Done right, every employee signs a contract when they join a company. But the real deal that shapes daily experience is not written down. It is the psychological contract: the expectations and obligations between employee and employer.
First discussed in the 1960s by Chris Argyris and Harry Levinson, and later formalised by Denise Rousseau, the idea explains why trust is gained or lost at work. Employers once promised stability and progression; employees offered loyalty and effort. For decades, both sides broadly upheld their end.
The old deal
The industrial-era contract was clear:
- Security in return for loyalty.
- Predictable progression through seniority.
- Pay as the main driver of engagement.
- Leaders directed, employees obeyed.
- Work was expected to come before personal needs, especially in more senior roles, typically occupied by men.
It worked in a world of stable industries and slower change.
Why it broke
From the 1980s, restructuring, automation, and global competition chipped away at stability. At the same time, capitalism itself shifted. As Steven Pearlstein has argued, business moved from shared prosperity to shareholder prosperity. Growth no longer guaranteed that workers or wider society shared in the gains. Harvard’s Rebecca Henderson goes further, insisting capitalism must be reimagined if it is to endure.
The workplace contract is also shaped by the wider social contract. When the cost of living spikes or public services strain, employees look to employers for balance; through higher pay, better benefits, or wellbeing support. When governments raise corporate taxes or regulation, organisations often recover costs by slowing wage growth or reducing benefits. When the societal deal frays, the workplace deal absorbs the shock.
The ambiguity it created
Nothing clearly replaced the old bargain. No one is quite sure what to expect anymore. Into that vacuum flows judgement. Employers assume staff are entitled and employees assume organisations are extractive. Both sides feel short-changed.
The new contract
What’s emerging is not the end of the psychological contract but a rewriting:
- Employability for adaptability. Employers invest in portable skills; employees commit to continual learning.
- Fair pay and fairness for commitment. Employers provide just pay and transparent treatment; employees respond with effort and loyalty.
- Flexibility for accountability. Employers give autonomy; employees deliver outcomes.
- Purpose for alignment. Employers live values authentically; employees bring creativity and energy to the cause.
- Healthy work for healthy contribution. Employers design sustainable roles; employees bring sustained focus.
The leadership task
The challenge now is to shape a contract that feels sustainable in your organisation. That means asking: what deal would feel fair and palatable on both sides? Then reinforcing it consistently, through signals and decisions. Do it without consultation, and you risk missing the fairness chord entirely.
The paper contract may get people through the door. The psychological contract decides whether they stay, how they perform, and whether trust endures.
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