Bridging Perception and Practices: Exploring the Reciprocal Relationship Between Organizational Climate and Psychological Contract – A Literature Review
Dr Syed Sadullah Hussainy
Assistant Professor,
Faculty of Business Studies,
Arab Open University, Oman
syed@aou.edu.om
Dr Mahmood Al-Wahaibi
Assistant Professor,
Faculty of Business Studies,
Arab Open University, Oman
mahmood.wahaibi@aou.edu.om
Dr Kabaly P. Subramaniam
Assistant Professor,
Faculty of Business Studies,
Arab Open University, Oman
alhaziazi@aou.edu.om
Dr Rengarajan Veeraswamy
Assistant Professor,
Faculty of Business Studies,
Arab Open University, Oman
renga@aou.edu.om
Fatima Al-Hinai
Lecturer, Faculty of Business Studies,
Arab Open University, Oman
fatema.h@Aou.edu.om
Abstract:
This study comprehensively reviews the existing literature on the interrelationship between organizational climate and psychological contracts. Organizational climate is the perception and feeling of employees towards the organizational working environment, its leadership, communication system and shared culture. The psychological contract refers to implicit agreement and expectations between employers and employees. This study examines how good organizational climate strengthens the psychological contract and how a favourable psychological contract of employees will improve the organization's climate. The findings of this study revealed that the psychological contract and the organizational climate mutually influence one another and will create implications for each other. This study shows the essence of prioritizing a good organizational climate to ensure favourable psychological contracts and how achieving a favourable psychological contract will improve employees' trust, loyalty and communication climate, generating a good working climate in the organization. Understanding this relationship is vital for managers willing to develop a conducive working environment.
Keywords: Organizational Climate, Psychological contract, employee trust, loyalty, working climate, conducive environment.
Introduction
The relationship between organizational climate and employees' psychological contract has been considered by practitioners and researchers in organizational psychology and behaviour (Rousseau &Tidents, 2001). This review paper explores how organizational climate affects employees' perception, attitude, and behaviour through the perspective of employees' psychological contract fulfilment. The organizational climate is defined as the employees' feelings towards the working environment provided by their organization, which provides a foundation upon which employees' psychological contracts are formed and developed (Schneider, 1999). The psychological contract can be described as a hidden contract which involves the unrecorded relationship between employer and employees (Rayton &Yalabik, 2014). The interaction between these two factors serves as a foundation for an effective workplace environment, which will influence the organization's success. (Coyle-Shapiro, 2020; Yu, J., 2022).Organizational climate is the employees' perception of their organization's working environment. These perceptions are shaped by various organizational factors, including leadership styles, communications climate, authority and support provided to the employees (Coyle-Shapiro, 2020). Scholars have opined that organizational climate comprises tangible and intangible aspects of the working environment, which include physical working conditions and the company's vision and mission; trust, fairness and equity contribute to the organizational climate (Schneider et al., 2019). Another important factor that affects the organizational climate is the leadership style of senior management. Transformational leadership has been closely related to the positive organizational climate because it emphasizes employees' development and empowerment (Mayer, 2022). Contrary to this, authoritarian leadership can create a negative perception of the working environment, contributing to a closed communication climate and a toxic organizational climate, which may lead to high stress, low morale and increased employee turnover (Berberoglu, 2018).
The psychological contract is described as an unwritten and informal agreement between an employer and employee regarding mutual obligations (Rousseau &Tijoriwal, 1998). Unlike the job contract, which explains terms and conditions of employment, such as duties and responsibilities, compensation and benefits, the psychological contract mainly deals with unspoken and intangible aspects of the employment relationship. It involves employee's expectations regarding career development, job security, work-life balance and fair treatment (Guest, 2020). The psychological contract develops over time and is shaped by organizational culture, communication climate, and employee interaction. When employees feel supported and given opportunities for growth, their psychological contract is reinforced. The psychological contract breach happens when employees feel the organization has not fulfilled its obligations, including minimum motivation, termination without any valid reason, and not recognizing the employee's contribution. When psychological contract breaches, employees may feel betrayed, leading to reduced job satisfaction and increased intention to leave the organization. (Robinson et al., 2022).
Interaction Between Organizational Climate and the Psychological Contract
This relationship is important for organizations seeking to enhance employee engagement, retention and productivity. A good psychological climate can improve employees' psychological contract by promoting a sense of security, fairness and opportunity. When employees feel that their working environment supports their growth, they will develop a feeling that organizations value their contributions, strengthening their psychological contract and enhancing their loyalty and commitment to the organization (Hassan et al., 2021). Contrary to this, a negative organizational climate results in breaching the psychological contract. For example, an environment with a closed communication climate, lack of recognition, and weak leadership can make employees feel low and disconnected from the organizational goals. Such climates often lead to dissatisfaction and betrayal as employees perceive that the organization is not fulfilling its obligations (Conway & Clinton, 2024). This disconnection from the organization's goals can result in reduced performance, low motivation, and higher turnover.
The Significance of Organizational Climate for Organization’s Success
Understanding the impact of organizational climate on the employees' psychological contract is important for retaining productive employees. In today's competitive business environment, where employees' expectations are mainly focused on meaningful work, inclusivity, and personal development, companies should not ignore the organizational climate's role in providing a better employee experience. Research reveals that companies with a favourable climate experience higher employee productivity and benefit from better organizational performance (Shen et al., 2019). Employees working in these environments will take more initiative, collaborate effectively, and contribute more to the organization. Contrary to this, companies who ignore the importance of organizational climate may face significant challenges. An adverse climate can create mistrust and disengagement, leading to declining employee morale and productivity. In such an environment, employees are more likely to disengage from their roles, seeking opportunities elsewhere that better align with their values and expectations. Besides that, companies with an adverse organizational climate often experience higher rates of turnover, which can be expensive in terms of recruitment, training and lost productivity (Lee, C.H.,& Chen, C. W. 2021).
This study is structured into five sections to provide a complete understanding of the relationship between organizational climate and psychological contract. The first section (Introduction) explores the conceptual foundations of organizational climate and the psychological contract, including their definition and theoretical frameworks. The second section presents a detailed analysis of empirical studies investigating the relationship between these two constructs, highlighting the key findings and identifying gaps in the literature. The third section deals with research methodology, which presents the detailed process of this research paper. The fourth discussion section synthesizes the reviewed evidence to explain the Implications for organizational practices and practices. Finally, the conclusion consolidates the important learning from the review, emphasizing its contribution to the field and outlining potential direction for future research. This structure ensures a systematic review which offers valuable insight for both scholars and practitioners in the field of organizational psychology and behaviour.
Review of Literature
This review aims to combine the current research on the relationship between organizational climate and the psychological contract. By evaluating the factors that contribute to both concepts and the ways in which these two concepts interact. The literature review provides insights into how companies can optimize their internal environment to promote employee loyalty, productivity, motivation and performance. By drawing from a wide range of studies, this research paper highlights the role of organizational leadership, communication climate and support structure in creating a positive psychological climate and discusses the potential consequences of failing to maintain these elements. The finding offers practical suggestions for practitioners and business managers striving to create a conducive working environment that supports fulfilling the employee's psychological contract and drives organizational success (Johnson &Kine, 2022). Understanding these dynamics is important for organizations aiming to maintain a productive and motivated human resource in the long term. As employee's perceptions and expectations evolve, companies must stay attuned to the factors that influence organizational climate and psychological contracts to have a competitive edge and retain efficient employees in an increasingly global and interconnected market. This literature review also synthesizes research findings from studies conducted between 2018 and 2024. The aim of this review is to explore the relationship between these two constructs and their impact on an organization's performance and employee outcomes. By concentrating on contemporary research, this literature review highlights the advancement in empirical and theoretical findings and methodological approaches in the field of research.
Interaction Between Organizational Climate and Psychological Contract
Organizational climate is the shared perception of employees towards policies, practices, and procedures that characterize their organization (Schnieder et al., 2018). It consists of aspects that include leadership, communication, and ethical standards, which shape the collective working culture and environment within which employees work. A good organizational climate is often connected with higher productivity, job satisfaction, better employee performance and greater organizational commitment (Kuenzi & Schminke, 2018).The psychological contract refers to the unwritten set of expectations between employers and employees. This construct focuses on the implicit, subjective agreement that employees and employers perceive regarding their roles, responsibilities, contributions and organizational support. (Herrera, J., & De Las Heras-Rosas, C., 2021). The fulfilment of psychological contracts is linked to improving trust, motivation, and retention of employees while breaching them can have negative implications such as dissatisfaction, turnover intention, and low employee performance (Lee & Chen, 2019).
The relationship between organizational climate and psychological contract is an important area to explore. Organizational climate affects the formation, fulfilment and maintenance of psychological contracts by shaping employee's perceptions and experiences (Parker et al., 2019). For example, an open and transparent organizational climate promotes trust and alignment, which are critical for sustaining a favourable psychological contract. Empirical studies provide the notion that a congruent organizational climate improves the likelihood of fulfilment of the psychological contract. According to the latest research findings, a high level of trust and an open communication climate within an organization are positively connected with the perception of psychological contract fulfilment (Zhao et al., 2020). Similarly, poor organizational climate often contributes to perceiving psychological contract breaches, undermining employees’ loyalty, motivation, morale and engagement (Nguyen & Dao, 2021).
Organizational Climate’s Dimension
Organizational climate is a multidimensional construct that differs across organizations and industries. Key dimensions identified in the latest research include leadership climate, ethical climate, innovative climate and safety climate. The leadership role in developing a positive organizational climate has been extensively documented. Transformational leadership, characterized by vision, values, inspiration and support, improves psychological contracts by promoting trust and alignment (Bass & Riggio, 2019). Ethical organizational practices and fairness in decision-making within organizations serve to create a sense of moral standard and integrity, positively influencing psychological contracts (Victor & Cullen, 2020). Innovation climates promote creativity and risk-taking, which encourages employees to view their psychological contract as dynamic and growth-oriented (Anderson & West, 2021). Safety climate, primarily related to high-risk industries, a robust safety climate reinforces trust, safety and security, directly affecting psychological contract perception (Zohar & Polachek, 2020)
Psychological Contract’s Dimension
The psychological contract also operates in multiple dimensions, reflecting the subjective nature of employee-employed relationships. Current studies have shown the following important dimensions: transaction contract, relational contract, and balanced contract. The transaction contract focuses on short-term but more specific exchanges such as pay for better performance. They exist in organizations focusing on measurable outputs (Herrera, J., & De Las Heras-Rosas, C., 2021). On the other hand, relational contracts consist of long-term, trust-based exchanges that are characterized by loyalty, mutual respect, and shared goals (Conway & Briner,2020). The balance contract is a blend of transactional and relational contract elements in which balance reflects flexibility and adaptability in meeting mutual expectations (Freese et al., 2019).
Impact of the relationship between organizational climate and psychological contracts on employee performance
The relationship between organizational climate and the psychological contract has a far-reaching impact on employee performance. The findings of the current research studies reveal that a positive organizational climate relates to high levels of job satisfaction due to the alignment of organizational values with employees' expectations. (Schneider et al., 2018). Psychological contract fulfilment also enhances employee satisfaction by promoting a sense of trust and reciprocity (Nguyen & Dao, 2021). Similarly, organizations with a positive climate and fulfilled psychological contracts report high employee productivity and performance. A study conducted by Zhao et al. (2020) shows that positive perceptions of fairness and leadership are directly related to task performance. Breach of psychological contracts often comes from negative organizational policies, which will affect and increase employee turnover intention. Similarly, a climate characterized by support and trust lowers employee turnover by reinforcing employee commitment (Lee & Chen, 2019). Additionally, a good climate and fulfilled psychological contract contribute to employee well-being by reducing stress and promoting resilience. A research study conducted by Parker et al. (2019) shows the mediating role of organizational climate in reducing the effects of workplace stressors.
Impact of Psychological Contract on Organizational Climate
Studies highlight the dynamic interplay between these constructs, underscoring how the breach and fulfillment of psychological contracts shape the organization's climate. Psychological contract fulfillment promotes trust, commitment, and job satisfaction, contributing to a positive organizational climate. (Rousseau, 1995). Conversely, breaches in the psychological contracts instances where expectations are not met- reduce trust and employee morale, leading to a negative organizational climate marked by conflict, disengagement, and reduced productivity (Robinson & Morrison, 2000)
Yu (2022) stated that perceived organizational support, a key component of a positive organizational climate, mediates the effect of psychological contract fulfillment on work attitudes. When organizations keep promises and demonstrate fairness, employees are more likely to reciprocate through good behavior, creating a culture of mutual respect. Similarly, Raeder (2023) opined that sustaining psychological contracts during organizational changes is essential for maintaining a cohesive and adaptive climate. Overall, the alignment of psychological contracts with organizational practices promotes employees' well-being and a resilient and positive organizational climate.
Moderator and Mediators
The relationship between organizational climate and psychological contract is affected by many moderators and mediators. Current search studies identify the following findings: leadership style works as a key mediator in changing the organizational climate and influencing individual perceptions of psychological contracts. Transformational leaders are very effective in enhancing psychological contract fulfilment through clear communication and support (Bass & Riggio, 2019). Similarly, individual differences include personality traits, values, organizational culture, moderate organizational climates and perceptions and how psychological contracts are developed. For instance, employees with collectivist orientations are more likely to value relational contracts (Frees et al., 2019). In addition to this, industry type, organization size, structure, and technological advancements affect the dynamic between organizational climate and the psychological contract. Research studies in the context of remote work highlight the role of digital communication in shaping perceptions (Anderson & West, 2021).The current research studies use diverse methods to investigate the relationship between organizational climate and psychological contract. Survey-based research remains predominant. However, qualitative approaches, such as interviews and case studies, provide a deep understanding of employee experience (Zhao et al., 2020). Advances in multilevel modelling have also enabled researchers to examine nested data structures, focusing on individual and organizational influences simultaneously (Nguyen & Dao, 2021).
The Research Gap & Direction for Future Research
Despite the substantial research studies conducted on the relationship between organizational climate and psychological contract, significant gaps warrant further research and investigation. One of the key areas that has been underexplored is the longitudinal dynamics of this research construct. The existing research studies have provided insights into how organizational climate influences psychological contract at a given time, but there is limited research on how these dynamics developed over time. There are also limited studies on how changes in organizational climate over an extended period affect the breach or fulfilment of psychological contact. Longitudinal studies can provide a deeper understanding of this relationship's temporal aspect while helping organizations understand how shifts in climate may influence employee behaviour and attitude over a period. Another important gap related to technological impact, especially in the context of remote and hybrid work arrangements. As organizations increasingly adopt flexible working models, the role of digital technology communication and virtual leadership in shaping both organizational climate and the psychological contract remains under-explored. Investigating how technology-mediated interaction impacts these constructs is important for formulating strategies that maintain positive employee-employer relationships in non-traditional work settings. Additionally, cross-cultural comparison in this domain has been very limited. While some studies acknowledge that cultural differences may shape the perception and affect the organizational climate and psychological contract, there is limited systematic research comparing these constructs across different cultural contexts. Cross-cultural studies can give insights into how organizational climate and psychological contact are understood and enacted in diverse environments, offering a more global perspective on these constructs.
Lastly, limited research investigates the intersectionality of demographic variables such as age, gender, and ethnicity in the formation and perception of psychological contact and organizational climate. Individual differences play an important role in how employees perceive their work environment and the expectations they hold regarding their employer. Addressing these gaps found in literature can improve the understanding of the relationship between organizational climate and psychological contract, which will undoubtedly provide some actionable insights for both academics and practitioners. Future research should investigate the temporal dynamics of organizational climate and psychological contracts, exploring how these constructs developed over time. It is also important to investigate the role of technology, especially in remote and hybrid work settings, in developing organizational climate and psychological contracts. Additionally, exploring cultural variation in the perception and impact of organizational climate and psychological contracts is a perfect area of research. Researchers should also investigate the interplay of demographic variables such as age, gender, and ethnicity in shaping employee experiences.
The relationship between organizational climate and psychological contract represents a critical area of research in organizational behaviour. Current research shows the relationship between these constructs, focusing on their collective effect on employees' performance and organizational effectiveness. By promoting a positive organizational climate and fulfilling psychological contracts, organizations can improve trust, commitment and performance, ultimately achieving sustainable success. Future research should also address emerging trends and methodological challenges to improve the field further.
Research Methodology
The research methodology in this study is designed to give a broad and detailed overview of the existing knowledge on the subject. This approach is to make sure that the study offers both depth and breadth in its review, providing readers with a complete understanding of the interaction between organizational climate and psychology based on credible and authorized scholarly sources. This paper used methodology, which is based on a qualitative approach, specifically a literature review methodology, which is suited to synthesizing and analysing available literature on the relationship between psychological contracts and organizational climate. The reason for using a literature review method as the research methodology is to collect, interpret and synthesize research findings from a wide range of available studies to draw a complete understanding of the topic of the study.
To ensure the relevance and depth of the review, the data was collected from peer-reviewed academic journals, books and book chapters on the topic, which were chosen as primary sources of information. Additional data was collected by searching electronic databases, such as EBSCO, ProQuest, Google Scholar, JSTOR and ScienceDirect, for peer-reviewed journal articles and book chapters by using search terms and keywords related to organizational climate, psychological contract and the relationship between organizational climate and psychological contract. Articles and chapters were published between 2018 and 2023 to make sure that the most recent and relevant studies were reviewed. However, some influential works, such as Rousseaus' foundational theories on the psychological contract, were included despite their being old. Studies from a human resource management perspective and organizational psychology and behaviour cover both theoretical and practical insights into the relationship between organizational climate and psychological contracts.
Criteria of inclusion and Exclusion
To keep relevance and focus, particular exclusion and inclusion criteria were used. Exclusion criteria included studies that mainly focused on organization climate and psychological contracts separately without drawing a relationship between these two variables. Research studies focus primarily on unrelated organizational outcomes like financial performance or market competition. The inclusion criteria were studies that clearly addressed the relationship between organizational climate and psychological contract (both qualitative and quantitative studies) and evaluated the impact of organizational climate on employees’ perception, attitudes and satisfaction.
Research Questions
This study aims to find the answer to the following research questions, which is essential to ensure that this study comprehensively addresses the problem statement and achieves its intended goals.
The Research Objectives
The objectives of this study are outlined to provide a clear and concise roadmap for achieving the research's goals, as follows.
Data Analysis
This research mainly focused on identifying themes, patterns and conclusions drawn from the selected research studies. The content analysis of the collected data was done to find key themes, patterns and relationships. The findings from the collected data have also been synthesized to provide a comprehensive understanding of the relationship between organizational climate and employees' psychological contracts. Additionally, thematic analysis of the collected data is used to understand the common themes across the literatureand identified the following important themes: leadership's role in shaping organizational climate, how communication influences employee expectations, the interplay between organizational climate and the fulfilment of psychological contract and the Implication of breach in the psychological contract on employee's perception and behaviour. The combination of these themes helped in a comprehensive understanding of how various elements of organizational climate contribute to the formation and maintenance of the psychological contract and how a breach of the psychological contract affects employees' perception. Convergent and divergent findings from the literature were analysed to understand the limitations and strengths of the current research. Special attention was given to those research studies that presented empirical data on the impact of organizational climate on psychological contracts to ground the review in evidence-based research.
Discussion
Organizational climate and psychological contract are important constructs in understanding the dynamic between organizations and their employees. The review of literature also highlights the impact of organizational climate on the fulfilment of psychological reveals that these two factors are linked intricately, influencing a range of outcomes such as employee loyalty, satisfaction, performance, engagement and retention.Organizational climate's dimensions, like leadership style, ethical practices and organizational culture, significantly shape how employees perceive their psychological contract. For example, transformational leadership and ethical organizational climate promote or affect psychological contracts (Bass & Riggio, 2019; Victor & Cullen, 2020). Contrary to this, an inconsistent organizational climate can lead to breaches in psychological contracts (Ngueyn & Dao, 2021). For example, an organization failing to keep promises can provoke negative reactions and feelings of betrayal among employees (Lee & Chen, 2019). This shows the importance of a positive organizational climate to prevent breaches and ensure promises are fulfilled.
In examining the dimension of the psychological contract, current studies differentiate between transactional, relational and balanced contracts. Transactional contracts are focused on short-term exchange-based relationships, where employees expect specific rewards for their performance (Herrera, J., & De Las Heras-Rosas, C. 2021). Contrary to this, relational contracts are based on long-term trust-based exchange, and the balanced contract is a combination of both (Freese et al., 2019). Understanding these different contracts allows organizations to customize their strategies to meet various employees' needs, promoting a more personalized and effective work environment.The implications of these findings for employee outcomes are huge. A positive organizational climate not only improves employee job satisfaction but also affects performance and retention. Research shows that when employees perceive that their psychological contract is being met, they will become more committed to the organization, exhibit a high level of productivity and experience greater well-being (Schneider et al., 2018; Zhao et al., 2020). Conversely, when it gets breached, there is a marked decline in job performance, satisfaction, and organizational commitment (Lee & Chen, 2019).
Apart from this, various moderators and mediators shape the relationship between organizational climate and psychological contract. Leadership style is seen as a key mediator that converts organizational climate into individual employees' perception of their psychological contract (Bass & Biggio, 2019). Individual differences, including personality traits and cultural backgrounds, further moderate how these climates are perceived and how psychological contracts are formed (Freese et al., 2019). These findings suggest that a one-size-fits-all approach may be suitable for managing the relationship between organizational climate and psychological contract. Instead, organizations should account for individual differences and contextual factors when designing their organizational climate and employee engagement strategies.
Conclusion
The relationship between organizational climate and the psychological contract is a fundamental aspect of organizational behaviour with substantial Implications for employee outcomes. The interaction between these two constructs emphasizes the need for organizations to create environments where organizational climate and psychological contracts align with employees' expectations. Research shows that organizations that give importance to the development of a positive organizational climate and work to fulfil employees' psychological contracts can achieve better performance in the long term (Schneider et al., 2018; Zhao et al., 2020). With the changing nature of the workplace-particularly after COVID-19 with remote work and the increasing importance of digital technology and communication, future research should further investigate the temporally dynamic of these two constructs. Ultimately, organizations that align their organizational climate with employees' psychological contracts will be better positioned to foster a productive workforce. As research in this area progresses, the insights gained will help organizations create work environments that are conducive to both individual well-being and organizational success.
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