The Fractured Psychological Contract Between Employers and Employees: A Call for Renewed Trust

In the past, there was an unbreakable psychological contract between employers and employees. A booming post-World War II economy saw American companies flourish, and in return, they shared their wealth generously with employees through substantial raises and extensive benefits. In "The End of Loyalty," Rick Wartzman details the introduction of pension plans, profit-sharing schemes, health insurance, and a dedication to employee well-being during this time.

However, the landscape began to change with globalisation as American businesses faced overseas competition and downsized domestic workforces. A new management philosophy emerged—one characterised by transactional rather than relational treatment of employees. In this shift, long-standing incentives for employee loyalty eroded, with companies replacing pensions, increasing employee healthcare contributions, and relying more on external hires.

The once-strong sense of job security dwindled, and layoffs, once rare, became more commonplace. The trust that characterised the employer-employee relationship started to unravel. The globalisation wave and the Great Resignation further eroded the traditional bond between employers and employees.

Once synonymous with job security and mutual commitment, the psychological contract suffered a rupture. The prevailing sentiment among disillusioned workers was that workplace loyalty was a relic of the past—a mere ploy for companies to exploit their workforce.

Yet, the expectation of loyalty lingered, manifesting in the discomfort some feel when contemplating job offers from other companies. Even amidst layoffs and economic uncertainties, many employees clung to the belief that reciprocity existed in the workplace.

The shift from a relational to a transactional approach has led to a vicious cycle of broken promises. Companies cut back on benefits and job security, while employees reduce their commitment and effort. The workplace that emerges is undesirable—a space where loyalty is scarce.

A Way Forward: Rebuilding Trust

Instead of perpetuating this cycle, some forward-thinking companies are exploring ways to rebuild trust and repair the psychological contract. One example is adopting "alumni programmes," offering networking opportunities and maintaining connections with former staff. These programmes acknowledge that employees may leave but can become clients, customers, or even return as valuable contributors.

While total job security may be challenging in the current landscape, companies can be more transparent about business challenges and offer voluntary buyouts before layoffs. Meaningful opportunities for learning and development can replace generic training programs. Internal candidates should be considered before external hires, and regular salary reviews can ensure fairness for veteran employees.

In return, employees can redefine loyalty by acknowledging that they must uphold their end of the bargain. This new loyalty doesn't entail sacrificing everything for the company, but it recognises that mutual commitment benefits both parties. It involves stepping up when needed, being a productive team member, and weathering temporary challenges without immediately seeking new opportunities.

However, the psychological contract is not a simple ledger of give-and-take. The relationship between how employers treat their employees and the obligations that both parties feel is intricate. Mutuality and reciprocity foster trust, which, in turn, generates loyalty.

A Call for Healthier Workplace Dynamics

Even those breaking traditional loyalty norms can be motivated to give their best when treated with respect and recognition.

The call for repairing the psychological contract is recognising the human element in the employer-employee relationship. Employers can take the first step by acknowledging that employees seek more than a financial transaction—they want to be seen as individuals, not just as line items. A healthier workplace dynamic can emerge where loyalty becomes a reciprocal exchange, benefiting both employers and employees.