turnley, Bolino, Lester, & Bloodgood, 2003). Second, PC and PCF are different and evolving together with the progress of the exchange relationship. For example, the benefit in the PC at Time 1 signals the employer’s intent to build the exchange relationship with employees. However, the realization of these promises (PCF) at Time 2 is conditional and depends on employees’ fulfillment of their obligations (Coyle-Shapiro, 2002). Similarly, the obligation of employees in the PC at Time 1 represents employees’ dedication to the organization. Nevertheless, their contribution composing the PCF at Time 2 (employee part) relies on the employers fulfilling their side of the exchange. The nature of the obligations from both employees’ and employers’ part is ongoing and evolving, with some temporary discharging of part of the obligations (Coyle-Shapiro, 2002).

As our study is the first of its kind that incorporates both constructs in a single study, we decided to explore the interaction effects of the two moderators, social comparison or social exchanges for both constructs, PC and PCF. Our assumption is that regardless of whether it is obligation–benefit or receipt–promise issue, social comparison will lead employees to compare what they get and what others get and thus moderate the effects of PC as well as PCF on employee outcomes. Likewise, employees in social exchange relationship with their employer will have expectations related to PC and PCF, and therefore, revisions to one or both will influence their responses.

We focus on employees’ in-role performance defined in terms of prescribed job-related behaviors recognized by the organization’s formal reward systems (Katz & Kahn, 1978). As compared to other employee responses, such as work-related attitudes, these behaviors are more proximal and have a more tangible impact on the workplace. Incorporating performance in the hypothesized model provides an assessment of the influence of social comparison and the nature of the exchange relationships on employee behaviors that are critical for organizational effectiveness—especially when undergoing a change event.

Role of Social Comparison

Emerging research in the PC literature underscores the importance of social comparison in shaping employee attitudes and behaviors (Ho, 2005). Their findings suggest that employee evaluation of the employment relationship is not an objective computation of how much individuals have received versus how much they were promised but, rather, a complex web of personal and social construction of reality (Morrison & Robinson, 1997; Rousseau, 1995). This process is confounded in a workplace that is undergoing transformation since such events are marked by lack of access to accurate and timely information. Therefore, employees not only seek subjective evaluation based on cues obtained from referent others, but to the extent that they identify a discrepancy (i.e., the extent to which one’s exchange relationship is perceived as inferior to that of a referent other), they reciprocate with actions meant to reduce the discrepancy (Festinger, 1957).

According to Wood (1996), social comparison is the process of thinking about information concerning one or more persons in relation to the self, wherein the thinking aspect refers to the process of social construction and relates to how individuals are influenced by the “actual, imagined, or implied presence of others” (Allport, 1967, p. 3). In the present context, this suggests that, first, a social comparison referent may or may not be an individual within an organization affected by the organizational change and, second, the information used for social comparison may be abstract in nature rather than any specific data that lend to objective comparison.

Experimental research in social cognitive psychology suggests that people make sense of events with themselves as the central focus (Markus, 1977). Thus, a change context leads employees to seek an answer to the question: “How does it affect me?” A context of change highlights terms of exchange that deviate from those that are deemed as valued and therefore part of one’s previous PC. Revision to PC, when viewed as unfavorable in relation to “actual or imagined” others, would prompt a response of redressing such revision by lowering one’s own contribution, such as in-role behaviors.

We expect a similar pattern in response to changes to PCF. Research on equity theory has shown that what is perceived as just is a function not only of one’s inducements and contributions but also of referent others’ ratio of inducements and contributions (Adams, 1965). For instance, Messe and Watts (1983) found that undergraduate students’ sense of inequity related to being paid less than what they believed they deserved was exacerbated when referent others were paid more. Therefore, we propose that an employee will respond with lowered performance when PCF is deemed unfavorable as compared to that of a referent other.

We further posit that these hypothesized effects will be stronger for transactional contracts than for relational or balanced type of contracts. As the term suggests, transactional personal contracts are calculative in nature, which means that employees with transactional contracts pay more attention to the quid pro quo aspects of the relationship and the extent to which these aspects are inferior to a referent other. Therefore, unfavorable social comparison will moderate the PC–performance relationship as well as PCF–performance relationship for transactional rather than relational or balanced contracts.

Hypothesis 1a: In the context of an organizational change event, social comparison moderates the relationship between PC at Time 2 and employee performance at Time 3 such that unfavorable social comparison is associated with lower performance. This interaction is stronger for transactional PC relative to relational and balanced PCs.

Hypothesis 1b: In the context of an organizational change event, social comparison moderates the relationship between PCF at Time 2 and employee performance at Time 3 such that unfavorable social comparison is associated with lower performance. This interaction is stronger for transactional PCF relative to relational and balanced PCFs.

Role of Social Exchange

Research evidence suggests social exchanges rather than economic exchanges are associated with positive outcomes, including higher commitment, lower intention to quit, and higher organizational citizenship behavior (Shore, Coyle-Shapiro, Chen, & Tetrick, 2009). For employees who view their terms of exchange as mostly socioemotional, there is an implicit but strong expectation that the reciprocity between themselves and their organization is continuous and steady. However, this very expectation that highlights the strength of socioemotional exchanges can be a source of inertia and thus, can be incompatible with the organizational change context (Bal et al., 2010).

Based on deprivation–satiation and entitlement formation perspectives, we argue that employees’ high level social exchange perception with the employer will undermine the impact of PC and contract fulfillment influences on performance. Deprivation–satiation perspective (Homans, 1974) suggests that individuals have an increased desire for things one feels deprived of, and a decreased desire or even boredom with things one has experienced. Thus, when employees develop social exchange relationship with their employer, this constitutes an existing social-emotional organizational context. Under this circumstance, employees’ terms of exchange with the organization as well as fulfillment of these terms by the organization become part of their expectations, and thus less likely to invoke feelings of indebtedness. We expect that this condition is more pronounced for employees with balanced and relational contracts rather than transactional as the former are more characteristic of socioemotional aspects, and thus more likely to be regarded as redundant.

We draw on another perspective, entitlement formation, described as employee beliefs that the organization needs to continue to provide certain valued arrangements to which the employee feels entitled (Naumann, Minsky, & Sturman, 2002) due to the long-term nature of social exchange relationships. Employees in social exchange relationships take for granted that the organization will continue to offer and provide resources irrespective of any action on the part of the employee. Compensation research has highlighted this as the “sticky wage” phenomenon, which suggests that employees expect to receive wages at the same levels or higher but never less than the current levels (Rousseau & Greller, 1994). During an organizational change process, employees will typically see their entitlements as more stable and more systematic than would a neutral observer (Heath, Knez, & Camerer, 1993). However, the very nature of change calls for a shift in such perceptions, and yet these employees may find it difficult to shift, or may feel reluctant to accept change. We further argue that since social exchange based entitlements derive from bounded rationality, it is more detrimental to the balanced and relational contracts as compared to transactional contracts. To support our premise, we draw on Morrison and Robinson’s (1997) work on different levels of vigilance related to employee–employer relationships among employees. According to the authors, relationships based on social exchanges are defined by trust and relational currencies of exchange, which are “noninstrumental” in nature, and therefore, associated with low level of vigilance. A change in context serves as an alarm bell to employees in a social exchange and triggers a process of paying close attention to all aspects of the exchange relationship, which so far had been neglected or taken for granted. The sense of entitlement present in this case, as well as the complacency that accompanies low vigilance, leads to a stronger negative reaction when faced with evaluation of one’s PC as well as PCF, and is reflected in lowered performance. On the other hand, a high level of vigilance is characteristic of those who do not share relational currencies of exchange such as trust and security, and is more appropriate for dealing with continuous organizational change and keeping sustainable performance. Therefore, a relatively low level of social exchange reflects a more realistic evaluation of an employee’s relationship with his or her employer and would be less detrimental in shaping employee assessment of changes to PC and PCF and, therefore, employee responses as well. Since relational exchanges are those deemed social in nature, we expect this association to be stronger for relational rather than transactional and balanced PC and PCF.

Hypothesis 2a: In the context of an organizational change event, social exchanges moderate the relationship between PC at Time 2 and employee performance at Time 3 such that higher level of social exchange are associated with lower performance. This interaction is weaker for transactional PC relative to relational and balanced PCs.

Hypothesis 2b: In the context of an organizational change event, social exchanges moderate the relationship between PCF at Time 2 and employee performance at Time 3 such that higher level of social exchange are associated with lower performance. This interaction is weaker for transactional PC relative to relational and balanced PCs.

Method

Participants and Procedure

Participants in this study were employed in an organization in the Midwest region of the United States that relies on grants and funding from public and private sources to serve the needs of an underprivileged population by providing activities such as after-school care. The programming activities included providing after-school programs for over 1,800 children in economically depressed areas of a large Midwestern city. The organization had learned in the previous months that a major annual grant that paid for most of its programming costs was no longer going to be available. The organization was aggressively seeking alternative methods to raise money, including fund-raising drives and seeking corporate sponsors, to name a few. Thus, the organizational change was in response to the organization having to undertake some major changes to its programming in terms of staffing, population served, and changes in locations (i.e., how some locations would be expanded whereas others closed, or how some locations would receive upgraded technology, whereas others would not. These changes were communicated to the employees in a company-wide meeting by the top management. Time 1 surveys were part of a larger project on PC and were administered to the employees a year before the organizational changes were implemented. Time 2 employee surveys were collected 2 months after the changes were announced and implemented. Manager surveys designed to assess ratings of employee performance were administered at Time 3, which was 2 months after the Time 2 employee survey administration. The Time 1 employee survey consisted of employee assessment of PC and PCF, and a measure of social exchange, whereas the Time 2 employee survey sought employee ratings of PC, PCF, and a measure of social comparison.

The Time 1 survey was completed by 180 employees of the organization, which employed approximately 300 employees in total (60% response rate). Six respondents did not provide any identifying information and, therefore, were excluded from the sample. At Time 2, a total of 231 employees filled out surveys (77% response rate). At both Time 1 and Time 2, 101 employees filled out surveys and received a manager’s rating of their performance. The mean age of the sample employees was 34 years. Average organizational tenure and average position tenure for the Time 2 sample were 6.2 years and 4.2 years, respectively. T tests to assess differences in the responses of employees who responded at both times and employees who responded at Time 1 only did not find any significant differences.

Among the 29 managers who provided information on employee performance, 7 gave ratings for one subordinate whereas the remaining provided ratings for two or more subordinates. Because supervisors rated multiple subordinates, we examined independence of supervisor ratings for each rated employee performance. The ratio of between-group to total variance yielded intraclass coefficient(1) = .08, indicating that 8% of total variance in employee performance was due to group membership. These intraclass coefficient(1) values are below the cutoff criterion of 10% that calls for modeling rater or group membership effects (Bliese, 2000).

Measures

Unless otherwise noted, we used a 5-point Likert-type scale that ranged from 1, anchoring strongly disagree, to 5, anchoring strongly agree for all the measures.

PC

Items from Rousseau’s (2000) measure, the Psychological Contract Inventory (PCI), were used both in Time 1 and Time 2 surveys to assess the three types of PC. All items used a 5-point Likert-type scale response format ranging from 1 (not at all) to 5 (to a great extent). A description of these items is presented in Appendix A.

PCF

For each type of PCF, two composites were made using identical PCI items from the Time 1 and Time 2 surveys (Hui et al., 2004). The instructions for this measure asked the respondents at Time 1 as well as Time 2 to indicate “the extent to which the employer provides the following benefits to the employee.” Responses were measured on a 5-point scale ranging from 1 (not fulfilled at all) to 5 (fulfilled to a great extent). A complete list of these items is provided in Appendix A.

Social Exchange

We used an eight-item measure developed by Shore, Tetrick, Lynch, and Barksdale (2006) to assess employee ratings of the extent to which the employment relationship is viewed as a social exchange. A sample item included in the survey is, “I try to look out for the best interest of the organization because I can rely on (Organization) to take care of me.”

Social Comparison

We modified G. Blau’s (1994) scale to capture employee ratings of comparison of one’s employment relationship with that of a referent other. One of the three items used—“I receive more from (Organization) than others doing the same type of work that I do” (reverse-scored)—led to a poor reliability score for the measure and, therefore, was dropped. A composite was created using the remaining two items: “I think coworkers at my grade level are receiving more from (Organization) than I am” and “Compared to employees in other organizations, I receive far less from (Organization).” In both of these items, the comparison is actually the “employee–organization” relationship comparison, thus the organization is the center referent (actor) in the measure.

Performance

Seven items originally developed by Williams and Anderson (1991) were used to assess the managers’ evaluations of employee performance. A sample item is “Performs tasks that are expected of him or her.”

Control Variables

Research has found a significant positive relationship between relational PCs and employee tenure, as well as the work status of employees (Coyle-Shapiro & Kessler, 2002). Also, tenure has been shown to moderate the PCF and objective performance relationship (Conway & Coyle-Shapiro, 2011). Therefore, employee tenure is indicated in terms of the number of years the employee has worked in the organization, and employee work status, coded as full-time work status (1) or part-time work status (2), included as control variable. Exchange ideology reflects an individual’s sensitivity to the rules of exchange, specifically, to reciprocity (Eisenberger, Huntington, Hutchison, & Sowa, 1986). An employee with strong exchange ideology will be predisposed to increase his or her effort in response to receiving more than the previous levels of inducements. To eliminate this alternative explanation, we decided to partial out effects of employee exchange ideology from the hypothesized relationships. A four-item measure (Eisenberger et al., 1986) assessed at Time 1 was included as a control variable. A sample item is “If someone does something for me, I feel required to do something for them.”

Results

Table 1 presents the means, standard deviations, and correlations among all the variables in the study. Cronbach’s alpha coefficients, listed along the diagonal in this table, show acceptable levels (.70 and above) for all the composites except relational PCF at Time 1 (.67; Nunally, 1978). However, it was decided to retain this measure as it can be said to have test–retest reliability, since the Time 2 measure uses identical items as the Time 1 measure, which has Cronbach’s alpha reliability of .73.

Table 1.

Descriptive Statistics, Zero-Order Correlations, and Reliabilities for Study Variables.

Variable	M	SD	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18
1. Full-time status	1.30	0.47	__
2. Organizational tenure (years)	6.19	5.71	−.30**	__
3. Exchange ideology (Time 1)	3.54	0.86	.10	.03	(.85)
4. Transactional PC (Time 1)	2.17	1.08	.11	−.08	−.03	(.70)
5. Relational PC (Time 1)	3.40	1.06	−.06	.08	−.07	.12	(.87)
6. Balanced PC (Time 1)	2.90	1.03	−.18	−.06	.04	.02	.47**	(.85)
7. Transactional PCF (Time 1)	2.69	0.92	.11	−.03	.04	.40**	.41**	.21*	(.79)
8. Relational PCF (Time 1)	3.35	0.80	−.28**	.19	.15	−.20	.36**	.33**	.04	(.67)
9. Balanced PCF (Time 1)	3.06	0.73	−.16	.04	−.07	.05	.42**	.65**	.39**	.34**	(.81)
10. Transactional PC (Time 2)	2.64	1.10	.11	−.12	−.19	.29**	.14	.05	.22*	.02	.07	(.72)
11. Relational PC (Time 2)	3.40	0.98	−.07	−.05	.04	.02	.45**	.28**	.20*	.35**	.29**	.32**	(.85)
12. Balanced PC (Time 2)	2.86	1.05	−.19	−.02	−.12	.06	.17	.46**	.21*	.10	.47**	.26**	.48**	(.84)
13. Transactional PCF (Time 2)	2.77	1.04	.13	−.14	−.04	.27**	.20	.02	.23*	−.04	.07	.41**	.18	.11	(.83)
14. Relational PCF (Time 2)	3.62	0.96	−.51**	.18	−.08	−.15	.18	.25*	−.16	.40**	.18	−.11	.13	.19	.05	(.73)
15. Balanced PCF (Time 2)	3.11	0.93	−.12	.03	.08	.02	.26*	.34**	.20	.14	.41**	.15	.37**	.67**	.23*	.36**	(.88)
16. Employee performance (Time 3)	4.10	0.59	−.34**	.10	−.11	−.03	.17	.04	−.05	.08	.02	.05	.12	−.04	.16	.09	−.01	(.89)
17. Social comparison (Time 2)	2.72	0.98	.12	.06	−.07	.19	−.27**	−.20	−.08	−.23*	−.12	.00	−.37**	−.23*	.01	−.40**	−.37**	.04	(.71)
18. Social exchange (Time 1)	3.43	0.65	−.06	.14	.12	.06	.52**	.17	.14	.39**	.33**	.00	.28**	.05	.10	.18	.22*	.03	−.13	(.82)

Note. PC = psychological contract; PCF = psychological contract fulfillment.

p < .05. **p < .01.

To establish discriminant validity of the measure of social exchange from that of PCI items used to assess PC and PCF, we conducted exploratory factor analyses. The results in Appendixes A and B confirm that all the items had eigenvalues greater than 1 and loaded on the intended factors. We also conducted exploratory tests to ascertain the extent to which PC and PCF variables at Time 2 differed from those at Time 1. Paired t test results reported in Table 2 show that transactional PC at Time 2 was significantly different than at Time 1 (M = 0.42, SD = 1.25, t = −3.30, p < .01), whereas there were no significant differences for relational PC and balanced PC from Time 1 to Time 2. For PCF variables, only relational PCF underwent significant change from Time 1 to Time 2 (M = 0.26, SD = 0.97, t = −2.66, p < .001).

Table 2.

Moderated Regression Results Predicting Interaction Effects of Transactional/Relational/Balanced PC × Social Comparison on Employee Performance.

Independent variables	Employee performance (Time 3)
Social comparison	Step 1	Step 2	Step 3	Step 1	Step 2	Step 3	Step 1	Step 2	Step 3
Status (full-time or part-time; Time 1)	−.44**	−.47**	−.45**	−.42**	−.43**	−.37**	−.46**	−.47**	−.42**
Organizational tenure (Time 2)	.00	.00	.00	.00	.00	.00	.00	.00	.00
Exchange ideology (Time 1)	−.16	−.15	−.19	−.16	−.16	−.22	−.18	−.19*	−.23*
Transactional PC (Time 1)	−.01	−.03	−.02
Transactional PC (Time 2)		.08	.10
Relational PC (Time 1)				−.09	−.06	−.07
Relational PC (Time 2)					.11	.18*
Balanced PC (Time 1)							−.03	−.01	−.01
Balanced PC (Time 2)								.06	−.022
Social comparison (Time 2)		.02	.02		.05	−.18*		−.02	.09
Transactional PC (Time 2) * Social comparison (Time 2)			−.20*
Relational PC (Time 2) * Social comparison (T2)						−.27**
Balanced PC (Time 2) * Social comparison (Time 2)									−.20*
ΔR² for step	.17*	.01	.07*	.19**	.03	.17**	.17*	.01	.07*
Model F	3.54*	2.55*	3.3**	4.04**	3.07*	4.89***	3.55*	2.44*	3.18**
Model adjusted R²	.12	.11	.18	.14	.14	.27	.12	.11	.17

Note. PC = psychological contract; PCF = psychological contract fulfillment.

†

p < .1. *p < .05. **p < .01.

We examined interaction effects of social comparison (Hypothesis 1) and social exchanges (Hypothesis 2) on the relationships between PC (and PCF) and performance for each type of contract: transactional, relational, and balanced. Results presented in Table 2 show that the interaction term for transactional PC at Time 2 and social comparison were negative and statistically significant, and explained 7% of the variance (Β = −.20, p < .05). Similarly, the interaction effect of social comparison and relational PC on employee performance was negative and statistically significant, explaining 17% of the variance (Β = −.27, p < .01). Finally, results indicate that social comparison moderated the relationship between balanced PC at Time 2 and performance (ΒB = −.20, p < .05), explaining 7% of the variance. Contrary to our premise, the interaction effect of social comparison was strongest for relational PC and not transactional PC.

The nature of the interaction was investigated by plotting the relationship between each type of PC and employee performance at high and low levels of social comparison, defined as 1 standard deviation above and below the mean (Aiken & West, 1991). Support for the hypothesized interaction effect is evidenced in the steeper slope and significance of high unfavorable social comparison line in relation to low unfavorable social comparison line as illustrated for transactional, relational, and balanced PC in Figure 1, confirming support for Hypothesis 1a. Post hoc analyses of the simple slopes demonstrated that high social comparison line was significant for transactional PC (t = −2.06, p < .05), for relational PC (t = −2.18, p < .05), and balanced PC (t = −2.17, p < .05). Thus, Hypothesis 1a is partially supported. Low social comparison line was significant only for balanced PC (t = −2.08, p < .05). There were no significant interaction effects of social comparison on any of the three types of PCF and employee performance (transactional PCF: Β = −.12, p < .1; relational PCF: Β = −.02, ns; balanced PCF: Β = .02, ns), thus failing to provide support for Hypothesis 1b.

Figure 1.

Interaction effects of three types of PC × social comparison.

Results for our second set of hypotheses examining the role of social exchange revealed non-significant findings for the three types of PCs (transactional PC: Β = −.01, ns; relational PC: Β = −.03, ns; balanced PC: Β = −.04, ns), and thus Hypothesis 2a was not supported. The next sets of regressions for testing Hypothesis 2b, reported in Table 3, revealed that although the interaction term for transactional PCF at Time 2 and social exchange was not significant (Β = .03, ns), results for relational PCF show that social exchange moderated the relationship with employee performance (Β = −.34, p < .01), explaining 13% of the variance. Similarly, the interaction effect of social exchange and balanced PCF on employee performance was negative and statistically significant, explaining 14% of the variance (Β = −.39, p < .01).

Table 3.

Moderated Regression Results Predicting Interaction Effects of Relational/Balanced PC Fulfillment × Social Exchange on Employee Performance.

Independent variables	Employee performance (Time 3)
Social exchange	Step 1	Step 2	Step 3	Step 1	Step 2	Step 3
Status (full-time or part-time; Time1)	−.41**	−.46*	−.44*	−.42**	−.42**	−.41**
Organizational tenure (Time 2)	.00	.00	.00	−.01	.00	−.00
Exchange ideology (Time 1)	−.15	−.15	−.18	−.14	−.14	−.09
Relational PCF (Time 1)	−.01	.03	−.03
Relational PCF (Time 2)		.04	−.04
Balanced PCF (Time 1)				−.04	−.04	.01
Balanced PCF (Time 2)					.03	.05
Social exchange (Time 1)		.00	.09		.03	.06
Relational PCF (Time 2) * Social exchange (Time 1)			−.34**
Balanced PCF (Time 2) * Social exchange (Time 1)						−.39**
ΔR² for step	.15*	.00	.13**	.14*	.01	.14**
Model F	3.10*	2.01^†	3.78**	2.91*	1.9^†	3.77**
Model adjusted R²	.10	.08	.21	.09	.07	.21

Note. PC = psychological contract; PCF = psychological contract fulfillment.

†

p < .1. *p < .05. **p < .01.

Figure 2 shows similar patterns for the two interactions as hypothesized in our study; employees who rated their relationship as being characterized by high levels of social exchange lowered their performance in response to revised relational PCF, as well as revised balanced PCF when compared to those with low ratings of social exchange. Results from slope significance tests show that both high social exchange line (t = −2.41, p < .05) and low social exchange line (t = −2.08, p < .05) are significant for relational PCF. Similar significant results for high social exchange line (t = −3.53, p < .001) and low social exchange line (t = −3.48, p < .001) for balanced PCF establish partial support for Hypothesis 2b.

Figure 2.

Interaction effects of two types of PCF × social exchange.

Discussion

In this study, we set out to investigate how the context in which the employment relationship is embedded affects employee sensemaking regarding the exchange relationship. We examined two factors that would be salient during an organizational change event in determining the nature of the employment relationship: social comparison and social exchange. A test of the hypothesized model using a longitudinal design and multisource data lends confidence in the interpretation of the findings.

Theoretical Implications

The change context examined in the current study led to a positive change in employees’ transactional PC and relational PCF. Thus, it can be inferred that due to the restructuring of funding resources and organizational practices, the company specified more job-specific and short-term obligations such as “pay based on specific duties” in Time 2 (transactional PC), while providing more stable benefits to employees’ families (relational PCF). The other PC types (relational and balanced) and PCF types (transactional and balanced) were unaffected as seen from nonsignificant changes in the means from Time 1 and Time 2. These results are contrary to the extant theorization, which suggests that workplace transitions are responsible for breakdowns of the PC (Ghoshal & Bartlett, 2000). However, research related to other change contexts such as outsourcing (Kessler, Coyle-Shapiro, & Purcell, 1999) lend support to the notion that change context may have a positive impact, which has also been documented in research on downsizing context (Beaumont & Harris, 2002). Thus, a question of import here is whether employees react adversely in an organizational change context even when the relationship is unaffected or affected positively. Our research findings, for the most part, provide support for this premise.

Our study extends the understanding of PC in the context of organizational change by taking on a pluralistic approach. Prior theoretical as well as empirical work has investigated and found support for factors such as justice perceptions (Kickul et al., 2002) and perceived size of loss (Rousseau, 1995) as determinant of employee responses to perceptions of changes in the PC. Our findings add to this body of research by highlighting the inequity (Adams, 1965) associated with the ratio of inducements versus contributions and how the perception of loss is tied to a referent other’s ratio. The salience of social comparative processes is underscored by the results that irrespective of the type of contract, transactional, relational, or balanced, employees react negatively when they perceive unfavorable social comparison. A fruitful avenue of future research integrating justice research with our study is to investigate whether procedural justice climate may buffer the adverse impact of inequity in the context of organizational change.

Results for the next set of hypotheses show that in terms of the quality of employees’ exchange relationship with their employer, employees who have formed a kind of relational or balanced “entitlement” significantly reduced their performance contributions in the context of organizational change. As workplace transitions occur, employees question whether their contributions can be rewarded by the organization in the long run, as nonsocial exchanges may become more salient in the change context. This line of thinking is consistent with the nonsignificant moderating result of social exchange on transactional PCF and performance linkage, and is in line with Rousseau’s (1995) argument that employees with a relational basis of the employment relationship have a stronger negative reaction, as perhaps they feel betrayed or perceive that the change erodes trust in the organization in the context of change.

The view that PC serves as an employee’s schema of the exchange relationship and that, once formed, is said to be resistant to change is reiterated by our research. It raises the issue of how to unfreeze this schema so that employee can incorporate new information regarding what may constitute realistic expectations about the employment relationship, especially in the context of workplace transitions. According to Rousseau (1996), employees are open to new information only at certain times. Of relevance here is the phenomenon termed as discontinuous information processing, or the idea that information about an event is not processed in detail unless the event is viewed as a shift from the norm (Rousseau, 1996). Thus, a shift from the norm increases the likelihood that the extant PC schema will be invalidated. Future research is needed to examine conditions that would foster unfreezing of the PC schema so that employee expectations can be brought in line with the new workplace reality.

Our results show that unfavorable social comparison does not affect employee performance in response to revisions to any of the three types of PCF, whereas the interaction effect of social exchanges on employee performance held for revisions to PCF and not PC. The differential outcomes for revisions to PC and revisions to PCF spell good news in establishing distinctness between these two constructs. The results demonstrate that social comparison is more important for the PC and social exchange is more salient for the PCF. The results reveal to us what employees care about compared to others, and what they get compared to what they contribute in the PC. Since PC addresses the obligations and benefits between employer and employees, it is more concrete and substantial, and more easily influenced by social comparison of their employee–organization relationships with those of their colleagues. On the contrary, PCF focuses on receipt–promise issue, and as such employees pay heed mostly to what they feel entitled in the process of evaluating their relationship with employing organization. After dedicating their efforts and being vested in a long-term relationship, employees may focus on the emotional aspects captured by balanced and relational PCF, caring about whether they will be treated well or may eventually be hurt. Thus, the role of emotions that have been so far only theorized (Morrison & Robinson, 1997) need empirical investigation of emotion. For instance, anger, anxiety, and surprise may be some affective aspects in the assessment of PC and PCF during organizational change events and can shed light on how these may affect responses to the change.

Our findings also raise the question as to why social comparison impacts employee responses to the alterations in transactional, relational, and balanced PCs whereas social exchanges shape employee responses to revised relational and balanced PCF alone in organizational change processes. Extant research has indicated that what is delivered has a stronger impact on an employee’s evaluation of PC than what is promised (Coyle-Shapiro & Conway, 2005). One can speculate that the nonsignificant findings for social comparison can be attributed to lack of knowledge about what a referent other receives. In other words, when an organization undergoes significant changes, employees are able to draw conclusions about what an organization has promised to another by comparison but unable to assess what an organization is actually providing to the referent other. Furthermore, research using social exchange theory has mostly highlighted the benefits of social exchanges due to the inherent reciprocity that shapes obligations of exchange parties over the long run. Our research highlights how these exchanges could possibly become burdens or vague “entitlements” when organizations are undergoing change programs. Thus, further research is needed to understand boundary conditions of the presumed benefits of social exchanges.

Strengths and Limitations

Overall, our study has several strengths that lend confidence to the tests of the hypothesized relationships: longitudinal survey design using a matched sample of employee and manager data, incorporating organizational change context by assessing employee perceptions well before the change event (1 year prior) as well as 1 month after the change event, and incorporating theoretically identified control variables to help eliminate alternative explanations of the results.

However, certain limitations of the study must also to be considered, which suggest a need for caution in interpreting the results as well as in helping identify future directions for research. Our study design only included performance as the dependent variable. In future studies, more attitudinal and behavioral job outcomes could be included as dependent variables. For example, under dissatisfactory circumstances, will employees’ EVLN (exit, voice, loyalty, and neglect) change in response to change of PC and contract fulfillment (Chaudhry et al., 2009; Rousseau, 1995)?

Data for the current study were collected from employees of a not-for-profit organization. Although researchers have mostly focused on for-profit organizations, PC theory and some empirical research suggest that the contract framework is likely to be robust in a variety of work arrangements including contingent workers (McLean Parks et al., 1998). This premise was tested by comparing the factor structure derived from the current study data with that of other studies that collected data from for-profit organizations (e.g., Dabos & Rousseau, 2004; Hui et al., 2004). Our results show that the employment relationship in both for-profit and not-for-profit settings is similar in nature; however, additional tests are needed to confirm for generalizability of this assertion.

Although we examine two mechanisms—social comparison and nature of the exchanges—it is prudent to examine other theoretical frameworks that may serve as the basis for employee assessment of employment relationship in the changing times. Additionally, in the future, cross-level analyses would be beneficial in understanding the multiple agents’ roles in the sensemaking process of PC change. CEOs’ and top management teams’ leadership styles, revised human resource practices, and communication approaches might need to be adjusted to anticipate the cognitive responses of employees.

Practical Implications

As organizations scramble to meet the challenges of current economic reality, as well as to grab opportunities inherent in globalization and a dynamic work environment, it is of critical importance that organizations pay close attention to how organizational change is understood by their employees, a key source of sustained competitive advantage for the organization. As Rousseau (1996) notes, “Companies are in danger of losing the voluntariness that makes possible much of the business’s ability to compete” (p. 50). Our research findings suggest that contrary to popular belief, change context does not necessarily mean a negative PC (i.e., employee beliefs that the organization owes the employee) or even a negative PCF (i.e., employee beliefs that organization is providing less than previously). Rather, the sensemaking that may be triggered by the change context may be responsible for employee assessment of unfavorable social comparisons, which manifests as reduced contribution by the employee. Thus, how well organizations can anticipate and manage employee social construction will be of the utmost importance. More and more organizations are attempting to involve employees in change programs as a way to manage employee interpretations of change, and thus to preempt any negative fallout arising from the event (Rousseau, 1996; Rousseau & Tijoriwala, 1999). Thus, an organization considering restructuring, for example, may undertake an intervention such as an all-staff meeting to trigger sensemaking regarding the restructuring. Such an intervention would serve the purpose of allowing employees to unfreeze PC schema in order to incorporate new information that would bring to light changes in the PC.

Organizational change contexts are typically characterized by ambiguity and uncertainty. Our findings suggest that such contexts serve as triggers for the employees to begin the process of calibrating what the organization has promised and what it is providing in terms of what others have been promised and what they are being provided. The process of social comparison, or in other words, assessing one’s exchange relationship vis-à-vis that of a referent other, can often lead to faulty assessments when there is ambiguity and an absence of objective information. Therefore, information accessibility might be one way to dampen any desire to seek answers to questions such as, “How am I being treated as opposed to a referent?” Schema research suggests that people are cognitively lazy and mostly try to fit new information into the old schema rather than change one’s schema entirely. The takeaway for organizations is that PC as the employment schema is mostly stable unless employees are deprived of timely and detailed information in the context of a change event. Thus, a suggestion that follows from our research is to practice transparency related to change events. Although theoretically sound, this may be difficult to implement. However, the costs of not being open and proactive in sharing information may be too high. Support for this contention comes from a study by Wanberg and Banas (2000), which found that information provided about the change as well as involvement in the change effort predicted openness to change as well as acceptance of change.

Our research reiterates comparison process as the integral part of employee sensemaking in a change context. In light of these findings, organizations may reconsider the common practice of forbidding employees from seeking information on other employees’ salary and benefits’ package or presenting such information to the supervisor as a basis for enhancing one’s own inducements. Instead, managers can engage in relative information sharing that may alleviate any perceived deprivation. For instance, data on industry trends that show marked decline in salaries and benefits may help employees choose another referent that leads to positive perception of one’s own situation. Support for this premise comes from a study by Rousseau and Tijoriwala (1999) in which social accounts, defined as managerial justifications and excuses, were found to be a factor associated with employee acceptance of an explanation for a need for change.

Our study also highlights the negative impact of social exchanges. The premise that long-term relational exchanges characterized by mutual trust are good buffers in times of change was shown to be not valid. Thus, organizations need to pay attention to entrenched employees, as they may have expectations that are counter to the changes needed in navigating the change programs. For instance, employees may expect certain obligations to continue even as the organization scrambles to implement changes. This underscores an important lesson for organizations regarding change context—change programs necessitate a continuous socialization process, not just for the new employees but also for tenured employees, that could be undertaken by organizational representatives such as supervisors and human resource managers to provide a realistic portrayal of what can be expected as part of the exchange relationship. Even senior employees have to face up to the reality of revisions to the PC that most likely differ from the extant contract. As Rousseau noted (1996), “Understanding new contract terms requires employees to act like newcomers, regardless of how long they have been with the organization” (p. 56). To manage entitlements, exemplified by expectations such as the “sticky wage” phenomenon, managers should strive to keep everyone on the same page—the same “new” page with an updated PC. This calls for promoting open dialogue regarding the unwritten and mostly implicit terms of exchange and how these are being revised, thus enabling the organization to change the “deal,” yet keep the people (Rousseau, 1996).

Footnotes

Appendix

Appendix B

Items and Factor Loading for Three Types of PCF and Social Exchange

	Balanced PCF	Social exchange	Transactional PCF	Relational PCF
Develop my visibility outside the firm	.851
Contacts that create employment opportunities elsewhere	.836
Exposure and visibility inside the firm	.829
Support me in meeting increasingly higher goals	.684
Support me to attain the highest possible levels of performance	.541
I don’t mind working hard today—I know I will eventually be rewarded by “Organization”		.746
My relationship with “Organization” is based on mutual trust		.652
Even though I may not always receive the recognition from “Organization” I deserve, I know my efforts will be rewarded in the future		.630
The things I do on the job today will benefit my standing in this organization in the long run		.623
I try to look out for the best interest of the organization because I can rely on “Organization” to take care of me		.609
There is a lot of give and take in my relationship with “Organization”		.546
“Organization” has made a significant investment in me		.502
I worry that all my efforts on behalf of “Organization” will never be rewarded		.432
Pay me only for specific duties I perform			−.855
A job limited to specific well-defined responsibilities			−.787
Require me to do only limited duties I was hired to perform			−.765
Wages and benefits I can count on				.784
Stable benefits to employees’ families				.633
Steady employment				.588

Note. PCF = psychological contract fulfillment.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The authors disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: We acknowledge the support from the National Natural Science Foundation in China (Project Nos. 71072142, 71202147, and 71372161).

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