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2 Types of Psychological Contracts That Improve Team Performance

by Alan Daniel
psychological contracts

Different work environments have varying work cultures. The right cultures  and psychological contracts can improve productivity while the wrong cultures can suppress creativity, productivity, and innovation.

 If you feel comfortable in a specific work environment, you are more likely to push further and obtain higher outcomes. You would likely fit into such a work environment and help you contribute in the best way possible. Different people respond better to distinct cultures. 

Great businesses realize that culture and proper psychological contracts isn’t something that you talk about or write about on your company blogs and job posts. Phenomenal businesses recognize that culture is all about each interaction internally and externally. 

It is about systems and how decisions are made in the workplace. Further, organizations are based on the type of contracts that are present within the entity.

There are various types of contracts, but the commitments that we’ll focus on is about the psychological agreement between leaders and team members. 

Specifically, we’ll focus on the difference between relational contracts and the transactional contract.

Why does this matter? 

COVID-19 will prompt many people to diversify their incomes online, choose side gigs, and create businesses. You might be one of these people that seek to grow your revenue. The first step is choosing your niche. But the second step, arguably, the more critical step is selecting high performing team members that work to generate significant value for the business. 

The idea is to get from point A to point B as everyone progresses to a collective and rewarding goal. Let’s take a look at transactional versus relational contracts.

The Relational Contract in High-Performance Environment

The relational contract is fundamentally built on creating value together with long term collaboration. It is not about just one transaction, such as the sale of an asset or one-time service. 

Relational contracts require both parties to act as partners and invest in the relationship for beneficial long-term outcomes in product management and other environments. Each partner or team member would be interested in the values and ideals and intended outcomes.

Each member would bring their value and specific skills to the table and communicate daily to meet their objectives. The relationships are more tight-knit and would have open-door policy environments. It would have increased affective commitment where each partner is more connected to the objective from different angles. 

They don’t view it as a task but connect to the objective in a more meaningful way. The point is to prioritize collective long-term goals and objectives over short-term individual interests. 

Relational contracts can have more investment in all team members and genuine interest in individual issues that may affect long-term outcomes. Aspects of this contract are necessary when there is more uncertainty present, and each present moment matters to keep the momentum going. 

Startup organizations, open-source movements, and new ideas such as bitcoin would likely lean more to the relational end of the psychological contract spectrum.

The Second Psychological Contract: Transactional Contract

Conversely, we have the transactional contract. The transactional contract is about transactions without any other attachments. 

The idea here isn’t to have any other interaction besides what is called for in the specific objective. It is self-interest oriented, and people work together solely because of extrinsic rewards and repercussions.

Transactional relationships are present in developed and large corporations where dispassionate individuals might seek to work solely to pay bills. It is a contract that will work well when teams implement hierarchical leadership, specific objectives, and short strict timelines. The value exchange within this psychological contract is very transparent and concrete. People expect what they expect and understand the results are capped.

The Difference Between the Two Psychological Contracts: Relational Vs. Transactional Contracts

The relational contract indicates that each individual has more attachment and identifies more deeply with the team and the objective. The transactional contract is merely about the rewards gained from working within the team.

Teams use these contracts depending on the situation and overall context. These contracts are not mutually exclusive. One can have properties of both present in the work environment. But cultures usually lean more toward one or the other.

Choose these contracts wisely because team members will expect different benefits based on these contexts. Lack of meeting these obligations would mean that team members lose trust. These psychological contracts are important to understand as they can make a difference in technology and other environments.

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