The Link Between HR Practices, Psychological Contract Fulfillment, and Organizational Performance: The Case of the Greek Service Sector
Abstract
The purpose of this study is to investigate the impact of human resource (HR) practices on organizational performance through the mediating role of psychological contract (expressed by the influence of employer on employee promises fulfillment through employee attitudes). The study is based on a national sample of 78 organizations from the public and private services sector in Greece, including education, health, and banking, and on data obtained from 348 employees. The statistical method employed is structural equation modeling, via LISREL and bootstrapping estimation. The findings of the study suggest that employee incentives, performance appraisal, and employee promotion are three major HR practices that must be extensively employed. Furthermore, the study suggests that the organization must primarily keep its promises about a pleasant and safe working environment, respectful treatment, and feedback for performance, in order for employees to largely keep their own promises about showing loyalty to the organization, maintaining high levels of attendance, and upholding company reputation. Additionally, the study argues that the employee attitudes of motivation, satisfaction, and commitment constitute the nested epicenter mediating construct in both the HR practices–performance and employer–employee promise fulfillment relationships, resulting in superior organizational performance. © 2012 Wiley Periodicals, Inc.
Introduction
Psychological contract is defined as “an individual's system of belief, shaped by the organization, regarding terms of an exchange agreement between him/herself and the organization” (Rousseau & Greller, 1994, p. 385). Psychological contract is important because previous research has shown it to influence important employee and organizational outcomes, such as employee attitudes and organizational performance. Specifically, it is argued that changes in psychological contract may have an impact on employee attitudes such as motivation, commitment, and satisfaction (Robinson & Morrison, 1995; Shore & Tetrick, 1994; Sparrow, 1998). Accordingly, changes in employee attitudes may have an influence on organizational performance (Boselie, Dietz, & Boon, 2005; Guest, 1997; Paauwe & Richardson, 1997). However, most literature refers to the employer–employee relationship in terms of attitudinal consequences and less on its effect on organizational performance (Nelson & Tonks, 2007; Pate, Martin, & McGoldrick, 2003).
Psychological contract research has tended to focus on the implications of psychological contract violation rather than psychological contract fulfillment (Grimmer & Oddy, 2007; Nelson & Tonks, 2007). Psychological contract violation occurs when employees believe that the organization has failed to fulfill its promises (also see Baker, 2009). This study, however, is focused on the employer promise fulfillment as perceived by employees, who are likely to reciprocate by fulfilling their own promises (Conway & Briner, 2005; de Jong, Schalk, & de Cuyper, 2009). This is because it is argued that the outcomes of the psychological contract are more strongly related to the fulfillment of promises than to promises per se (Lambert, Edwards, & Cable, 2003).
When psychological contracts are sound and perceived to be honored, it does not necessarily mean that performance levels will be enhanced. Rather, when a contract is not sound and is perceived not to be honored or is somehow unbalanced, then it will act as a de-motivator and result in various levels of withdrawal behavior (Sparrow, 1998). It must be said, however, that there is a conceptual ambiguity surrounding the causal association in the employment relationship, and the actual empirical relationship for this relationship is scant (Guest, Conway, Briner, & Dickman, 1996). (Westwood, Sparrow, & Leung, 2001, p. 624)
Research has also suggested, though perhaps not strongly empirically tested, that HR practices may be a key predictor of employee perceptions of the psychological contract—both employer and employee fulfillment of their obligations. Specifically, it is argued that a major function of human resource management is to cultivate a positive psychological contract that will lead to greater employee commitment and satisfaction and thus to improved organizational performance. Particularly, Suazo, Martinez, and Sandoval (2009) describe the means by which human resource practices can create psychological contracts, and argue that “research on HRM practices as antecedents to psychological contracts is in need of further development” (p. 160), something that we propose to investigate in this study. On the whole, taking into consideration that the psychological contract in this study is reflected on the degree that employee promise fulfillment is influenced by employer promise fulfillment, we further assume that HR practices are antecedents of employer and employee promise fulfillment (Suazo et al., 2009).
Although the concept of psychological contract has been largely investigated over the past years, more research is needed in order for it to become a reasonable framework for understanding the interactions between employers and employees (Guest, 2004). Specifically, there is a lack of empirical work in the field (Pate et al., 2003) investigating causal orderings between the relationships involved (Aryee, Budhwar, & Chen, 2002; Cropanzano & Mitchell, 2005; Coyle-Shapiro & Shore, 2007), and there is a need for more studies examining both employer and employee perspectives of the psychological contract (Baker, 2009). Therefore, the study aims to test a model hypothesizing a mediating role for employee perceptions of both employer and employee fulfillment of their psychological contract obligations in the relationship between HR practices and organizational performance.
Moreover, considering that there is “poverty of research on psychological contract outside Western economies” (Westwood et al., 2001, p. 648) we also propose to extend previous US-centric psychological contract research into a previously untested cultural/societal context, such as the Greek services sector. Greece is a peripheral country in the European Union that both influences, and is influenced by, the Balkan and the Black Sea countries. The Greek, Balkan, and Black Sea countries' cultural and economic context is rather different from the West European countries' context. Therefore, it would be interesting to extend the debate on the role of human resource management (HRM) and psychological contract in improving organizational performance to countries such as Greece.
Overall, there is a lack of previous psychological contract research treating organizational performance as the ultimate dependent variable (de Jong et al., 2009). There is also a lack of psychological contract research referring to employer and employee promise fulfillment (Grimmer & Oddy, 2007; Nelson & Tonks, 2007). Further, there is a scarcity of research considering that HR practices are antecedents of employer and employee promise fulfillment (Suazo et al., 2009), especially for non-Western contexts investigating the HR practices–psychological contract–organizational performance relationship (Pate et al., 2003). Therefore, the aim of this study is to investigate the impact of HR practices on organizational performance through the mediating role of psychological contract, expressed by the influence of employer on employee promise fulfillment in the Greek service-sector context.
Research Model and Hypotheses
Building on the contributions of Guest and Conway (2004) and Purcell, Kinnie, and Hutchinson (2003), Figure 1 presents an operational model linking HR practices, psychological contract, and organizational performance. The proposed operational model assumes that the state of the psychological contract mediates the relationship between HR practices and organizational performance. Specifically, the model is constituted by two related systems: the psychological contract system and the HR practices system. The first system refers to psychological contract that is expressed by the relationship between employer promise fulfillment (e.g., transactional, relational) and employee promise fulfillment (e.g., transactional, relational) mediated by employee attitudes (e.g., satisfaction, commitment, motivation). This system is based on the notions of reciprocity and social exchange, whereas if the employer upholds his side of the bargain, this will make employees satisfied, committed, and motivated, and so they will reciprocate by upholding their side of the bargain (Coyle-Shapiro & Kessler, 2003; Rousseau, 1995). The second system refers to the relationship between HR practices (e.g., resourcing, development, rewards, relations) and organizational performance (e.g., effectiveness, efficiency, development, innovation, quality). This system is based on the high performance HR practices concept, whereas HR practices influence organizational performance because of psychological contract fulfillment (Rousseau, 1995). In particular, the specific systems of the proposed model are explained below.
An HR Practices–Psychological Contract–Organizational Performance Linkage Framework
The Psychological Contract System
Employees keep their promises according to the behavior of the “good employer,” or the “history” of the organization in keeping its promises to employees (Purcell & Hutchinson, 2007; Rousseau, 1995). Specifically, in the context of the employment exchange relationship, employees keep their promises if employers also keep their promises (Coyle-Shapiro, 2002; Coyle-Shapiro & Kessler, 2003). Reciprocity constitutes a core component in the psychological contract, meaning that employees positively respond to favorable behavior from their employers (Rousseau & McLean Parks, 1993). In cases where employees believe that employers have broken their given promises, this will have a negative effect on employee promises fulfillment (Coyle-Shapiro & Kessler, 2000).
In the proposed model, employer and employee promise fulfillments are two related parts of psychological contracts. However, although psychological contracts are highly subjective (McDonald & Makin, 2000), there are some common features that categorize psychological contracts into transactional and relational contracts (MacNeil, 1985; Rousseau, 1990). Transactional contracts involve short-term, specific, and monetary-in-nature beliefs such as competitive wage rates and performance-based pay. Relational contracts involve long-term, less specific, and monetary- and non-monetary-in-nature beliefs such as job security, loyalty, training and development, career development, commitment, and trust (Cavanaugh & Noe, 1999; Robinson, Kraatz, & Rousseau, 1994; Rousseau, 1990).
Psychological contract literature, further, argues that fulfillment of the employer promises will be reciprocated by employee satisfaction, commitment, and motivation (Coyle-Shapiro & Kessler, 2000). For example, Robinson and Rousseau (1994) and Guest et al. (1996) support the view that employer contracts influence job satisfaction and organizational commitment. Bies and Tripp (1995) argue that the state of the psychological contract in terms of fulfillment or breach will result in positive or negative employee attitudes, respectively, which in turn will have an impact on employees in fulfilling their promises. Coyle-Shapiro and Kessler (2000), Robinson (1996), and Sturges, Conway, Guest, and Liefooghe (2005) support the view that employer promise fulfillment is positively related to employee commitment, supporting additionally that these attitudes will bring significant benefits to the organization in the form of increased efficiency. Generally, in cases where employees are satisfied, committed, and motivated, they will keep their promises to the organization.
Hypothesis 1: Employee attitudes will mediate the relationship between employer promise fulfillment and employee promise fulfillment.
The HR Practices System
It is argued that HR practices, such as employee resourcing, development, rewards, and relations, influence psychological contracts by shaping employer and employee promise fulfillment (Suazo et al., 2009). Specifically, employee resourcing, being the beginning of the employment relationship, transmits the employment terms and conditions of the organization to the potential job applicants (Rynes, 1991). The emphasis the organization is putting on employee training and development usually reflects the view that the organization considers employees as being part of its permanent employment (Gomez-Mejia, Balkin, & Cardy, 2004). Each of the components of employee rewards is capable of producing psychological contract by establishing the belief that the organization's employees are worth their long-term salaries (Gomez-Mejia et al., 2004). Good employee relations produce positive feelings in employees, who accordingly keep their promises to organizations (Robinson et al., 1994). Consequently, HR practices are likely to influence psychological contracts. This is because the appropriate use of HR practices will create a positive organizational environment that will influence the degree of employer and employee promise fulfillment (Marchington, 2001; Purcell et al., 2003; Suazo et al., 2009). Thus, HR practices determine the status of psychological contracts by shaping the day-to-day behaviors of the members in an organization (Rousseau, 1995).
Hypothesis 2: Psychological contract fulfillment will mediate the relationship between HR practices and organizational performance.
Contingencies
Several organizational contingencies, such as ownership (e.g., public, private), and size, and individual contingencies, such as gender, age, years in organization (seniority), and position in organization (e.g., management, worker), may influence the HR practices–psychological contract–organizational performance relationship. This means that organizations do not operate in a vacuum, but contingencies may have a positive or negative impact on HR practices and psychological contract and thus on organizational performance (Cavanaugh & Noe, 1999; Guest & Conway, 2004).
Overall, based on the social exchange theory and the theories of reciprocity, the coherent story explaining our proposed model supports the view that the state of the psychological contract mediates the relationship between HR practices and organizational performance. Furthermore, in terms of the proposed model, the categorization of psychological contracts into transactional versus relational may be used to clarify the empirical contribution of the study by measuring the degree of the influence on organizational performance of the various items that constitute employer and employee promise fulfillment. This is because the study area for testing the proposed model is Greece, where the current economic crisis from 2008 onward has affected its workplace, by substantially increasing its unemployment rate due to the downsizing of organizations, by significantly changing the nature of jobs, due to the preference of organizations to use more flexible employment contracts, and by considerably changing processes and production technology, due to the efforts the organizations put in order to produce more innovative products that will meet the constant change of markets. Thus, considering the psychological contract system, the proposed model may also add information to the literature by measuring the strength of the influence of employers on employees' promise fulfillment in terms of the transactional and relational associations.
Method
Sample
Data for this research were collected in April and May 2008 by means of a questionnaire survey that was administered to the employees of public and private firms in the service sector, including education, health, and banking, covering the entire country of Greece. The samplers were 120 executives attending development programs at a Greek business school who helped to collect data from their organizations. The samplers were asked to concentrate on six respondents from each firm; two at the management level (one from the HRM/Personnel Department and one from the Finance Department) and four at other employees' level (i.e., 720 questionnaires altogether). This is because psychological contracts are based on the perceptions and beliefs of individuals (McDonald & Makin, 2000). Thus, with respect to respondents, the study refers to multiple actors (e.g., managers, employees) and to multiple raters (e.g., different raters per unit of analysis) (Boselie et al., 2005), considering that all structural variables reflect “perceptions” of individuals. Three hundred forty-eight usable questionnaires were returned from the employees in 78 firms, a response rate of 65 percent at firm level and 48 percent at employee level.
Of the sample of 78 firms, 61.5 percent had 20 to 100 employees, and 38.5 percent had more than 100 employees; 42.3 percent were public and 57.7 percent were private. Of the sample of 348 respondents, 48.3 percent were male and 51.7 percent were female. The average age was 38.9 years old, and the average seniority was 10.3 years. The job status of the respondents was management 25.0 percent and other employees 75.0 percent. The sector category of the respondents was 32.8 percent public and 67.2 percent private. Finally, 69.8 percent of the respondents were from firms having 20 to 100 employees, and 30.2 percent from firms having more than 100 employees.
Measures
HR Practices
The construct of HR practices comprised 12 items (e.g., recruitment, selection, flexible work arrangements, work design, performance appraisal, training and development, compensation, promotion, incentives, participation, involvement, communication) referring to the usual four key areas of resourcing, development, reward, and relations, developed by Armstrong (1996). The items were measured on a scale ranging from 1 (low use) to 5 (high use). Specifically, the respondents were asked, “How would you rate the use of the training and development policy in your organization?”
Fulfillment of Employer Promises
The construct of fulfillment of employer promises comprised ten items, following the Chartered Institute of Personnel and Development (CIPD, 2008) psychological contract fact sheet, which contains items from both the traditional and the new psychological contract. Specifically, items that have been used in the past to reflect the transactional nature of employer promises in the psychological contract were pay commensurate with performance and an attractive benefits package, while items that have been used in the past to reflect the relational nature of employer promises in the psychological contract were opportunities for training and development, opportunities for promotion, recognition for innovation for new idea, feedback on performance, interesting tasks, respectful treatment, reasonable job security, and a pleasant and safe working environment (McDonald & Makin, 2000). Responses were made on a five-point scale ranging from 1 (very low) to 5 (very high). Specifically, the respondents were asked, “How would you rate the fulfillment of the employer promises with respect to the opportunities for promotion in your organization?”
Fulfillment of Employee Promises
The construct of fulfillment of employee promises comprised ten items, following the CIPD (2008) psychological contract fact sheet, which contains items from both the traditional and the new psychological contract. Specifically, items that have been used in the past to reflect the transactional nature of employee promises in the psychological contract were work hard, maintain high levels of attendance and punctuality, and work extra hours when required, while items that have been used in the past to reflect the relational nature of employee promises in the psychological contract were uphold company reputation, show loyalty to the organization, develop new skills and update old ones, be flexible, be courteous to clients and colleagues, be honest, and come up with new ideas (Robinson et al., 1994). Responses were made on a five-point scale ranging from 1 (very low) to 5 (very high). Specifically, the respondents were asked, “How would you rate the fulfillment of the employee promises with respect to working hard in your organization?”
Employee Attitudes
Employee attitudes were measured with three aggregate items (e.g., motivation, commitment, satisfaction) following Katou and Budhwar (2007). We acknowledge that the employee motivation, commitment, and satisfaction items could instead be introduced as three distinctive constructs by themselves, and thus they should not be combined into one general measure. However, we decided to accept this aggregation because our model was already too large and complex, and introducing into the model three more separate constructs would make it more complex without necessarily improving the validity of the model. Responses were made on a five-point scale ranging from 1 (very bad) to 5 (very good). Specifically, the respondents were asked, “How would you rate satisfaction in your organization?”
Organizational Performance Variables
We used multiple organizational performance variables, which were measured under the philosophy of a perceived rating of the organization's performance on a five-point scale ranging from 1 (very bad) to 5 (very good). The specific items constituting the organizational performance construct were effectiveness, whether the organization meets its objectives; efficiency, whether the organization uses the fewest possible resources to meet its objectives; development, whether the organization is developing in its capacity to meet future opportunities and challenges; innovation, for products and processes; and quality, percentage of products of high quality, developed by Delaney and Huselid (1996). Specifically, the respondents were asked, “How would you rate effectiveness [whether the organization meets its objectives] in your organization?”
Contingencies
Several additional organizational and individual variables were controlled for, in order to rule out alternative explanations of the findings (Turnley & Feldman, 2000). Specifically, we used the organizational contingencies of ownership (1 = public, 2 = private) and size (1 = 20–100 employees, 2 = more than 100 employees), and the individual contingencies of gender (1 = male, 2 = female), age (1 = –25 years, 2 = 26–35 years, 3 = 36–45 years, 4 = 46+ years), seniority (1 = –5 years, 2 = 6–10 years, 3 = 1–15 years, 4 = 16+ years), and position (1 = management, 2 = other employees).
We must note here that the organizational and individual characteristics are used in the proposed research design as appropriate controls for explaining the influence of these characteristics on the variables included in the operational model, and not as relevant contingencies for investigating the moderating interaction effects of these characteristics on the relationship between the main independent and dependent variables of the operational model (Boselie et al., 2005).
Consistency of the Survey Instrument
Content validity was established by operationalizing well-accepted and validated items developed in the literature (Straub, 1989). Construct internal consistency was investigated by evaluating the computed Cronbach (1951) alphas. The figures in Table 1 indicate that the survey instrument is reliable for testing the model presented in Figure 1, as all Cronbach alphas are much higher than 0.70 (Nunnally, 1978). Construct validity was examined by evaluating the percentage of the total variance explained per dimension obtained by applying confirmatory factor analysis (CFA) with Varimax rotation and the eigenvalue greater than one criterion using LISREL (Jöreskog & Sörbom, 2004). The percentage of total variance explained values reported in Table 1, where all items loaded well on their respective factors (omitted for brevity), are higher than 50.0 percent indicating acceptable survey instrument construct validity (Hair, Anderson, Tatham, & Black, 2008). Furthermore, construct validity was examined by evaluating the average variance extracted (AVE) per dimension obtained by applying CFA. The AVE values reported in Table 1 are much higher than 0.50, indicating acceptable survey instrument construct validity (Hair et al., 2008). Construct composite reliability was assessed by examining the calculated composite reliability scores (Pavlou & Gefen, 2005). The figures in Table 1 indicate that the degree of construct reliability is acceptable, since all reliability scores exceed 0.90. Construct discriminant validity was assessed by examining whether the correlation coefficients between pairs of constructs were significantly different from unity, and by examining whether the square root of each factor's AVE is larger than its correlations with other factors (Gefen & Straub, 2005). Table 1 presents the correlation coefficients of all constructs used in the study. It is seen that the correlation coefficients are significantly different from unity, and they are smaller than the square root of each factor's AVE, providing thus evidence for separate constructs.
Although the correlation matrix highlights some high correlations, multicollinearity among these constructs is not a serious concern since all relevant checks such as condition index (largest CI = 5.484 less than 10), tolerance values (smallest TOL = 0.356 significantly greater than zero), and variance inflation factors (largest VIF = 2.806 less than 10) did not suggest evidence of significant multicollinearity (Kleinbaum, Kupper, & Muller, 1988). Similarly, the Koenker and Basett (1982) chi-squared test (χ2(1) = 0.696 not significant at 0.05 level) indicated that there is no heteroskedasticity in the error terms.
To reduce the common method bias threat in the survey design, we asked multiple respondents from each organization to answer the questions of the questionnaire (Lindell & Whitney, 2001). However, taking into consideration that some correlation coefficients were rather high, Harman's (1967) single-factor test was used to examine the likelihood of common method bias threat. According to this test, the simultaneous loading of all items in a factor analysis revealed six factors, and not just one, with the first factor covering only 18.106 percent of total variance explained, indicating thus that the common method bias in the data was rather limited.
Statistical Analysis
To test the raised research questions of the proposed framework, the methodology of structural equation models (SEMs) or latent variable models (Hair et al., 2008) was used, via LISREL and bootstrapping estimation (see Jöreskog & Sörbom, 2004). SEM is effective when testing models that are path analytic with mediating variables, and include latent constructs that are being measured with multiple items (Luna-Arocas & Camps, 2008). We used bootstrapping because this method is considered to be the most appropriate method for testing mediation due to the fact that it does not require the normality assumption to be met (Shrout & Bolger, 2002). However, the general rule for SEM, that is, that the number of observations needed for each parameter is estimated to be between 8 and 12 observations (Hair et al., 2008), is not fulfilled in the present study. Although we could fulfill this rule by following procedures (Aryee et al., 2002) to reduce the number of items by creating fewer indicators for each construct, we decided not to do so in order to have a general picture about all the items used in the study.
We assessed the overall model fit following Bollen's (1989) recommendation to examine multiple indices, since it is possible for a model to be adequate on one fit index but inadequate on many others. We used the chi-square test (with critical significant level p > 0.05) and the normed-chi-square ratio (with critical level no more than 3), the goodness of fit index (GFI; with critical level not lower than 0.80), the normed fit index (NFI; with critical level not lower than 0.90), the comparative fit index (CFI; with critical level not lower than 0.90), and the root mean squared error of approximation (RMSEA; with critical level not more than 0.08) (Bentler, 1990).
Results
Table 1 presents the means and the standard deviations of all the constructs used in the study, derived as weighed averages of confirmatory factor analyses applied to each group of relevant items. Furthermore, Table 1 displays the bivariate correlation coefficients between all constructs used in the study. We observe strong, positive, and significant correlations between HR practices, organizational performance, employee attitudes, and employer and employee promise fulfillment, supporting the hypotheses of the study. With respect to organizational and individual contingencies, we see in Table 1 that generally there is a variety of correlations between contingencies and the rest of the variables used in the study.
However, results based on correlations, although interesting, may be misleading due to the interactions between several variables. Therefore, in order to isolate the possible links between the variables involved in the operational model presented in Figure 1, the estimated path diagram for this proposed framework is presented in Figure 2. These results refer to full mediation, where the links with question marks are not present, reflecting thus a more parsimonious model. The circles represent the related latent variables, and the bold arrows indicate the structural relationships between the corresponding variables. The numbers that are assigned to each arrow show the estimated standardized coefficients. All coefficients are significant at the 0.001 level, except the coefficient linking individual contingencies with employer promises fulfillment that is significant at the 0.10 level. The excellent goodness-of-fit indexes confirmed the validity of the operational model (chi-square = 1943.96, df = 1262, p-value = 0.000, normed-chi-square = 1.54, RMSEA = 0.039, CFI = 0.98, NFI = 0.93, GFI = 0.82). However, it must be noted here that the chi-square's being significant indicates that the proposed model is not an adequate presentation of the entire set of relationships. But taking into account that chi-square statistics may be inflated by high sample sizes, the value of the normed-chi-square (i.e., value of chi-square/degrees of freedom) was used instead. In our case, this value is less than 3, confirming the validity of our model (Pedhazur & Pedhazur-Schelkin, 1991).
Estimation Results of the Hypothesized Model (Full Mediation)
Considering that all the standardized coefficients are significant and the fit statistics of the model are acceptable we may conclude that the two hypotheses of the study are supported. This means that employee attitudes (fully) mediate the relationship between employer and employee promises fulfillment, and psychological contract fulfillment (fully) mediates the relationship between HR practices and organizational performance. However, Figure 3 represents the estimated path diagram of the complete model presented in Figure 1 (i.e., including the links with question marks), reflecting thus partial mediation. All standardized coefficients in Figure 3 are significant at the 0.001 level, except the coefficient linking individual contingencies with employer promises fulfillment that is significant at the 0.10 level. The goodness-of-fit indexes confirmed the validity of this less parsimonious operational model (chi-square = 1870.60, df = 1260, p-value = 0.000, normed-chi-square = 1.48, RMSEA = 0.037, CFI = 0.99, NFI = 0.93, GFI = 0.83). In this case, we also considered that the value of the normed-chi-square is less than 3, in order to support the validity of the model.
Estimation Results of the Hypothesized Model (Partial Mediation)
Comparing the results of the more parsimonious model (Figure 2) and the less parsimonious model (Figure 3), we see that the fit statistics of the results in Figure 3 are better than the results in Figure 2. Thus, we conclude that the complete model may be more preferred than the more parsimonious model, and, consequently, the rest of the study is devoted to the results of Figure 3. Considering that both the direct and the indirect standardized effects are significant, we see that employee attitudes partially mediate the relationship between employer and employee promise fulfillment. Additionally, considering that all indirect standardized effects of the variables involved in the study are significant, we may infer that psychological contract fulfillment partially mediates the relationship between HR practices and organizational performance. However, we must note here that although the fit statistics for the model containing direct effects are stronger, the differences are only very small. Thus, the model fits the data very well, and therefore it could be argued for the sake of parsimony that the model, rather than the more complex model containing direct and indirect effects, is more preferable.
Special reference should be made with respect to the contingencies used in estimation. Although we acknowledge that there is no sound theoretical rationale to consider organizational contingencies and individual contingencies as distinct factors, we still use these factors for estimation purposes only in order to isolate the impact of the independent variables on organizational performance (Boselie et al., 2005). Additionally, we must note here that although we tried all possibilities connecting contingencies with all the other constructs (Paauwe & Richardson, 1997), the only significant results obtained are those reported in Figures 2 and 3.
Discussion
Implications for Theory
The theoretical significance of this study is fivefold. First, this study confirms and extends existing empirical evidence concerning the basis of the HR practices–-psychological contract–organizational performance relationship. This is because a major finding of this relationship is that employee attitudes such as employee satisfaction, commitment, and motivation, constitute the heart (Boxall & Purcell, 2002) or the epicenter of this relationship. All other relationships are activated around this epicenter, meaning that employee attitudes are influencing employee promises fulfillment and organizational performance and being influenced by employer promises fulfillment and HR practices. Specifically, in view of the standardized coefficients of the items constituting the initial driving construct in Figure 3, it is seen that the HR practices of incentives, performance appraisal, promotion, participation, and training and development have the highest influence on psychological contract and organizational performance. These findings not only support the theory that HR practices have a positive impact on organizational performance but also extend the literature referring to the HRM–performance relationship in a non-US/UK context such as that of Greece.
Second, the study provides evidence of the reciprocal influence that occurs in the exchange relationship between employers and employees. This is because, in view of the standardized coefficients of the items constituting the employer promises fulfillment construct in Figure 3, it is seen that the employer promises of fulfillment with respect to keeping a pleasant and safe environment, respectful treatment, feedback for performance, opportunities for training and development, and pay commensurate with performance have the highest influence on employee motivation, satisfaction, and commitment. These attitudes will make employees positively react by keeping their promises with respect to showing loyalty to the organization, maintaining high levels of attendance, upholding company reputation, developing new skills and updating old ones, and being honest. This finding indicates that in a country such as Greece, where individualism is rather low (Hofstede, 1994), and power-distance is also low (Ng, Sorensen, & Yim, 2009), psychological contract is relatively strong (Sahinidis & Bouris, 2008).
Third, the study confirms and extends Rousseau's (1995) argument on the centrality of reciprocity with respect to how exchange relationships are governed (Coyle-Shapiro & Kessler, 2003). This is because the major property of the conceptual model of the study is that the relationship between HR practices and organizational performance is partially mediated by psychological contract fulfillment, and employee attitudes are partially nested in this psychological contract. Although extensive empirical research has been carried out linking HR practices with organizational performance through employee attitudes, still little justification has been presented for how HR practices influence individual attitudes (Allen, Shore, & Griffeth, 2003). This study considers that the history of the organization in terms of keeping its promises to employees, being contingent on the HR practices employed, shapes both employee attitudes and the degree of employee promises fulfillment to the organization (see also Rousseau, 1995). This finding may give some light to the so-called “black-box” referring to the mechanisms that exist between HR practices and organizational performance (Hutchison & Purcell, 2003; Purcell et al., 2003).
Fourth, this study provides evidence with respect to the importance of transactional versus relational contracts. The average values of the standardized loadings reported in Figure 3 are equal to 0.56 for transactional and 0.55 for relational employer promises fulfillment, and to 0.48 for transactional and 0.52 for relational employee promises fulfillment. Considering that there are no significant differences between these values, we argue that the elasticity of transactional employee promises fulfillment with respect to employer promises fulfillment is equal to the elasticity of relational employee promises fulfillment with respect to employer promises fulfillment in the Greek context. Therefore, we may say that changes in the fulfillment of employer promises are equally associated with changes in transactional and relational employee promises fulfillment. Furthermore, this finding means that both the transactional and the relational parts of the psychological contact equally influence employees. However, it is argued that although transactional contracts constitute an indispensable condition in the employment relationship, relational contracts are more appreciated by employees, due to the fact that transactional contracts, because they have a short-term nature, do not influence employees as much as relational contracts do, which have a long-term nature (Rousseau & Tijoriwala, 1998; Sturges et al., 2005). This may not be true in countries such as Greece, where the unemployment rate has risen fast due to the current financial crisis. In these cases, although individuals appreciate the long-term relational contracts, they are more interested in the short-term transactional contracts to cover their current needs. Additionally, we cannot argue that our finding contradicts the result of Robinson et al. (1994), who found that violation of promises by employers more strongly decrease the relational than the transactional promise fulfillment by employees. This is because in our case the testing refers to the fulfillment of employer promises that may empower the relations between employers and employees, while Robinson et al. (1994) refers to the opposite case where the violation of employer promise fulfillment will destroy the whole relationship between employers and employees. Therefore, our findings support the view that the fulfillment of psychological contract, or the absence of violations in psychological contract, may sustain both the transactional and relational employee promise fulfillment. We agree that transactional aspects of the psychological contract must be fulfilled before relational aspects can be addressed (Millward & Brewerton, 1999) because transactional aspects drive relational aspects due to their cause-and-effect association (Pate et al., 2003).
Fifth, this study provides evidence with respect to the universalistic versus contingency models, referring to the HR practices–psychological contract–organizational performance relationship. Contrary to the suggestion of de Jong et al. (2009, p. 347) “to search for a universal theory of psychological contracts,” the findings with respect to contingencies support the view that there is not any universalistic model, referring to the HR practices–psychological contract–organizational performance relationship, which if applied to organizations will improve their organizational performance. In contrast, the study supports the view that there are contingency models depending on organizational and individual factors influencing the HRM–psychological contract–organizational performance relationship. Specifically, the positive factor loading of ownership reveals that organizational performance in private organizations is higher than in public organizations in the Greek service sector. In contrast, the negative factor loading of size reveals that organizational performance does not follow the economies-of-scale rule, as it is usually hypothesized (Tzafrir, 2005), and it supports Delbridge and Whitfield (1999), who argue that size is negatively related to employee satisfaction and thus, to organizational performance. Furthermore, gender and position negatively influence psychological contract, meaning that the influence of women and workers is lower. Additionally, the findings show that age and seniority indicate that the influence of older people and people working more years in the organization is higher. These results support the positive influences of age and seniority to organizational performance, through motivation (Guest, 1999), commitment (Scholarios, Ramsay, & Harley, 1999), and satisfaction (Boselie & Van der Wiele, 2002).
Implications for Practice/Management
The study has clear implications for both managers and decision makers in the Greek service sector. It identifies employee incentives, performance appraisal, and employee promotion as three major HR practices potentially capable of sending signals that may lead to the creation of psychological contract fulfillment. Although it may be difficult to know exactly what constitutes the psychological contract of an employee (Suazo et al., 2009), managers primarily must keep their promises about a pleasant and safe working environment, respectful treatment, and feedback for performance, in order for employees to largely keep their own promises about showing loyalty to organization, maintaining high levels of attendance, and upholding company reputation. Finally, managers need to develop skills that will allow them to improve the employee attitudes of motivation, satisfaction, and commitment, because they constitute the nested epicenter mediating construct in both the HR practices–performance and employer–employee promises fulfillment relationships, which will improve organizational performance.
Limitations
This study has some limitations. First, the data was collected using a questionnaire at a single point in time. As a result, the study does not allow for dynamic causal inferences (Cavanaugh & Noe, 1999). Second, a potential limitation of the study concerns the measurement of some latent variables, such as the attitudes, with only three aggregate general observable variables that may restrict the validity of the construct (Luna-Arocas & Camps, 2008). Third, a limited number of items that usually have been hypothesized to be part of a new psychological contract have been included in the study, due to estimation purposes. Fourth, to minimize possible common method bias concerns data should be gathered from independent sources (Podsakoff & Organ, 1986). Fifth, the study was applied in the context of Greece which has unique labor relations and institutional conditions, and thus the findings from the Greek sample may not generalize across borders (de Jong et al., 2009). However, despite these limitations, this study provides a greater understanding of the process by which psychological contract mediates the relationship between HR practices and organizational performance.
Conclusion
Past research has provided extensive evidence on the positive relationship between HR practices and organizational performance in an effort to reveal a positive impact of HR practices (Wright, Gardner, Moynihan, & Allen, 2005). This study is partially in line with Purcell and colleagues' (2003) high-performance model, where employee attitudes mediate the relationship between HR practices and organizational performance, and with Guest and Conway's (2004) psychological contract model, where HR practices have a major influence on the state of the psychological contract, indicating that a positive psychological contract will lead to improved organizational performance. Thus, this study, which considers HR practices to be part of a “high-performance” organization, is attempting to provide proof that these practices cause organizational high performance through psychological contract fulfillment.
Specifically, with respect to the scope of the study, we may say that HR practices through psychological contract have a positive effect on organizational performance in the Greek service sector, indicating further that this effect is higher in the private sector. Additionally, the study supports the observation that changes in the fulfillment of employer promises are equally associated with changes in transactional and relational employee promise fulfillment in the Greek service sector. Moreover, the study supports the view that employee attitudes (satisfaction, commitment, motivation) constitute the epicenter-mediating construct in both the HR practices–organizational performance and employer promise fulfillment–employee promise fulfillment relationships. Finally, the study supports the view that there is no universalistic model, but, in contrast, there are contingency models depending on organizational and individual factors influencing the HR practices–psychological contract–organizational performance relationship.
Although this study refers to the causal link between HR practices, psychological contract, and organizational performance in the Greek service sector, future research should concentrate on other sectors and contexts of different countries, in order to be able to verify and extend the present results. This is because “contextual factors are keys to understanding the psychological contract” (Pate et al., 2003, p. 571).
Acknowledgments
An earlier version of this article was presented at the 11th International Human Resource Management Conference, June 9–12, 2010, Birmingham, United Kingdom. The authors thank the two conference reviewers and the conference participants for their useful comments. Also, the very constructive comments of the two anonymous reviewers of this journal are greatly acknowledged.
Biographical Information
Anastasia A. Katou is a lecturer in the Department of Marketing and Operations Management at the University of Macedonia, Thessaloniki, Greece. Her research interests include human resource management, organizational behavior, and business strategies, with a focus on organizational performance. She received a BA and an MBA from the University of Sunderland, United Kingdom, and a PhD and a PgD from Cardiff University, Wales. She has published numerous articles in academic journals, such as the International Journal of Human Resource Management, Thunderbird International Business Review, Employee Relations, Global Business and Organizational Excellence, Multinational Business Review, European Journal of International Management, European Management Journal, Personnel Review, International Journal of Human Resources Development and Management, Management Research Review, and Journal of World Business.
Pawan S. Budhwar is a professor of international HRM and Associate Dean Research at Aston Business School. He is also director of the Aston India Foundation and president of the Indian Academy of Management. He received his doctorate from Manchester Business School. Prior to joining Aston in 2003, he was on the faculty at Cardiff Business School for six years and at MD University, India, for five years. Pawan has published over 75 articles in a number of leading journals (such as the Journal of Human Resource Management, Organizational Behavior and Human Decision Processes, Journal of International Business Studies, Journal of Organizational Behavior, Human Relations, Organization Studies, Journal of World Business, Thunderbird International Business Review, and International Journal of Human Resource Management) on international HRM/OB related topics with a specific focus on India. He has also written and/or co-edited books on HRM-related topics on Asia-Pacific, Middle East, performance management, India, developing countries, research methods, major works in international HRM, and doing business in India. Pawan is on the editorial board of over ten journals and at present is associate editor of Human Resource Management and International Journal of Cross Cultural Management. He is also an advisor to the Commonwealth Commission for scholarships and fellowships and a Fellow of the Higher Education Academy. He is also a chartered member of the Chartered Institute of Personnel and Development and a council member of the British Academy of Management.
