Sunday, 21 August 2011

How the changing content of the psychological contract influences reward packages design

It is widely recognised that one of the subjects high on the agenda of HR professionals is that of staff motivation, which together with commitment and engagement definitely represents the current top priority for every organization.


Identifying the most effective way to attain this ambitious objective is indeed of pivotal importance for every employer. To help organizations effectually deal with the issue several studies aiming at providing good, innovative solutions have been indeed carried out over the years, others are currently underway and many others will very likely be conducted in the future.

Especially during periods dominated by harsh competition and economic downturn and slowdown, when employers have to tight their belts in order to gain and maintain their competitiveness, the human capital factor, that is to say the only factor which can be hardly or by no means replicated, is broadly recognised as the only and most powerful ingredient which can actually enable organizations to attain their objective.



Employers invariably endeavour to find effective, efficient methods to encourage individuals’ productive discretionary behaviour and induce these to go the extra mile to ensure the attainment of the desired level of performance. The feat, nonetheless, is sorely difficult to perform. To tackle the issue, employers should simply refer back to the root of every employment relationships, that is to say the psychological contract, according to which individuals commit themselves to perform the working activities for their employers in exchange for a not exactly specified and broadly defined “reward.”


The solution to this conundrum is actually not as straightforward as it might possibly seem. The meaning and content of reward is in fact unlikely to remain the same for the different individuals working in an organization. Yet, it is improbable that for the same individual the meaning and content of desired reward may remain stable and invariable over time.


As suggested by Armstrong (2006), individuals identify different objectives to satisfy their diverse wants and differently act to attain their aims. The one-size-fits-all approach to motivation whether applied would hence be very unlikely to produce positive results. The most effectual and to some extent most obvious method to tackle the issue would just be that to give each individual what s/he actually wants and would like to receive. To find out individual preferences focus groups, “have your say” communication sessions, employee consultation forums, large group sessions, internal surveys and other similar initiatives could prove to be extremely useful. That done, appropriate actions should be taken accordingly, for instance, designing and developing cafeteria-style benefits programmes, which enable individuals to choose amongst a number of pre-set, pre-identified benefits that or those which most appropriately meet(s) their needs and interests.

Since it is not only people who are subject to change but also the world outside every organization, a thorough and comprehensive investigation should not miss to consider both the endogenous and exogenous environment. In order to find out how individual preferences change and what actually influences individual wants and expectations, an appropriate understanding of the external environment is indeed necessary. One of the most effective tools to investigate the external environment is habitually represented by the PESTLE. Having crystal clear ideas of how the world changes and of the factors and circumstances which are mostly contributing to this can definitely help employers to gain a more thorough and in-depth understanding of the outcome provided by the internal investigation.

A clear example of the importance of duly considering and knowing the relevance of the impact made, for instance, by the political and legal framework in which organizations operate is provided by the findings of the recent study “Benefits around the world Report 2011”, conducted by Mercer. The investigation basically stresses the significance of the efforts and changes multinational organizations have been prompted to respectively make and introduce in response to state pension, health and welfare reforms. Many countries across the world have indeed been forced to review their state retirement and health provisions, which has ultimately accounted for the emergence of a gap between what employees were expected to receive and what these will actually receive. Organizations are consequently dedicating a lot of efforts to design and implement the required amendments in order to bridge the emerged gap.
Whether we would also consider and assess the social factor, as investigated by mans of the PESTLE tool, we would find out that people across the world tend to live longer so that the ageing population phenomenon should represent a further element to consider when managing employee reward. Individuals are becoming increasingly sensitive to this aspect and would definitely appreciate what their employers would do for them to this extent in terms, for instance, of pension plans and medical insurance.
Findings of the studies and investigations conducted to date have revealed that individuals are not motivated just by the extrinsic and financial component of reward, but rather by intrinsic, non-financial rewards and find much more motivation in their job, rather than in the pay they receive to perform this.

The content of the psychological contract has clearly changed over time, which provide evidence on the one hand that what individuals need and are expected to receive from their employers is not stable and on the other hand that employers are the weaker of the two parts involved in the unwritten contract. The change and evolution of the content of the psychological contract in fact very much depends on employees, rather than on employers’ ever-changing expectations.

In order to duly consider individual continuously changing wants and to balance the effects of intrinsic and financial reward (whatever the emphasis on non-financial component of reward, employees would not clearly work whether these would not receive any cash), relatively recently a new concept of reward has been developed, that is, that of total reward.In order to duly consider individual continuously changing needs and to balance the effects of intrinsic and financial reward (whatever the emphasis on non-financial component of reward, employees would not work whether they would not receive a salary), relatively recently a new concept of reward has been developed, that is, that of total reward.

Broadly speaking, total reward approaches are models or frameworks aiming at developing reward packages formed by two distinct groups of components: a financial/extrinsic group and a non-financial/intrinsic one (Total reward – What should be considered before addressing the issue - Can Total Reward be considered an additional model of HRM?).

The design and development of this latest type of models is based on the idea, supported by decades of studies and investigations, that financial rewards on their own are not so effective and powerful motivators, at least in the mid- to long-term. Findings of dozens of investigations and surveys have revealed that financial rewards can help organizations to attract individuals during the recruitment process but that, contrary to expectations, these do not habitually prove to be a powerful and effective means to actually retain employees. To this extent, emphasis has rather to be placed on individual development, involvement and participation.

Total reward approaches essentially enable employers to promptly respond to the changing needs and content of the unwritten psychological contract. The exogenous context is constantly subject to changes and individual wants and expectations are clearly influenced by what happens in the external environment so that, inasmuch as the external environment is changing so rapidly, individual needs will be subject to change at the same pace. To retain their employees, organizations must take heed of this circumstance and should ensure to have access to the appropriate tools necessary to properly investigate the phenomenon.


Reward, or rather, total reward is clearly of paramount importance and has a relevant role to play in the process; employers having recourse to well-designed, flexible total reward approaches should be able to face the changing circumstances timely and effectively. It can be basically contended that businesses which have in place total reward programmes will be able to promptly adapt to the changing content of the psychological contract without any particular inconvenience.

A consistent and effective way to support total reward approaches and effectually manage the intangible sides of reward is also represented by the introduction and implementation of Performance Management “processes”, as opposed to Performance Management “systems.” Designed and developed to enable employers to more appropriately intrinsically reward individuals, induce employee participation and respond to individuals growth expectations, PM processes aim at building and reinforcing a constant communications channel and a strong relationship between individuals and managers; where managers are seen as coaches and guides for their reports, rather than as judges of their actions and conduct.


There is, nonetheless, a circumstance which employers cannot really overlook nor underestimate. As discussed earlier, individuals are different one another and not necessarily all of them, albeit certainly the greatest number of them, long for a professional growth. The Job Characteristics Model developed by Hackman and Oldham (1974), which is a contingent rather than a universal approach like the Hierarchy of needs developed in 1943 by Maslow (Porter, 2006), shows that not all the individuals have the same level of Growth Need Strength (GNS). In particular, people with low GNS at large are usually not interested in intrinsic reward, they do not seek for the variety of the job performed, skill variety; are not concerned with task identity, that is, the importance of their role within the overall organizational process; nor are these interested in knowing the impact of their job on other employees jobs, task significance. Yet, people with low GNS do not feel rewarded with the devolvement of higher level of autonomy; neither are these normally interested in receiving feedback from their managers about their performance. These individuals do not hence habitually obtain any benefit from intrinsic reward; by contrast, whether forced beyond their desired level of GNS they may even perform worse.
Employees with low GNS represent a meagre percentage of the overall employee population, but these cases have to be promptly identified and treated accordingly by employers. These individuals (mostly, but not necessarily involved in mechanical jobs) usually feel more comfortable with being rewarded with extra cash only for their good performance.
Longo, R., (2011), How the changing content of the psychological contract influences reward packages design, HR Professionals, [online].

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