IIMB Management Review, September 2007 313 The Relationship between Human Resource Practices, Psychological Contract and Employee Engagement — Implications for Managing Talent Upasana Aggarwal Sumita Datta Shivganesh Bhargava I n today’s era of acce lerated cha nges a cross the globe, ma naging talent hasb ec ome atoppriorityandakeybusinessc hallenge .H av ingtheright talent in pivotal roles at the right time is of strate gic importance , ma king a difference to re ve nues, innova tion and organisation effective ness 1 . With talent em erging as a key dri ve r for competitive adva ntage , it is important to ex am ine the factors that de termine highe r uti lisa tion and retention of talent. Organisations are also grappling with myriad strategies to improve organisa tional performance. Lately , there see ms to be a heightened focus on individualemployee sasasourceofcompetitiveadvantag e. Th ewaysinwhich people workmake acrucial dif fe rencebetween success fu l and unsuccessful firms 2 . Pro-social em ployee beha viour is a nece ssity for orga nisa tional, national and ec onomic surviva l 3 , and in today’s fiercely com petitiveti me s,organisati onsneede mploye es whoareflexibl e,innova tive , willingtocontributea ndgo‘abov ea ndbeyo ndthele tter’of theirforma l job descriptions or contracts of employment 4 . Th e tr a d it io na l ‘o ne - s iz e- fit s a ll’ approac h to manag ing em pl oyees is no w be ingreplace dbymoreindividualise demploye eapproache s.Theindividual- Upasana Aggarwal is a Doctoral Student in Human Resource Development and Organisation Behaviour at the Shailesh J Mehta School of Management, IIT Bombay. [email protected]Sumita Datta is a Doctoral Student in Human Resource Development and Organisation Behaviour at the Shailesh J Mehta School of Management, IIT Bombay. [email protected]Shivganesh Bhargava is Professor, Human Resource Development and Organisation Behaviour, Shailesh J Mehta School of Management, IIT Bombay. [email protected]Ro un d Ta ble
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Shivganesh Bhargava is Professor, HumanResource Development and OrganisationBehaviour, Shailesh J Mehta School ofManagement, IIT Bombay. [email protected]
314 The Relationship between HR Practices, Psychological Contract and Employee Engagement
specific psychological state of employees is recognised as akey determining factor of employee behaviour and responses
at work. As Kahn5 suggests in his seminal work ‘...the more
people draw on themselves to perform their roles within
those boundaries, the more stirring are their performances’.
Two psychological constructs which have been extensively
studied and are said to achieve tangible as well as intangible
firm level outcomes are employee engagement (EE) and
employee psychological contract (PC). A common thread
passing through the constructs of engagement and
psychological contract is that they are recognised as processes
for developing and retaining talent6. Likewise, there are many
other dimensions of these two constructs which call attention
to their significance in the effectiveness of human resource
(HR) management practices.
Research suggests that HR practices have a significant impact
on employee attitudes and behaviours. Though studies suggest
that HR practices are a part of high performing organisations,
HR practices alone do not guarantee such high performance7.
How is it then that organisations with similar HR practices
and employee skill sets vary in their outcomes? Presumably,
there are factors which moderate the relationship betweeneffective HR practices and organisational outcomes. We posit
that employee engagement and psychological contract are
the key explanatory variables which could help in explaining
the difference in performances across various organisations,
and are worthy of detailed examination. Further, the literature
suggests that employee psychological contract, engagement
and human resource practices (HRP) need to be looked at as
an integrative whole, and that HRP is the linchpin between
PC and EE which can be important strategic tools for talent
utilisation and retention. The paper suggests an integrative
framework which proposes new directions for these
relationships and suggests areas for further research.
Psychological Contract and EmployeePsychological Contract and EmployeePsychological Contract and EmployeePsychological Contract and EmployeePsychological Contract and Employee
Engagement – The ConstructsEngagement – The ConstructsEngagement – The ConstructsEngagement – The ConstructsEngagement – The Constructs
Psychological contract is a widely discussed and debated
construct. Studies on PC commenced in the early 1960s8,
but empirical assessment of the construct can be put down
to the 1990s. In general, there is a dearth of academic
literature on employee engagement9 and much of what has
been written on the subject comes from practitioner literature
and consulting firms10. However, since 1994, the two
constructs have continued to be a serious topic for conceptual
and empirical analysis11.
The growing interest in EE and PC can perhaps be attributed
to the fact that both the constructs have the potential to
predict employee outcomes, organisational success and
meaningful is it for me to bring myself into this performance
(measured by job enrichment, work role fit and co-worker
relations29); psychological safety —how safe is it to do so
(measured by supervisor relations, co-worker relations and
co-worker norms; and (3) psychological availability —how
available am I to do so? (measured by resources, work role
security and outside activities).
EE has been measured by using different tools, questionnaires
and inventories. One of the most popular measures is the
Gallup Workplace Audit30, though scholars are still identifying
new measures of EE.
Conceptual Distinctiveness of Psychological Conceptual Distinctiveness of Psychological Conceptual Distinctiveness of Psychological Conceptual Distinctiveness of Psychological Conceptual Distinctiveness of Psychological Contract and Employee Engagement Contract and Employee Engagement Contract and Employee Engagement Contract and Employee Engagement Contract and Employee Engagement
A number of constructs in organisation behaviour theory
indicate the psychological relationship of an employee with
the organisation or role. Psychological contract has an impact
on job satisfaction31, organisational commitment32, intention
to quit33 and organisational citizenship behaviour34, as does
employee engagement35. As differentiating between seemingly
similar constructs is important to avoid construct
proliferation36 an attempt has been made to distinguish PC
and EE from other related constructs.
Past job experience and personality
of employees have been recognised
as having a significant impact on
shaping employees’ psychological
contract. ‘Early life experiences’ alsoshape an employee, influencing
committed and satisfied with their jobs. Therefore these
attitudinal constructs may be considered as antecedents of
EE. Further, as attitudes are affective and to a significant extent
can predict behaviour49, employees with a deep sense of
engagement will demonstrate behaviours which are not
mandated, and assist organisations through organisation
citizenship. Literature has established the impact of EE on JSas an outcome. We suggest that highly engaged employees
will also have a positive relation with JI, OC and OCB.
Alternatively, it is possible that the relational constructs are
predictors of employee engagement, such that employees
who have positive JS, OC as well as JI and demonstrate
discretionary behaviour, will be highly absorbed in their work
and will experience a higher degree of engagement.
Furthermore, JS, JI and OC may coexist with employee
engagement. Therefore the relationships between EE, JI, JS
and OCB could be of those of antecedents, outcomes or
correlates. The direction of relationship between theseconstructs needs to be empirically ascertained.
The literature examining the relationship between PC and
other relational constructs is far more developed. The
fulfilment of psychological contract predicts employee
attitudes and behaviours, some of which (JS, OCB, OC) have
been studied while some still need to be investigated (EE, JI
among others). The distinction between PC and EE has been
elaborated in a later section of the paper.
What Psychological Contract and Employee What Psychological Contract and Employee What Psychological Contract and Employee What Psychological Contract and Employee What Psychological Contract and Employee
318 The Relationship between HR Practices, Psychological Contract and Employee Engagement
socialisation54 establishes that the psychological contract of
employees evolves over a period of time (it may decrease or
increase) as a result of experience and organisational policies;
Similarly, like PC, EE is not a static concept. It is subject to
revision. Kahn defines employee engagement and
disengagement as ‘moments in which people bring themselves
into work or remove themselves from particular task
behaviours’55.
Employee engagement and psychological contract are
essentiallysocial exchanges . EE and PC are both anchored in
and well explained by the theory of social exchange. The Social
Exchange Theory (SET) suggests that although the formal orcontractual relationships in employment are economically
driven, a social element to such relationship typically evolves56.
Simply put, where an individual does another a favour there
is an expectation of some future return. Trust and the norm
of reciprocity are the core elements of SET. Using this
perspective in the employment relationship context, when
individuals receive economic and socio emotional resources
from their organisation, they feel obliged to respond in kind
and repay the organisation57. Moreover, the exchange between
two parties is in somewhat diffuse terms and without any
guarantee of a future. Therefore trust is the cornerstone of
the relationship between the two parties of the social
exchange process and relationships evolve over time into
trusting, loyal and mutual commitments as long as the parties
abide by certain rules of exchange.
The social exchange theory is the most cited framework for
understanding the psychological contract process58. As an
explanatory theory, SET views the process of psychological
contract by predicting employee-employer relationships.
Likewise, SET is also one of the theoretical foundations of
employee engagement. When employees receive economic
and socio-emotional resources from the organisation, they
feel obliged to repay. One of the ways to repay the organisation
is employing greater levels of engagement.
In addition to the aforesaid similarities, there are a few factors
which are common in terms of shaping both PC and EE,these being perceived organisational support (POS), job
characteristics and procedural justice.
Psychological Contract and Employee Psychological Contract and Employee Psychological Contract and Employee Psychological Contract and Employee Psychological Contract and Employee Engagement — Differences Engagement — Differences Engagement — Differences Engagement — Differences Engagement — Differences
Although the literature suggests that there are overlaps
between EE and PC (with regard to nature of the constructs,
their origin in SET, the level of operationalisation being the
individual, their antecedents and the impact on attitudes and
behaviour of employees and organisational outcomes), they
are essentially two different constructs.
A sense of fulfilment of promissory obligations (PC) is different
from degree of physical, mental and psychological presence
(EE). While PC is a cognitive construct, EE is multidimensional
in nature. Kahn argues that besides being cognitive,
engagement operates at the emotional as well as the physical
plane. Although PC and EE are both dynamic in nature, while
EE literature focuses on ‘moments of task performance’59,
PC is assumed to be ‘comparatively’ more constant and
stable. Amongst other differences, PC and EE vary at their
level of operationalisation. Literature distinguishes between job and organisation engagement as two different constructs.
Though PC has been generally discussed from an
organisational perspective and there are no studies
distinguishing between psychological contract of an employee
towards the job and towards the organisation, nonetheless
literature on PC discusses how an employee’s expectations
as well as response may vary towards multiple agents of an
organisation – for example, will breach of contract from a
line manager result in an employee perceiving an
organisational breach?
Inter-relationships between PsychologicalInter-relationships between PsychologicalInter-relationships between PsychologicalInter-relationships between PsychologicalInter-relationships between Psychological
Contract and Employee EngagementContract and Employee EngagementContract and Employee EngagementContract and Employee EngagementContract and Employee Engagement
Based on suggested similarities and differences between PC
and EE, we have raised some research questions about the
relationship between these two constructs.
In the literature on PC there is enough evidence of the negative
reactions of employees to unfulfilled and under-fulfilled
Employee engagement and
psychological contract are
essentially social exchanges. They
are both anchored in and well
explained by the Social ExchangeTheory, which suggests that
In the literature, perceived organisational support (POS) is
recognised as the predictor as well as moderator of
psychological contract fulfilment and employee engagement.
It has been suggested that if employees feel unsupported by
their organisation or supervisor62 it may result in a breach of psychological contract. Saks63 identified POS as an antecedent
of job and organisation engagement. Besides POS, literature
on PC suggests that procedural justice moderates the
relationship between breach and outcomes. Interestingly
procedural justice also predicts organisation engagement of
an employee.
Given the strong correlation between the two psychological
constructs, we posit that there is a need to examine the strong
relationship between PC and EE to differentiate the merit of
independence of the two constructs.
Role o f HR Pract ices on EmployeeRole o f HR Pract ices on EmployeeRole o f HR Pract ices on EmployeeRole o f HR Pract ices on EmployeeRole o f HR Pract ices on Employee
Psychological Contract and EmployeePsychological Contract and EmployeePsychological Contract and EmployeePsychological Contract and EmployeePsychological Contract and Employee
Having studied the inter-relationships between PC and EE it
would be interesting to examine how human resource
practices significantly influence PC and EE and whether they
are the common link between the two constructs.
HR Practices and Psychological Contract HR Practices and Psychological Contract HR Practices and Psychological Contract HR Practices and Psychological Contract HR Practices and Psychological Contract
HR processes and practices determine to a large extent the
relationships between employers and employees, and play a
significant role in shaping employee psychological contract.
Numerous studies64 have examined the link between HR
practices (HRP) and psychological contract. The formation
of the ‘exchange’ relationship begins during the recruitment
and selection process and continues throughout the
employee’s tenure with an organisation. These studies have
shown how recruitment, training, performance appraisal,
compensation and benefits can encourage the formation or
elaboration of a psychological contact. A common thread
running through the studies examining HRP and PC is that an
organisation’s human resource practices can change the
psychological contract status and influence work related
outcomes.
How different human resource practices can shape and
influence the interpretation of psychological contracts of
employees has been highlighted below.
HR practices determine to a large
extent the relationships between
employers and employees, and play
a significant role in shaping
employee psychological contract.The formation of the ‘exchange’
relationships are likely to lead them to expect certain types of
compensation. The study provides ideas of how the
compensation system is a part of the HRM strategy aimed at
establishing specific types of employment relationships.
To conclude, human resource practice significantly impacts
employee development as well as assessment of psychological
contract fulfilment. When employees are recruited, whenthey go through performance appraisals, when they evaluate
their benefits packages or receive recognition for their efforts,
they interpret the experience and that interpretation will
influence how they react to it. The failure of a company to
comply with its obligations (as perceived by an employee)
can erode the employment relationship and the injured
employee’s belief in the contract, thereby altering what the
employee feels obligated to offer in return74.
HR Practices and Employee Engagement HR Practices and Employee Engagement HR Practices and Employee Engagement HR Practices and Employee Engagement HR Practices and Employee Engagement
As discussed in the section on similarities between PC and
EE, the two constructs are shaped by some common factors.
From research, it emerges that HR practice is one of the
most important factors influencing the psychological contract
of the employee. However, the impact of HRP on EE and the
relationship between the two still remain unexplored; this
could perhaps be because studies on the antecedents of EE
are at a nascent stage. By including EE and PC in a theoretical
framework (model), we would be in a position to address the
existing gap in the literature on predicting the direction of the
relationship between HRP and EE and its subsequent impacton outcomes. Additionally, although there is accumulating
evidence of the impact of HRP on organisational outcomes75,
the impact of HRP on individual employees has not been
examined76. The relationships at organisational level do not
necessarily reflect similar trends at the individual level77. In
other words, although HRP results in positive organisational
outcomes, it may not have the same relationship with
individual outcomes. In this paper we have attempted to
examine the impact of HRP on PC and EE, which can be
considered as two such individual-level idiosyncratic
constructs.
Job characteristics encompassing challenge, variety and
autonomy are more likely to provide psychological
meaningfulness, a condition for employee engagement. Job
characteristics are defined by the human resource practices
of an organisation, the latter being an important predictor of
PC. For example, when a frontline customer care executive
is made part of a cross-functional team working on a
complicated project, he starts finding meaning in the task as
it provides him variety and challenge, thereby affecting hislevel of engagement.
Similarly, the performance management processes which
focus on roles and responsibilities provide conditions for
employee engagement when the implied identities in these
roles are psychologically appealing to the employee78. For
example, a person responsible for a routine administrative
role might get psychologically attached to the implied identity
of status and power when he or she is required to interact
with powerful people as part of the job. This identity also
involves a feeling of being valuable to the organisation which
in turn helps in engaging the employee.
Training and development is another important area in HRP
which contributes to employee engagement. Learning new
skills may trigger renewed interest in such aspects of the job
which had not been meaningful earlier. For example, a
software developer who acquires skills in an area of his own
interest might get engaged in projects and assignments
requiring him to use the new skill. Or a manager when made
aware of the power of emotions through sustained training
and coaching starts focusing on relationships with his team
members and peers and might experience hugely satisfyingreciprocal behaviours. These experiences are bound to make
him connect better with his co-workers and foster higher
engagement. In recent times, with talent retention becoming
a critical priority for businesses, managers are getting trained
on retention competencies in order to foster higher
engagement and thereby retention among their team
members79.
Rewards management, another very significant human
The impact of HRP on EE and the
relationship between the two still
remain unexplored; this could be
because studies on the antecedents
of EE are at a nascent stage. Byincluding EE and PC in a theoretical
Contract-Employee Engagement: An IntegrativeContract-Employee Engagement: An IntegrativeContract-Employee Engagement: An IntegrativeContract-Employee Engagement: An IntegrativeContract-Employee Engagement: An Integrative
FrameworkFrameworkFrameworkFrameworkFramework
Human
Resource
Practices
AttitudesBehaviour
TalentUtilisation and
Retention
Psychological
Contract
ExternalEnvironment
EmployeeEngagement
The dotted lines indicate the proposed relationships
12 Richman, A, 2006, ‘Everyone Wants an Engaged Workforce.How Can You Create it?’, Workspan, Vol 49, pp 36-39;International Survey Research, 2003, ‘Engaged EmployeesDrive the Bottom Line’, Research Summary: Chicago,Illinois.
13 Rousseau, D, 1990, ‘New Hire Perceptions of Their Ownand Their Employer’s Obligations: A Study of PsychologicalContracts’, Journal of Organisational Behavior,Vol 11, No 5, pp
389-400.
14 Hochschild, A, 1983, ‘The Managed Heart: Commercialization of Human Feelings’, Berkeley: University of California Press.
15 Sparrow, P, 1996, ‘Transitions in the Psychological Contract:Some Evidence From the Banking Sector’, Human Resource Management Journal , Vol 6, No 4, pp 75-92.
16 Singh, R, 1998 ‘Redefining Psychological Contracts with theUS Workforce: A Critical Task for Strategic Human ResourceManagement Planners in the 1990s’, Human Resource Management, Vol 37, No1, pp 61-69.
17 Barnard, C, 1973, The Functions of the Executive, HarvardUniversity Press: Cambridge, MA.
18 Guest, D, 1998, ‘Is the Psychological Contract Worth TakingSeriously?’, Journal of Organisational Behavior, Vol 19, pp 649-664.
19 Rousseau, D, ‘New Hire Perceptions …’, p 390.
20 Rousseau, D, 1995,Psychological Contracts in Organisations:Understanding Written and Unwritten Agreements , ThousandOaks, CA: Sage.
21 MacNeil, I, 1980, The New Social Contract: An Enquiry into Modern Contractual Relations , New Haven: Yale UniversityPress.
22 Raja, U, and F Ntalianis, 2004, ‘The Impact of Personality on
Psychological Contracts’, Academy of Management Journal,Vol 47, pp 350-367.
23 Coyle, Shapiro, and J Neuman, 2004, ‘Individual Dispositionsand Psychological Contract: Employee and EmployerPerspectives’,European Journal of Organisational Psychology ,Vol 11, pp 69-86.
24 Kickul, J, S Lester, and E Belgio, 2004, ‘Attitudinal and
Behavioral Outcomes of Psychological Contract Breach: ACross Cultural Comparison of the United States and Hong
Kong Chinese’, International Journal of Cross Cultural Management , Vol 4, pp 229-252.
25 The Towers Perrin Talent Report, 2003, ‘Working Today:Understanding What Drives Employee Engagement’, USA;
defining it along the same lines is Bates, S, 2004, ‘GettingEngaged’,HR Magazine , Vol 49, No 2.
26 Kahn,W, ‘Psychological Conditions of Personal Engagementand Disengagement at Work’.
27 Luthans, F, and S Peterson, 2002 ‘Employee Engagementand Manager Self-Efficacy-Implications for Managerial
Effectiveness and Development’, Journal of Management Development , Vol 21, No 5/6, pp 376-387.
28 Harter, J, F Schmist, and T Hayes, 2002, ‘Business-level UnitRelationship between Employee Satisfaction, Employee
practitioner literature. We suggest that though these constructs
are closely related, nonetheless they are not the same. We
need to investigate the direction of relationship between PC
and EE. Research on antecedents of employee engagement is
still in the embryonic stage; however HRP appears to be the
key antecedent of PC as well as EE. In other words, human
resource practices help in the formation of the psychologicalcontract of an employee and also create conditions for
employee engagement. Research would need to explore if
HRP moderates the relationship between PC and EE and
consequently has a bearing on organisational outcomes. Based
on a literature review we propose that employee psychological
contract, engagement and human resource practices need to
be looked at as an integrative whole. We conclude that HRP
is the linchpin between PC and EE which can be important
strategic tools for talent utilisation and retention.
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81 The concept of talent emerged from the study of individualdifferences (Ericsson, K, and A Lehmann, 1996, ‘Expertand Exceptional Performance: Evidence of Maximal
Adaptation to Task Constraints’,Annual Review of Psychology ,Vol 47, pp 273-305). Early studies have focused on theintellectual abilities which were believed to have producedexceptional or superior performance the sheer brilliance ormagnitude of which cast eminence on the talentedindividual. The last couple of decades have seen anemergence of the concept of talent in the management andpractitioner oriented literature. The term talent has beeninter-changeably used with very many inter-related termsviz intelligence, creativity, exceptional performance,giftedness, competencies etc. For the purpose of this study,the term talent has been operationalised as the applicationor process of applying and thereby activating one’s abilities,skills and knowledge in a given context to achieve superior
outcome. Associated studies in this area include Spencer,M, and M Spencer, 1993, Competence at Work: Models for Superior Performance , John Wiley and Sons; Sternberg, R J, 1997, ‘Managerial Intelligence: Why IQ isn’t Enough’, Journal of Management, Vol 23, No 3, pp 475-493; Ulrich, D,and D Lake, 1991, ‘Organisational Capability: CreatingCompetitive Advantage’ , Academy of Management Executive, Vol 5, No 1.