A psychological contract refers to a set of informal expectations and responsibilities between the employer and employee. The psychological contract is different from the employment contract, which establishes a formal relationship between the employer and employee. Further, the employment contract outlines in writing the responsibilities and obligations of the employee and the employer during their engagement.
The psychological contract is dynamic and subject to change based on changing perceptions and communication between the two parties. Psychological contracts are based on the equity theory, where each party expects fairness in order to sustain the relationship. Breach of fairness will lead to a deplorable state of the relationship. This will also impact on productivity and the general environment/ mood in the workplace. Thus, managing the expectation of the psychological contract is important to ensure the business's bottom-line is not negatively affected.