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On the theory of psychological contracts in family firms.


Issues of fairness, justice, trust, integrity, and agency relationships are widely discussed in the family business literature as they relate to family member and non-family member employees. To date, however, psychological contracts have not been utilized to address the obligations between employees and the family firm. Psychological contracts are individual beliefs in a reciprocal obligation between the individual and the organization including perceived promises, valued payments, and acceptance of exchanges. Examining psychological contracts in family firms is essential in light of these two unique groups. This paper addresses the topic by providing a theoretical model of the role of psychological contracts in family firms supported by propositions. We believe this provides a more comprehensive approach to issues such as fairness, trust, and justice because of the element of reciprocity, where mutual and cooperative relationships are examined.


With more than two-thirds of all organizations being family owned and/or managed (Gersick, Davis, Hampton, and Lansberg, 1997), it is essential to examine the management practices within those firms. Furthermore, it is important to determine the impact of specific human resource practices on performance, as illustrated by Astrachan and Kolenko (1994), who empirically examined the human resource practices in 600 family owned businesses. Their findings suggest that the effective use of HR practices provides a competitive advantage in the marketplace, particularly showing positive correlations with gross revenue and CEO personal income levels.

This paper aims to provide a theoretical model for examining the role of psychological contracts in family firms, more specifically focusing on two unique groups, family and non-family members. Psychological contracts are individual beliefs in a reciprocal obligation between the individual and the organization (Rousseau, 1989). A review of the literature is provided, first on human resource practices in family firms and then on psychological capital, which centers on the definition, contract formation, and contract fulfillment. The theoretical model is then introduced supported by our propositions and followed by a conclusion and call for empirical research.


Many family-owned businesses must rely on non-family member employees to operate and be successful. Thus, a significant challenge family-owned businesses face is effectively managing non-family members (Chua, Chrisman, & Sharma, 2003). This includes attracting and retaining high quality employees who contribute to the success of the firm and other typical HR processes such as staffing, compensating, conducting performance appraisals, applying company policies and procedures, and granting promotions. Furthermore, Corbetta and Salvator (2004) assert that family firms must implement HR practices that provide non-family members with a strong sense of psychological ownership. Therefore, it is not only imperative to assess HR practices in a general sense, but also as they relate to two unique groups, family and non-family members.

As Mitchell, Morse, and Sharma (2003) contend, non-family members may oftentimes find themselves in complex and uncertain situations because they are part of the business system but not the family system. What leads to the uncertainties and complexities stems from a variety of issues such as how decisions are made (Blondel, Carlock, & Heyden, 2000), a perceived environment of bias and favoritism (Schulze, Labatkin, & Dino, 2003; Lubatkin, Shulze, & Dino, 2005), the direct involvement and influence of family members (Astrachan, Klein, & Smyrinos, 2002), as well as fairness and procedural justice issues (Cropanzano & Greenberg, 1997; Barnett & Kellermanns, 2006).

While James (1999) finds that explicit formal contractual relationships (i.e. written agreements) can be more effective in family firms than implicit informal relationships (i.e. unwritten agreements), the latter of the two always exists where issues of fairness and trust may be more prevalent, especially in firms where nonfamily members lack "status" in the family system. This status disparity could lead to "ingroup-outgroup" perceptions such as questioning the trustworthiness and fairness of the family business system and/or individual family members (Barnett and Kellermanns, 2006).

Issues of trust, integrity, and fairness have been addressed in the literature as they relate to family firms, especially on the topic of succession management. For example, Steier (2001) contends that while trust in those holding positions of authority plays an important role in any organization, it actually provides family firms a unique competitive advantage because it is so indigenous in the relationships that exist. Once a firm grows and succession management occurs, trust becomes an even more important coupled with effective communication (Morris, Williams, and Nel, 1996). In a similar vein, an empirical study by Chrisman, Chua, and Sharma (1998) found that integrity rated among the most important attributes of a successor in family firms.

While issues of fairness and justice have been addressed in family business research (Baldridge & Schulze, 1999; Blondel, et. al, 2000) as well as trust and integrity (Steier, 2001; Morris, et. al, 1996; Chrisman, et. al, 1998) in addition to agency relationships (Corbretta & Salvato, 2004; Schulze, et. al, 2003a; Schulze, et. al, 2003b; Schulze, et. al, 2001), psychological contracts have not yet been examined. Our paper presents a theoretical model and propositions to address psychological contract formation and fulfillment in family-owned businesses. Specifically, we suggest how non-family employees may form contracts different from family members, how mutuality and reciprocity affect contract breach, specific factors that moderate the contract breach-violation relationship, and the ultimate effect that contract violation can have on the success and sustainability of family firms. Included in Appendix A is our model of the role of psychological contracts in family firms.


In this section we introduce the concept of psychological contracts by providing a discussion of the definition and important elements of contract formation and fulfillment. We also discuss how they may play out in family firms.

Psychological Contract Definition

Psychological contracts are individual beliefs in a reciprocal obligation between the individual and the organization (Rousseau, 1989). A psychological contract includes a perceived promise, a valued payment, and acceptance of the exchange ENRfu(Rousseau, 1995). A promise occurs when the employee perceives the existence of a reciprocal obligation with the employer even if the employer does not recognize that obligation's existence. Psychological contract advocates state that perceived promises greatly affect employees because promises are associated with an immense sense of commitment ENRfu(Rousseau, 1989, 1995; Rousseau & McLean-Parks, 1993). A payment occurs when the organization fulfills the perceived obligation by offering a reward valued by the employee. Acceptance of the contract occurs when employers and employees voluntarily participate in perceiving, developing, and rewarding promises and are held accountable to each other for the perceived fulfillment of those promises. The psychological contract process involves how employers and employees form contracts, what contributes to perceptions about the fulfillment of the contract, and how fulfillment and non-fulfillment of a contract affects organizational success. To gain a thorough understanding of the important role that psychological contracts play in family firms, our paper will develop a model that addresses each step of the process.

Psychological Contract Formation

An employee can develop four different types of contracts based on his or her perceptions of the reciprocal promises includes in the psychological contract ENRfu(Rousseau, 1995). A transactional contract exists when performance is specified and the employment relationship is short-term. Rousseau (1990) found that transactional contracts are generally characterized by monetary focused exchanges for a brief, specific performance. Relational contracts occur when the employment relationship is long-term with ambiguous performance requirements. Relational contracts have been found to include monetary and non-monetary aspects that focus more on the long-term exchange ENRfu(Robinson, Kraatz, & Rouseau, 1994). Transitional contracts result when employment is temporary and performance is not specified. Balanced contracts, like relational contracts, exist when employment is continuing but unlike relational contracts performance requirements are known. See Figure 1

Psychological contract formation can be influenced by a number of different variables. For example, the type of psychological contract a person forms can be greatly influenced through the recruiting process ENRfu(Shore & Tetrick, 1994). When a person engages in various aspects of the recruiting process, both the employer and prospective employee provide explicit and implicit messages about the employment relationship. For small family firms, the recruitment process can be expensive both in time and money. Having a transparent recruitment process with realistic job previews can diminish the recruiting costs while increasing the opportunity that the employee will form a psychological contract that aligns with the employer's expectations for the employment relationship.

Another influence is the employment goals that the prospective employee has for the employment relationship (Shore & Tetrick, 1994). Both employers and prospective employees have expectations about the length of the employment relationship. In family-owned businesses family members are more likely to have a long-term commitment to the organization, and because of the familial ties, are more likely to form relational or balanced contracts. However, a non-family prospective employee is not bound by familial ties and may have any number of expectations for the employment relationship. An employee who has accepted employment with the goal of a short-term commitment would be more likely to form a transitional contract than an individual who wants to retire with the hiring organization. That person would be more likely to form a relational or balanced contract.

How information is communicated and processed during the recruitment process can influence an individual's psychological contract formation (Shore & Tetrick, 1994). In particular, this involves how the individual inquires and interprets information about the employment relationship. Many individuals will often rely on incomplete information when making decisions. The amount of incomplete information that a prospective employee is willing to accept can influence the type of psychological contract formed. If an individual has very incomplete information about the employment relationship, then he or she might form a very different contract than if more complete information had been available. Also, if any negotiation occurs during the recruitment process, how the prospective employee engages in the negotiation process and the resulting outcomes can influence the type of contract the individual forms.

Rousseau (2004) identified the role that a person's personality can have when forming a psychological contract. According to Rousseau, individuals highly sensitive to organizational justice issues or may have neurotic tendencies are more likely to form transactional contracts; whereas, individuals with high conscientiousness and self-esteem may form more relational based psychological contracts. Oftentimes, organization-person fit is important for family firms because family and non-family employees may work very closely together. Understanding what type of personality family members seek in non-family members can also give insight to the potential psychological contracts that non-family members may form.

Psychological Contract Fulfillment

All employers and employees form psychological contracts whether they realize and acknowledge them or not. Therefore, it is necessary for the family business owners to understand the significant role that fulfilling these contracts can have on the level of trust within the employment relationship and, ultimately, the organization's performance.

Dabos and Rousseau (2004) identified the important effects that perceived mutuality and reciprocity have on psychological contract fulfillment perceptions within collaborative work environments. Their research found that mutuality is related to positive employer and employee results and that perceived reciprocity of obligations may be dependent on the type of contract formed. Mutuality and reciprocity can be very influential on how family member and non-family members perceive whether contracts are kept or broken. Contract breach may not occur as frequently when family members and non-family employees share similar beliefs about obligations that are owed to each other (mutuality) and how those obligations will be similarly returned to each other (reciprocity) as when less mutuality and reciprocity exists among each other.

Whether contract breach is perceived or not is critical to how psychological contracts affect organizational outcomes. Morrison and Robinson (1997) in their psychological violation development model identified perceived breach (the cognitive evaluation of contract non-fulfillment) as the immediate precursor to contract violation (the emotional/affective response to contract non-fulfillment). Their model also identifies possible moderators such as level of trust, fairness judgment, outcome assessment that may influence an individual's emotional or affective response to the perceived breach. Recently, another article found that personality characteristics moderated the perceived breach and violation relationship (Raja, Johns, & Ntalianis, 2004). Understanding how contract violation occurs and the possible effects on family firms' success and sustainability is critical since past psychological contract research has found violation related to decreased employee trust, organizational citizenship behavior, organizational commitment, and intentions to remain ENRfu(Robinson, 1995, 1996; Robinson & Morrison, 1995).

We believe evaluating psychological contracts in family firms is imperative due to the unique, permanent relationships among family members that extend beyond the business activities. These relationships may present the opportunity for the antecedents and outcomes of a psychological contract to be very different from non-family employees since the non-family employees may have clearer boundaries between work and family and may even terminate the entire relationship by leaving the business. Due to the unique, personal, and enduring relationships among family members, any psychological contract breach may be more severely felt than contract breach by a non-family employee. For example, a family member who exits the business would most likely experience greater psychological and other penalties than a non-family member who leaves the firm. Turnley and Feldman (1999) found that when managers perceived contract breach they were more likely to exit, to increase voice, to become less loyal, and/or engage in neglect behaviors unless certain situational factors were also present. If reemployment was likely, justification for the breach was insufficient, and procedural justice was low, then managers were more likely to leave the organization but not necessarily increase their voice and neglect behaviors or decrease their loyalty. Considering the exit, voice, loyalty, neglect framework for family firms, whether an individual is a family member or not could moderate the breach -violation relationship and affect how the family member chooses to engage in exit, voice, neglect, and loyalty behaviors. While non-family members may not hesitate to leave the firm when the psychological contract has been breached, family members may not perceive exit as an available coping strategy. Rather, family members who perceive their contract to be breached but unable to leave the family firm may be more likely to perceive the contract has being violated which may lead to negative organizational outcomes. On the other hand, if non-family employees perceive that family members are treated more fairly then they may experience contract breach more often and engage in exit, voice, neglect, and loyalty behaviors to a greater degree leading to a greater detrimental impact on the family firm's performance. Additionally, what family members perceive they are owed and must similarly return to each other may be very different than the reciprocal obligations perceived by non-family members in the same family business. It is important to apply psychological contracts directly to the study of family firms, especially to the non-family members where concerns of fairness, trust, integrity and justice appear to be elevated and in light of the importance non-family employees are to family firm success. This will provide a more comprehensive approach to the issues because of the element reciprocity, where a mutual and cooperative relationship is examined between entities.


Appendix A provides a model of the role of psychological contracts in family firms. Following are propositions to support and help explain the model:

Proposition 1: Psychological contract formation within family firms will be different between family members and non-family members. Employment goals, information processing during the recruitment process, and an individual's personality can create different expectations for the non-family employee than the family member. We propose that family members will be more likely to form relational psychological contracts than non-family employees due to the unique, familial bond that family members have with the business.

Proposition 2: Mutuality will moderate the positive relationship between the type of contract formed and contract breach perceptions such that the greater the alignment between the obligations that family members and non-family employees believe to be owed to each other, the less likely contract breach perceptions will be formed.

Proposition 3: Reciprocity will moderate the positive relationship between the type of contract formed and contract breach perceptions such that the greater the amount of similar obligations returned by family members and non-family employees to each other, the less likely contract breach perceptions will be formed.

Proposition 4: Trust will moderate the perceived breach and violation relationship such that non-family employees who have a high level of trust of family members will experience less violation than non-family employees who are less trusting of family members.

Proposition 5: Personality characteristics will moderate the perceived breach and violation relationship such that family members and non-family employees who are equity sensitive or neurotic will experience greater violation than family members and non-family employees who are extraverted, conscientious, have an external locus of control, or high self-esteem.

Proposition 6: Fairness judgments will moderate the perceived breach and violation relationship such that family members will experience less violation when procedural justice is perceived than when nonfamily employees perceive procedural justice.

Proposition 7: Outcome assessment will moderate the perceived breach and violation relationship such that the greater the non-family employee's perceived discrepancy of outcomes between him or herself and the family members, the greater the likelihood that the non-family employee will experience violation than when the family member perceives an outcome discrepancy.

Proposition 8: Contract violation will be negatively related to family firms' sustainability and success measures such as tenure of business, profitability, size, employee turnover, organizational commitment, and job satisfaction.


The purpose of this paper is to provide a framework and theoretical model for examining the role of psychological contracts in family firms. Again, more than two-thirds of all organizations are family-owned and/or managed (Gersick, et. al, 1997) and the literature supports the fact that unique relationship and human resource issues emerge between and among family members and non-family members in family. These issues often focus on trust, fairness, integrity, and justice (Baldridge & Schulze, 1999; Blondel, et. al, 2000; Steier, 2001; Morris, et. al, 1996; Chrisman, et. al, 1998; Corbretta & Salvato, 2004; Schulze, et. al, 2003a; Schulze, et. al, 2003b; and Schulze, et. al, 2001). Applying psychological contracts to study the issues provides a more comprehensive approach because of reciprocity.

Of course, empirical research is imperative to test the model. This paper serves as a viable springboard for such studies, which can focus only on employees within family firms or draw comparative analyses between family firm and nonfamily firms. Several other factors should also be taken into consideration such as the size and age of the firm.

The overall goal is to increase effective management through human resource practices that enhance firm performance. We believe that understanding psychological contracts, how they are formed, how they are fulfilled, and their impact on employees is critical for family firm performance and sustainability.



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Stephanie G. Ward, St. Mary's University

Brooke R. Envick, St. Mary's University

Margaret Langford, St. Mary's University
Figure 1: Psychological Contract Formation *

 Short-term Long-term
 Relationship Relationship

Specific Transactional Balanced

Ambiguous Transitional Relational

* Adapted from Rousseau, D. (1995), p. 98.
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Author:Ward, Stephanie G.; Envick, Brooke R.; Langford, Margaret
Publication:Entrepreneurial Executive
Geographic Code:1USA
Date:Jan 1, 2007
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