Research on Principle and Agent Theory

Over the years business organisations worldwide have evolved from small-scale, self-sufficient institutions into large, advanced corporations growing beyond national boundaries. An important driver of this growth has been the human resources involved with these organisations. As these organisations have evolved, their workforce has also grown in magnitude and complexity. There is now a need to individualize rather than standardize the human resources of a company due to several changes in the business environment that have also lead to actions such as outsourcing and downsizing. This has resulted in the formation of employment contracts within organisations. Beyond these contracts the principal and agent are affected by another phenomena that is know as psychological contracts. This essay will help define the significance of psychological contracts, illustrate the importance of a strong employer and employee relationship and help explain how violation of a psychological contract would impact employee attitudes and behavior in an organisation.

In the last two decades there as been a lot of research on psychological contracts and the impact it has within an organisation (David Prottas, 2007). Increasingly, the psychological contract is seen as an important framework for understanding the employment relationship (Shore et al., 2004; Taylor & Tekleab, 2004). This contract can be defined as “individual beliefs, shaped by the organisation, regarding terms of an exchange agreement between individuals and their organisation” (Rousseau, 1995). Employees in an organisation develop a set of informal obligations, expectations and assumptions about what the employer owes them. Psychological contracts entail beliefs about what employees believe they are entitled to receive, because they perceive that their employers conveyed promise to provide those things (Sandra L. Robinson, 1996). A new manger in an organisation would assume to receive a good job, high salary and be given new opportunities. These expectations emanate from a wide variety of sources, including past experiences and social norms (Sandra L. Robinson, 1996). However these assumptions are not always a reality in the business environment and thus cause obstacles between the principal and agent. Employees consider psychological contracts as an implicit understanding of the deal they have with their employer (Hao Zhao et all, 2007). It is a crucial aspect of employer and employee relationship as it deals with the unspoken agreement formed between the two parties. For a business to successfully manage its human resources, it requires communication between principal and agent at all levels as they need to effectively co exist and work together for the development of any business (William H. Turnley et al, 2003). If the employer neglects the employee’s expectations and beliefs, it would invoke a sense of disappointment, frustration and distress for the employee (Robinson and Morrison,