Impact Of Psychological Contract On Employees Performance In Selected Entrepreneurial Firms In Oyo State, Nigeria

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Impact Of Psychological Contract On Employees Performance In Selected Entrepreneurial Firms In Oyo State, Nigeria


The purpose of this study was to investigate impact of psychological contract on employees’ performance in selected entrepreneurial firms in Oyo state, Nigeria. The study adopted the quantitative research method and stratified sampling method was used. The data was collected using questioners from 106 (85% response rate) from employees. The obtained data was analyzed using the statistical package for social science (SPSS) using regression & correlation analyses. The result of this study indicates that majority of the respondents agreed that the relational psychological contract was the most practiced psychological contract type which emphasize that the company provides secure employment and has concern for personal wellbeing of its employees and families by providing stable benefit for employee’s family. The correlation result shows that the relationships between the three variables of the study were negative and moderate, except the relation between relational and balanced psychological contract. And relational psychological contract has significant and negative correlations with employee’s performance. The present paper recommends to firms about the need to enhance steady employment, give emphasis for employee’s personal welfare, communication prior to decisions have been made and provide long term developmental opportunities to change the attitudes of employees towards employee’s intention to leave.

Chapter One


1.1 Background of the Study

As a result of globalization, organizations are now a days facing the challenges of global competition, economic instability and technological changes, among others. These difficulties request organizations to change their strategies, specially, with respect to human resource management, to allow them remain active and competitive (Omoruyi, Chipunza & Samuel, 2011). This led to increasing interests shown by both the academics and practitioners on how best to manage employment relationship (Rousseau & Scheperling, 2003). For these reasons, research in psychological contract and performance becomes very vital.

The psychological contract can be defined as an individual’s beliefs about the terms of the exchange agreement between employee and employer. It concerns the idea of an exchange between parties. Additionally, it is important to note that the psychological contract does not involve items found in the employment contract. Instead of objective and defined promises, it concerns more implicit, subjective and supple ones (Rosseau, 1995).

Schein (1965) has explained that the notion of a psychological contact implies that there is an unwritten set of expectations operating at all times between every member of an organization and the various managers and others in that organization. Kotter (1973) on the other hand, defined the term as an implicit contract between an individual and his organization which specifies what each expects to give and receives from each other in the relationship.
According to Social Exchange Theory, people involve in relations with other people because they are driven by the expectations of receiving inducements in return from the other party. Thus, in line with the norm of reciprocity, higher contract fulfillment is expected to lead to higher work engagement and lower performance, (Gouldner, 1960).
In a service giving industry like Entrepreneurial firms, the interaction between employees and customers is essential to putting the perception of customers on the level of service quality delivery and satisfaction. Therefore, the human resource is a key source of gaining competitive advantage. Rastgar and Pourebrahimi (2013) have stated that the major challenge of most organizations today is how to recruit, retain, manage and satisfy their employees who can help the organizations to realize higher level of competitive advantage. Thus, managing and retaining competent employees is a serious challenge. High turnover rate will not only increase the cost of recruitment and selection, but also reduce the organizational morale and weaken the intellectual capital.

On the other hand, performance was very significant as a predictor of actual turnover, as well as an indicator of employee that may not contribute to organization at their full potentials. It can also serve as a sign of the degree of one’s psychological attachment to the organization. A study carried out by (Ongori, 2007) indicated that, if employee turnover is not managed properly it would affect the organization adversely in terms of personnel costs and in the long run it would affect its liquidity position.

Thus, on a larger perspective the understanding of this concept and its proper implementation creates a sense of mutual understanding and creates a long-term relationship between employer and employee that in turns contributes to employee retention and business sustainability of the organization. To this end firms also conducts measurement of its employee’s satisfaction level at yearly base and turnover analysis every six month, believing that employee’s satisfaction, engagement and competencies are most important factors for the organizational success.

1.2 Statement of the Problem

Psychological contract is one of the hidden, hard-to-measure factors that end up being crucial to the success of a company. The psychological contract influences how employees behave, according to the underlying relationship they have with the company and other staff. The employee balances what they put into their job with how they feel they are being treated by their employer. If they are inputting more than they feel they are getting back in return, the balance is twisted and the psychological contract is breached.

There are a number of researches that studied the consequences or outcomes of perceived psychological contract breach on employee’s behavior, attitude and feelings. Such studies include Robinson and Rousseau (1994), Turnley and Feldman (1999), Ongori, (2007), Umar and Ringim (2015). These studies indicated that the perceptions of psychological contract breach were positively related to employee performances and or actual turnover.
Since turnover is a critical human resource issue in all sector of the economy, it can be utilized as an indicator of company performance and can be easily observed negatively towards the organization efficiency and effectiveness. (Glebbeek et al, 2004) In relation with this, creating s sufficient number of stable and well-paying jobs remains a major challenge for African economies. Urban labor markets in the region were identified by high informality and unemployment rate. In deed in Nigeria, the informal economy is estimated to account for over 38% of GDP with data from the Nigerian Central Statistical Agency showing that formal employment accounted for below 70% of total employment in 2012.

As stated above, several studies were conducted on the influence of psychological contract on employee’s work attitudes in organizations with inconsistent results. In addition, these studies were mainly conducted in developed and developing countries such as Europe, Asia and America. Moreover, the influence of culture might play a role in the findings of such studies in those developed societies.

The vision of FIRMS is to become a leading and dynamic Exchange in Africa. FIRMS has a mission to provide a modern, efficient, transparent and reliable market platform to serve the national development goals through adaptation of technology, excellence in innovation and with integrity.

In order to achieve its organizational missions & vision, firms’s management need to properly manage its vital resources and pass decisions that are in favor of the employees. Despite, understanding of the concept that people are the greatest asset an organization has, the management would be expected to take the time to investigate what may influence an employee expectation and behavior.

In addition, Turnover has proved to be a drain of profit of an organization and firms suffer the loss of job specific skills, disruption in production and incur the cost of hiring and training new works. (Martin et al 2007). Similarly, firms was also vulnerable to turnover related problems. Hence, by giving more emphasis to the issue, firms management tries to know the existing level of employees’ satisfaction and engagement every year.

On the other hand, exit interview was conducted by the human resource department in order to know the reason behind employee’s resignation. The resigned employees mentioned that uncompetitive pay, in conducive work environment and boring work are some of the reasons to leave the organization. Contrariwise, the mental state of those employees who remain behind may differ from those who already left the organization. Because employees who already resigned might not have interest to explain the real problems which were faced retained in the organization.

Coming to the specific case company, Entrepreneurial firms has not been studied to any great extent, except the annual employee satisfaction survey & turnover analysis conducted every six months based on exit interview, since its introduction in Nigeria in the late 2006.

Therefore, the above-mentioned facts motivated the researcher to examine the effect of each psychological contract traits by identifying a psychological contract trait that has greater effect on employee performance in order to precursor turnover and forward possible policy implication to be implemented by the organization.

Therefore, this study was conducted to identify effect of each selected psychological contract on employee’s performance. And through reviewing current empirical finding in similar studies, this study attempted to address the following research questions.

1.3 Purpose of the Study

The purpose of the study is to investigate impact of psychological contract on employees’ performance in selected entrepreneurial firms in Oyo state, Nigeria

1.4 Research Questions

Based on the above statement of the problem, the study attempts to address the following questions

  1. To what extent does transactional psychological contract have influence on employee’s performance in entrepreneurial firms?
  2. To what extent does relational psychological contract have influence on employees‟ performance in entrepreneurial firms??
  3. To what extent does balanced psychological contract have influence on employees‟ performance in entrepreneurial firms?

1.5. Research Objective of the Study

1.5.1 General Objective

The main objective of the study was to investigate the impact of psychological contract on employees’ performance in selected entrepreneurial firms in Oyo state, Nigeria

1.5.2 Specific Objectives

In order to achieve the general objective, this research attempt to address the following specific objectives by examining the extent to which:

  1. To assess the influence of transactional psychological contract on employee’s performance in entrepreneurial firms?
  2. To examine the influence of relational psychological contract on employee’s performance in entrepreneurial firms?
  3. To determine the influence of balanced psychological contract on employee’s performance in entrepreneurial firms?

1.6 Research Hypothesis

  1. H0: – Transactional psychological contract has no significant influence on employee’s performance in FIRMS.
    H1: – Transactional psychological contract has significant influence on employee’s performance in entrepreneurial firms?.
  2. H0: – Relational psychological contract has no significant influence on employee’s performance in entrepreneurial firms?.
    H1: – Relational psychological contract has significant influence on employee’s performance in entrepreneurial firms?.
  3. H0: – Balanced psychological contract has no significant influence on employee’s performance in entrepreneurial firms?
    H1: – Balanced psychological contract has significant influence on employee’s performance in entrepreneurial firms?.

1.7 Significance of the Study

The findings of the study would be significant, beyond serving the academic purpose; it is expected to enhance the awareness level of mangers and leaders to have the information necessary to increase organizational commitment and retain its best employee’s by understanding influence of psychological contract on performance in firms.

Furthermore, this study will have the following significance:

  1. The study could benefit the case organization by determining which type of psychological contract has highest effect on employee’s intention to leave. This could also lead to improvements in workplaces to help employees become more fulfilled and committed to their jobs.
  2. Effect of psychological contract on Entrepreneurial firms employee’s performance is not evidently known. Therefore, this study could help Entrepreneurial firms to enrich its psychological contract practice and adjust its focus on most important type of contracts that can bring employee commitment and fulfilment.

1.8 Delimitation of the Study

The research is delimited to the data obtained from permanent employees and had been considered part of the study. Methodology wise the study used cross- sectional study and quantitative research design. The study based on key factors of Psychological Contract (relational, transactional and balanced) and employees’ performance.

1.9 Organization of the Study

This study organized in to five chapters. The first chapter is an introductory part which includes background of the study, statement of the problem, research questions and objectives, significance and scope of the study. Literature review and research methodology addresses the review of related literature and the research design of the study, sampling techniques and data collection instruments. The fourth chapter describes the interpretations and discussion of the findings. Finally, in the last chapter, summary, conclusion and recommendation are included.

1.10 Operational Definition

Transactional Psychological Contracts:

Transactional contracts as a reference to employment arrangement with a limited duration primarily focused on economic exchange, specific narrow duties and limited worker involvement in the organization, according to Rousseau (2000).

Relational Psychological Contracts:

Explain the nature of relational psychological contracts; have stated that it can be characterized by long term employment relationship in which the mutual obligations cannot be unambiguously specified.

Balanced Psychological Contract:

Combines the open-ended time frame and mutual concern of relational agreement with the performance, demand and renegotiation of transactional contracts (Wangithi & Muceke, 2012).

Chapter Five

Conclusions and Recommendation

5.1 Conclusions

Employees are very important resources in any organization because they are the foundation upon which organizations are built. Understanding the nature of workplace relationship is vital to both employers and employees, because their behaviors are essential for providing quality products or services to customers. There is also growing concern among the management in Entrepreneurial firms about the degree of labor turnover and employee engagement. Psychological contract was an important concept that has been established in the literature to affect employee’s turnover and performances. Therefore, the main objective of this study was to examine the influence of psychological contract in the Entrepreneurial firms. This study used a sample of 125 employees and collected data using questionnaire. But, only 106 questionnaires were fully completed and returned. The questionnaire used was assessed its reliability in the context of Entrepreneurial firms. Therefore, Cronbach’s alpha coefficient was used to determine reliability in which all the variables were found to be consistent and reliable.
The data analysis revealed that the respondents greatly agreed on the existence and more practiced among the psychological contract traits in firms was relational psychological contract and balanced psychological contract, respectively. The results indicate that the respondents hold similar values, attitudes, and beliefs on existence of relational psychological contract.

Among psychological contract indicators, relational psychological contract has significant coefficient on employee’s performance with direct negative relation. Its implication is that providing of secure employment, stable benefit including dependents and making decisions with employee’s interest in mind was crucial.

In general, as per the findings of the study, relationship among psychological contract and employee’s performance is moderate relation with positive (with transactional psychological contract) and negative relationship (with both relational and balanced psychological contract). Hence, despite possible factors associated to the individual employee’s personality traits and prior job experience, employees are influenced by their perception of the nature of psychological contract with their employers.

Finally, the researcher concluded that, the overall employee’s intention to leave the organization was high and this indicates that FIRMS human resource management does not give high attention to employee’s psychological contract. Because, most of the employees confirmed that they often look for job opportunities outside the organization.

Consequently, it could be concluded that if FIRMS employees perceive decisions have been made with their interest in mind and if long term developmental opportunities provided in their organization, they are likely not to have performance.

5.2 Recommendation

Depending on the findings of the study and conclusions made, the researcher came up with some important recommendations which would help the organization to focus on psychological contract that can largely contribute to the improvement on the level of employee’s performance. The recommendations given are the following:

  1. Firms should continue in its efforts at maintaining effective carrier development opportunities employment and also at maintaining very good personnel welfare and wellbeing, including employee’s dependents. firms management should also have to consider nurturing the development of positive perception through alignment of employee’s perception by encouraging long-term career progression and developing employee’s external marketability. In order to let employees, perceive that decisions have been made with employee’s interest in mind, the management should be more open communication is needed especially before arriving at vital decisions.
  2. The measure on transactional psychological contract shows the fact that indicates there was positive relation with performance. Since, it is a very important tool for enhancing the relationships between employer and employees,
  3. When we come to the traits of psychological contract, relational psychological contract has significant coefficient on employee’s performance with direct negative relation. Thus, FIRMS management should have to drive its human resources policies and strategies to be stronger on applying relational psychological contract among employees concerning the involvement on the decision-making process.
  4. Lastly, since employees are the foundation for any organization to build on, they are very important resources in any organization. In relation with that, understanding the nature of workplace relationship is very important to both employers and employees, because their behaviors are central to providing quality products or services to customers. Therefore, identifying which dimension of Psychological contract was very important constructs that have been established in the organization and upgrading the current practice could be significant to affect employee’s performances.

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