Watching the news or reading the financial reporting of both local and international newspapers, we are simultaneously bombarded today by the political upheavals of the Arab world (now focused in Syria) and by the economic problems facing the western world. At the same time, it is of the very essence of Hong Kong’s systems that we are all affected in many ways by the economic changes afoot elsewhere. So at present, it is the events across the other side of the world in Europe upon which our eyes are fixed. The austerity demanded of the peoples of these states, with smaller government expenditure and increased taxation, is impoverishing economies and reducing employment (and so increasing social unrest). Banks are seeking to reduce costs and shore up their balance sheets. All this has the effect of reducing investment and so, in turn, has already started to affect financial organisations. The impact on Hong Kong’s industries is obvious and well reported. Many in the financial sector are finding their job in flux.
So just as we were affected by the US housing crisis in 2008, this crisis brewing in Europe, though it seems so far away from us in Asia, will affect us here. The ripples of anxiety are already beginning to lap against the shores of Asia and we have undeniably begun to see local reactions to reduced confidence. For starters, in recent months, we have begun to see increasing personnel movement, downsizing and the closing of practices or divisions in some financial institutions, particularly those connected with European markets.
Organisations will always have to restructure to cope with changing economic situations, but it makes sense to do so in ways that retain the loyalty and trust of their salaried staff, people who are as much a part of the business model of a company as the fluctuating bottom line. Employees in firms affected by downsizing will work better if treated well. Companies that treat their staff well will create reputations that will give them an edge in retaining staff and, when the time comes, recruiting them again. Organisations that have adopted processes that are mutually beneficial both to them and departing employees are likely to be more successful than those which do not.
Consequently, companies need to consider how best to show their respect for employees when letting staff go. This is just one part, though, of the wider perception employees have of their employer and work, what they feel they owe to and are owned by, their firm. This wider area is the psychological contract, which, recognised or not, exists in some form for each and every one of us. While companies will always need to specify the detailed terms of work in an employee’s employment contract, they should also be conscious today of the impact of the psychological contract they hold with their employee and how that will affect any restructuring process they face.
What is a psychological contract?
The psychological contract is not new. It has been around for about 50 years. According to Rousseau (1995), the psychological contract is defined as ‘individual beliefs, shaped by the organisation, regarding terms of an exchange agreement between the individual and the organisation’ in which beliefs are referred to an employee’s interpretation of both explicit and implicit promises. Research into this area continues to be done because the psychological contract has been identified as such an important mechanism for understanding employment relationships and workplace behaviour. Thus an understanding of the psychological contract has great importance when organisations downsize or restructure, as it helps explain many employees’ reactions and behaviours.
The psychological contract is used to:
1) Explain how reciprocal promises oblige employees to do things for their employers.
2) Predict how employees will react when they believe promises made to them are broken.
There are other reasons why considering the psychological contract will always be necessary and why organisations need to be aware of the issue when facing restructuring or economic uncertainty. These include:
1) The implicit linkage between the psychological contract and written employment contracts. The explicit terms and conditions embedded in employment contracts can be construed to have wider implicit meanings in employment relationships.
2) Organisations can, through an understanding of their psychological contracts, calculate how changes to employment relationships might affect their employees’ work experience. An example here is how the impact and effects of downsizing can affect the trust in the relationship between employee and firm.
3) Ensuring that there is an ongoing reciprocal process, where terms are re-negotiated, fulfilled or breaches are noticed on a daily basis by both parties to the psychological contract.
What makes a psychological contract?
The next question is, what are the contents of a psychological contract? According to Rousseau (1990), these are: ‘expectations of what the employee feels she or he owes and is owed in turn by the organisation.’ This will be of particular relevance when employees are being asked to go. It is at such times that employees will look for the fulfilment of their expectations and will seek to exercise the rights they believe they hold under any psychological contract. This will be more than just the compliance with the terms agreed in the employment contract, such as a bonus or a month’s salary in lieu of notice. They will also include expectations of treatment after notice. When a psychological contract is breached or violated, employees will likely experience anger, distrust, reduced loyalty and commitment, and an increased propensity to leave the organisation.
What, then, can organisations do to ensure that they are able to meet their employees’ expectations of their employment relationship? When organisations start to think in terms of severance packages, they can consider more than notice periods and monetary payouts and provide their departing employees with an outplacement programme.
What is an outplacement programme?
When employees are asked to leave an organisation, they will look very closely at what their employers provide, especially so if they are long-serving employees, who will expect their loyalty and service to be compensated. They will, in effect, expect the organisation to go an extra mile for them. Meeting such perceived obligations can be done by adopting measures such as transition support, providing departing employees ample time to find a job or providing outplacement programmes.
Outplacement programmes are conducted by trained consultants who work with the affected employee on various levels. Consultants concentrate on managing employee emotions while getting employees back into the employment market by reviewing their CVs and polishing their interviewing skills. Whilst the consultant’s role is to encourage and help the employee move forward, it remains the prerogative of the employee to decide on the progress of the process. The outplacement programme does not, of course, guarantee that the employee will end up gainfully employed. Rather, such a programme aims to provide the employee with a set of tools and methods to continue the search for new work opportunities.
Although there is no explicit legislation in Asia calling for employers to provide an outplacement programme as part of a severance package, in view of advocating best practices it nevertheless makes good commercial sense for departing employees to be given the option of participating in one. Many organisations think that a quick pay-off and exit of departing employees is the best way to deal with redundancies. However, they often do not realise that if the employee leaving the firm or the rest of the company’s staff see the treatment as unfair or ungenerous, they will not be shy in sharing the experience outside the company. Hasty actions towards departing employees can affect, on many levels, the company’s reputation in the market. It is also likely to deter future employment of talent when the organisation recovers.
What is the relevance of these issues in the present economic climate?
Whilst we here in Asia may not feel the full brunt of the events in Europe, we will not escape them unscathed. Asia is mutually dependent on the European market and is already being affected by its slowdown. Downsizing has commenced in certain industries. In these circumstances, I would urge organisations preparing for any full-blown economic crisis by modifying the way they work to be mindful about giving full consideration to the psychological contracts they have with their staff.
Any plans for restructuring should include strategies to smooth the transition for their employees. They should adopt best practices, such as the support for transitioning provided by outplacement programmes. Doing so will not only make the whole process bearable for both exiting and remaining staff, but it will also ensure that departing employees will be more likely to share good things about their transition out of the organisation, wherever their futures take them.