The importance of employee engagement in facilitating the organizational growth of a company can never be overemphasized. Employee engagement is defined as the degree of involvement, attachment and commitment shown by an employee while working in an organization. The recent management theories are focusing on the importance of keeping the employees engaged so that the employees can work harmoniously and productively in the company leading to increased revenue-earning capacity of the company. While so far most of the organizations have focused on the financial rewards as the tool of enhancing the performance of the employees. However, recent human resource theories have emphasized the importance of compensating the employees by offering non-financial rewards that do not involve cash or monetary payments.
Although any form of financial reward is valued by an employee as it acts an intrinsic source of motivation, the non-financial rewards are far more important as these help an employee feel that his presence in the company and his contribution is being valued by the management authority. A special day out, a certificate of performance recognition, or a great meal arranged by the management for its employees can create a stronger employee-employer bond, than a mere sum of money professionally being deposited in the bank account of an employee. The importance of the non-financial awards being given to the employees can be explained with the help of the Psychological Contract theory, an important management theory that emerged in the 1960s. The Psychological Contract refers to the relationship between an employer and its employees, and specifically concerns mutual expectations of inputs and outcomes (Kiazad et al. 2014). Being put in simple words, the Psychological Contract theory states the importance of creating a sense of fairness amongst the employees so that they feel that they are being treated exactly the way they work dedicatedly to serve the organization. As per the Psychological Contract theory, an employee who works overtime and helped a company achieve its sales target last year will never want its employer to reject him promotion in favour of someone who did not work as hard as him. A sense of equity, fairness and balance form the integral concepts of the Psychological Contract theory (Festing and Schäfer 2014).
While discussing about the issue of employee engagement, it is important to define the concept of Psychological Contract. It is important to note that a psychological contract represents the mutual beliefs, informal obligations and mutual loyalty shared between the employer and the employees. Unlike the formal written contract, that merely establishes the mutual duties and obligations of the employees and the employer towards each other, the psychological contract helps in nurturing the interpersonal relationships amongst the employer and the employees. In order to sufficiently motivate an employee it is highly important to ensure that the employees are being daily treated the way they wish to be treated. Herein lays the importance of the non-financial rewards. An employer may revise the pay scale of an employee and yet as and when the employee will get a hike on the present salary, he may instantly leave the organization for another. The Psychological Contract theory claims that loyalty and employee commitment is created on a daily basis and hence an occasional increment in salary or an annual health insurance is insufficient in themselves (Vander Elst et al. 2016). The salary, insurance or provident fund are the benefits promised by a legal contract that will not necessarily motivate an employee throughout the year. It is the form of behavioural action and reaction on a daily basis that will determine if the employees are motivated enough or not. Research studies show that even if the employees do not experience a hike in salary and yet they enjoy a congenial work environment, fairness in appraisal and promotion, and fair and equitable pay across the company and market at large, the employees will continue to work in the company. This is exactly what the psychological contract is all about. The employers must be able to create a belief amongst its employees that it does value its individual employee and will care about his job security and well-being. Once the expectations of the employees match the action of the employer or the management authority, the motivation rate and the level of employee engagement in the organization is bound to increase as well. Owing to the psychological contract, the employees will also work more dedicatedly matching the expectations of the employer regarding the quality and productivity of the job being done and employee self-presentation and flexibility at workplace (Laulié and Tekleab 2014). According to the Psychological Contract theory, it is highly important for any organization to understand the specific needs of the employees. Offering the same incentive to all the employees will never be able to create a sense of mutual trust and loyalty amongst the employees and the employer. An in-house nursery or flexible working condition may match the needs and expectations of the female employees of the organization, while a company car for pick and drop facility may deliver the promises of recognition for another employee. Again, a very ambitious employee may feel content to have a series of mentorship programs financed by the organization for employee development. It is well evident here that none of the above-stated amenities offered by the organization is financial in nature, and yet these help in motivating the employees to a considerable extent. In the highly competitive world of today, retention of talented workforce has emerged to be an important issue. However, the Psychological contract Theory states that it is not sufficient for an organization to provide its employees with a job enrichment initiative, career perspective or flexible working environment (Epitropaki 2013). In order to facilitate effective employee retention management, it is equally important to manage and control employee perception of the rewards being provided to him. In other words, the Psychological Contract Theory claims that the retention strategies are important only if the employees value them and feel valued by the organization in return. Thus, the psychological contract unlike the written, legal contract focuses on employees’ subjective interpretation of promised inducements that determine the degree of employee motivation in the organization.
It is important to refer to the Equity Theory that lies at the heart of the Psychological Theory of Contract. A company’s first goal in employee relations is to ensure that the employee feels the relationship is equitable. They put something in, they get something out. The sense of fairness and justice should be the basis of the employer-employee relation. According to the Equity Theory of Motivation propounded by Adams, when an employee feels he has been fairly and advantageously treated, his level of commitment towards the organization will essentially increase (Lazaroiu 2015). Inequalities in rewards can lead to lower levels of job satisfaction, deviant workplace behaviour and low employee morale and can cause performance problems that negatively impact the entire organization. While serving an organization, each employee has his own perception regarding the fair ratio that is the ratio of the productivity the employee delivers in the work and the amount of recognition he believes that he deserves to receive in return. Hence, it is the responsibility of the organization to ensure that the employees do not feel that the ratio is unfair for him. Hence, instead of merely offering financial rewards to the employee, it is important to provide a sense of security and motivation to the employees. The psychological needs of the employee should be satisfied so that he can develop a sense of loyalty and commitment towards the organization. Since different individuals have different psychological needs, the company has to take care of the non-financial reward it is offering an organization at a given time. There is no point in increasing the pay of an employee if he still feels that he deserves as much as his friend receives. The employee gets highly motivated when he feels he is being justly treated, valued and cared by the management authority. The psychological contract theory establishes the importance of offering a positive environment to the employees where they feel there exists a sense of equity, fairness and justice in what they receive (Williams 2013). The employees will work with utmost dedication not merely if they are being offered wit promotion and financial incentives, but they need to be provided with safe, congenial workplace, flexible work policy, fair and equitable pay structure (the policy matters, not the money) and others (Anitha 2014). However, while considering the non-financial incentives to be provided to the employees, it is important to remember that there are differences in employees’ and managers’ perceptions of the terms of the psychological contract and hence effective, regular communication amongst both the parties is required to get an insight into the expectations of each.
Time and again, research studies have stated that in order to create loyalty amongst the employees and to ensure employee engagement, an organization must focus on building strong relationships with the employees, rather than merely bribing them with short-term incentives. Since cash can never be the currency of appreciation and recognition, it can never build trust and loyalty amongst the employees. When an organization chooses to reward employee performance in terms of money it is offering it transactional reward that has little and short-term value for the employees. An employee expects his performance to be monitored and his contribution to be acknowledged. Accordingly the organization should choose to offer relational reward to the employees. As part of the relational reward scheme, the manager may call the employee and publicly announce and appreciate his performance, offer him a certificate of applause or simply offer him a paid leave for working overtime (Massingham and Tam 2015). The praise and recognition schemes, autonomy at workplace, job security and a sense of career advancement and personal growth are highly important to satisfy the psychological needs of the employees. As per the legal contract entered between the employee and the employer at the time of employee appointment, the employees are being promised about the financial benefits and career development polices as per the norms of the organization. However, an employee may soon feel de-motivated o may feel allured by better financial promises offered by other organizations. This is why the relational rewards are prioritized over the transactional rewards in the recent employee management theories. In order to respond to the psychological contract of an employee, the organization should go beyond the conditions of the legal contract, thereby honouring the intent rather than the letter of contract.
The empirical research data suggests that psychological contract breach is directly related to lower employer trust, job dissatisfaction and low employee retention rate. It becomes clear here that a loss of trust in the efficiency of the management results in job dissatisfaction that ultimately leads to low level of employee engagement. According to Herzberg’s theory of employee motivation, extrinsic motivators are important for an employee and are the basic reasons why an employee agrees to join an organization or work (Bradler et al. 2016). Hence, the extrinsic motivators, especially the good salary package and job status of the organization should be present. However, Herzberg maintains that the employee will soon feel de-motivated if he is not being offered the intrinsic motivators such as challenging work, recognition, relationships, and growth potential which help in fulfilling the employees’ emotional needs (Hur 2017).
According to the Psychological Contract Theory, two important things that determine the employee engagement are how the employee feels that he is being treated by the employer, and what does the employee put into the job to receive the same. This contract represents the notion of 'relationship' or 'trust' or 'understanding' which can exist for one or a number of employees, instead of a tangible piece of paper or legal document which might be different from one employee to another. The employees should necessarily feel valued, and taken care of, and the same is only possible when the organization enables its employees to participate in the decision-making process of the company, recognizes the performance of the employees for his contribution and provides feedback to the employees for their contribution (Lau and Roopnarain 2014). The employees of the organization definitely care about the financial rewards. However, at the same time, they wish that what they put in, in an organization is being recognized and appreciated, instead of being overlooked. Research studies have strongly suggested that verbal praise of appreciation from management in front of colleagues, a positive working environment, and encouragement by upper management on new initiatives, effective internal communication as well as good relationship with other co-workers, proper and correct appraisal of employee by management are some of the important motivational factors for the employees of an organization. The company needs to provide the non-financial benefits appropriately to the employees otherwise the employees can devalue such benefits given by the company. According to the Psychological Contract theory, the employees expect a fair and just return of what they put in. Hence, while providing the non-financial benefits the company needs to be fair in its process otherwise the scheme can show opposite effects.
The values of the scheme shall be clearly informed to all the employees and shall not be secretive or specified to a class of employees (Kabak et al. 2014). The employees need to have a clear understanding as to why the specific set of non-financial incentives has been offered to him. Otherwise the employees may feel disrespected and dissatisfied. The scheme shall be transparent, credible and robust. Also the scheme shall create positive effect on the performance management of the employees and not reduce the potential of employees by de-motivating them. Usually, a large number of employees contribute to the well-being of the organization in one way or the other, and yet very few of them get recognized. Since the non-financial rewards are highly important for employee motivation, the top management should try to recognize a major part of the team members working in a group. It should be noted here that the Psychological Theory of Contract works on the principle of reciprocity. The implied promise to behave in a certain way at work is undoubtedly conditional on the other party providing something as ‘part of the deal’. Hence, if the organization chooses to recognize the performance of a single employee or offer work from home facility to a limited few, then the overall employee motivation and engagement will not increase, leading to the fall in the revenue earning capacity of the company (Malik et al. 2015).
The expectations of the employees are increasing at a high rate and in a highly competitive world the employers are finding it tougher to offer the employees whatever they want. In such a situation, the non-financial reward schemes can help in motivating the employees without losing on the cash. While rewarding the employees, it has to be remembered that the management authority should not merely recognize the employee performance by giving away monetary rewards on an occasional basis. The majority of the employees expect a fair and just treatment on a daily basis, and the same can be offered to the employees by introducing an effective non-financial reward scheme. A considerable number of non-financial incentive schemes are introduced only to remind the managers the importance of retaining healthy management practices, regardless of any legal scheme.
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