This is a summary of research by Marc Thompson and Paul Heron of Templeton College, entitled Innovation and the Psychological Contract in the Knowledge Business, by Marc Thompson and Paul Heron.
Knowledge workers are a critical source of competitive advantage in the modern economy, and firms will continue to experience recruitment and retention difficulties into the forecast recession. In research-led high tech businesses these pressures will be more acute as the supply of research capable scientists and engineers is unlikely to keep up with demand. This means that in order to be successful, firms will need to create organisational environments that attract and retain these leading-edge skills and also ensure that they are productive.
We argue that in order to create the conditions necessary for the greater combination and exchange of knowledge within the firm, organisations need to improve the psychological contract of their knowledge workers.
The study is based on a model in which a broad range of organisational and individual factors are mediated via the psychological contract to three types of outcome - organisational commitment, citizenship and innovation. A measure to gauge fulfillment levels in the individual psychological contract was also devised.
The data interpreted by the model was obtained from a survey of six R&D-intensive high technology companies conducted in the year 2000 in the IT, software, electronics and pharmaceutical sectors. 849 surveys were distributed, and 429 responses achieved - a response rate of 57%, which is good for a voluntary survey.
Our main findings are as follows:
What knowledge workers value most in the psychological contract
- The following five areas are seen as the most important features of the psychological contract: working on challenging assignments, opportunity to balance work and home life, job security, opportunities to develop new skills, promotion on the technical ladder.
- Engineers rate an annual pay increase linked to performance much more highly than scientists, perhaps confirming that these knowledge workers are likely to have a much stronger organisational than professional identity.
The state of the psychological contract
- The areas where knowledge workers identified the biggest gap between what they felt the organisation owed them and the extent to which it was being fulfilled are: financial incentives, good job design and work/life balance
- Where financial incentive obligations were seen as fulfilled, employees are more likely to have been involved in the design of the reward system.
- Good job design (i.e. structuring jobs that provide opportunities for interesting work, skill acquisition and career development) is more likely to be fulfilled where the organisation has fair and transparent organisational processes. This is in addition to creating a positive organisational climate.
- Connections between certain factors suggest some knowledge workers may be minimising their contribution to the organisation in order to meet family obligations. This represents a potential under-utilisation of skills and knowledge in firms that do not succeed in developing policies to balance work and home life.
- In sum, the organisational factors most important in predicting a better psychological contract overall are: a positive organisational climate, involvement in reward system design, lower levels of work-related exhaustion, high salary levels and longer length of service.
The impact of the psychological contract
- Good job design is the most important dimension of the psychological contract predicting higher levels of innovation in firms.
- A high level of organisational citizenship (i.e. behaviours that go beyond the strict requirements of the job) is positively associated with innovation performance. Once again good job design is critical in shaping this.
- Good job design and a positive organisational climate are in turn critical for higher levels of organisational commitment. Our model shows that high levels of organisational commitment are strongly and positively associated with organisational citizenship, which in turn is linked to higher levels of innovation.
Our research is unique because it not only explores the state of the psychological contract in knowledge-intensive firms but also identifies which dimensions of this contract are critical to higher levels of innovation. However, many knowledge workers are not working in environments where their talents are fully utilised. Fewer than one in four rates their psychological contract positively, indicating that there is plenty of room for improvement.
What can firms do to improve this situation and help create a more effective knowledge business? Many organisations may see performance-based rewards as the route to success but our research advises managers to address the whole of the psychological contract and, in particular, employee involvement and good job design.
As the contribution of knowledge-intensive firms to national prosperity grows, managers need to look carefully at how that can create the right social conditions for innovation. The challenge for managers is to design interesting, challenging work that provides opportunities for skill acquisition, career development and recognition. This is not an easy task, but it is our contention that policies that focus on managing the extrinsic, financial aspects of the psychological contract will not in themselves be sufficient to stimulate higher levels of innovation.
The full report is available from dave.hall@templeton.ox.ac.uk
