As leaders, we’re the custodians of the psychological contract that governs employee engagement – and underpins retention.
“I call us the Hotel California. You check-in, but you don’t check out”, says Dean Carter, chief HR, legal, finance and shared services officer of Patagonia, referring to his LA-based organisation’s ability to hold on to its people.
With only a 4% staff turnover, this is no more than the truth – and a key factor in the company’s success. At Patagonia, 91% of employees say it is a great place to work compared to 59% of employees at a typical US-based company.
In the past, people needed companies. Nowadays, it’s companies that need people. Ideas and intellectual capital are the essence of sustainability in our knowledge economy, and organisations must go the extra mile to secure those who bring them.
We’ve already talked about the never-ending ‘war for talent’, which requires leaders to treat recruitment as an important strategic opportunity. But all the effort we put into ‘hiring right’ is for nothing if we struggle to engage and retain these talented individuals once we have them on board.
Today’s most in-demand workers are highly mobile and loyal to themselves rather than to individual employers; they fully expect to have many jobs (or even careers) in their lifetime or to pursue a portfolio of interests – and will move on if they do not feel adequately challenged, developed or rewarded. It’s not enough to offer a competitive compensation package and little more.
Elements that may add to (or detract from) an organisation’s ability to retain staff include the appeal and authenticity of its values, mission, purpose and the style of its culture (all of which must align with employee experience). Nowadays, people are looking for a shared vision, meaningful work and a sense of belonging. Staff can also be lost or retained on the basis of non-financial benefits such as flexibility, remote working and opportunities for career progression, learning and development.
Patagonia, for example, asserts that it is in business “to save our home planet” and designs its culture around the recognition that its people want to be “wildly productive at work, and they want to make a difference”. They also “want to be outside, they want to be healthy, they want to spend time with their family” sums up Carter, so its policies embrace work-life balance.
“We allow flexibility time, even the middle of the day,” he is quoted as saying. “If the swell is up, it’s not unusual for there to be a lot of wetsuits and towels hanging around the building here. It would be cruel to hire people who love to be outside and just keep them captured in these buildings all day.”
Custodians of the psychological contract
While some of these influencing factors may lie outside of our personal control, strategically speaking, they all feed into the ‘psychological contract’ employees have with an organisation they work for. Though unwritten, this is a behavioural equivalent of a formal employment contract, and shorthand for the mutual beliefs, perceptions and informal obligations between an employer and employee. The concept was developed by organisational psychologist Denise Rousseau in the 1980s, building on earlier work by behavioural scientist Chris Argyris.
At a basic level, Rousseau’s ‘contract’ is about transactional things such as pay and benefits. But it’s also about the balance of contribution on both sides of the relationship; effort flowing both ways. It’s about people receiving the right kind of support and feedback, adequate opportunities for development, and even being able to recognise that meaning and purpose in their work. Broadly, it covers:
- job security
- perceived fairness of pay and benefits
- manager support
- career prospects
- learning and development
- organisational culture
- employer’s mission, purpose and contribution to society
Workers who feel their psychological contract is fair – in that they get out just as much as they put in – tend to perform better, display greater commitment to the company’s objectives, and are more likely to go above and beyond. However, it’s all too easy for the contract to be breached, for expectations to become mismatched, and promises to be left unfulfilled. If, for instance, we are led to believe that working hard will gain us a pay rise, we may withhold effort (or even apply to jobs elsewhere) if one fails to materialise.
While it is better to prevent a breach occurring rather than trying to repair the damage caused, they are not always avoidable – for example, uncertain economic conditions (or a global pandemic) might have an unexpected impact on our business. However, we can mitigate negative outcomes by managing situations with fairness and sensitivity.
This day-to-day engagement is not “an HR thing”, emphasises US analytics and advisory service Gallup. In fact, it calculates that 70% of the variance in team engagement is determined solely by a team’s manager. As leaders, we’re on the frontline, not only responsible for hiring people but also for supporting and enabling them once they’re on board, for shaping teams and translating values and culture into the practicalities of working life. We are the custodians of the psychological contract.
Since different people want different things out of work (and value different rewards and motivators), this is no easy thing to get right. It involves paying close attention to our staff so that we understand them as individuals, taking note of their unique contributions and personal drivers. These will inevitably evolve over time. For example, a young graduate may initially feel sufficiently rewarded by the opportunity to join a respected brand, receiving on-the-job training and being part of a lively social environment. As they gain experience, or enter different stages of their life, they may require new incentives, such as better pay or opportunities for flexible working.
Note that we should also monitor our own feelings about the organisation and how we are managed, as these will inevitably leak through and affect the way we work with others.
Starting as we mean to go on
Early impressions can be highly influential. Employee experience begins at the attraction stage (continuing right through to their departure from the company), with the psychological contract forged during recruitment, when ‘promise exchanges’ are first made between employer and employee.
Poor communication, late paperwork and other avoidable inconveniences will immediately undermine the relationship, as will a lack of alignment between the role described at interview and its realities on arrival. While we want to win talent into our organisations, over-promising or misleading people about values and culture will only lead to future disappointment and frustration.
In a survey of US workers by recruitment platform Jobvite, a third of respondents reported that they had quit their jobs within the first 90 days of employment. Of these, 43% had done so because their day-to-day role wasn’t what they had been led to believe it would be during the hiring process. A further 32% left because they disliked the company’s culture; the way employees are treated in their first few weeks can impact directly on their performance and retention.
Take Alison, whose manager meets her at reception on her first day, introduces her to the team and talks her through her role in context to organisational goals. She personally ensures Alison can access the IT and systems she needs, providing her with an itinerary for the week, a staff handbook, and a colleague to act as a ‘buddy’ (though she also checks in with her daily). Training has been scheduled for Alison’s second week and her manager is noting her skills and interests, and providing constructive feedback and guidance.
Meanwhile, Jack arrives on day one only to find that he doesn’t have the right pass to get into the building and his manager isn’t in yet. He has to introduce himself to team members – who aren’t sure where he should be sitting or what he should be doing. A week in, he’s still not clear what is expected of him and his first month passes in a whirlwind of confusion. Jack’s morale dips further when he is paid late because he hasn’t been set up properly on the pay-roll system.
Every ounce of effort we put into welcoming and orienting an employee will affirm their decision to join us (and encourage them to stay). As leaders, we are central to integrating new staff, modelling respect and inclusion, setting out clear performance standards and objectives, and arranging any initial training. Time invested in helping people to settle in will be repaid when they are swiftly up to speed and able to perform their role fully.
During onboarding, a new employee should be helped to understand what is expected of them and how their role relates to team goals and the business needs of the organisation; they will benefit from guidance on “how we do things round here”, including how decisions are made, problems are resolved and people behave in meetings and other communications. They will also want to feel that their manager is interested in harnessing their strengths and monitoring their wellbeing – and to be able to identify a clear path for career progression.
This is equally applicable to remote workers, who may need additional help in setting up technology, accessing systems and engaging with colleagues. Scheduling a combination of formal and informal interactions between the new hire and their colleagues can aid relationship-building. Since global teams may work across time zones, these need to be factored in, alongside any cultural differences.
Special care should be taken to induct workers with neurodiversity or disabilities, with processes tailored to individual needs and incorporating reasonable adjustments to the working environment or the way information is provided. For example, access requirements for a wheelchair user should be clarified well in advance of the employee’s start date; a person with autism might need more detailed joining instructions than other starters.
Where we are hiring for ‘culture add’, we may similarly need to factor in extra support to help integrate people. Championing difference is one thing, but enabling it – with inclusive practices and psychological safety – is quite another. A McKinsey and LeanIn.org study shows that women – especially women of colour – are less likely to have managers support them in the workplace. One in four black employees have resigned from their job citing a lack of inclusion, compared with 26% of their white colleagues, according to research from UK market research company Savanta.
To maintain support for all new hires, and ensure we know how people are feeling, it’s advisable to view onboarding as a year-long process that offers employees a variety of opportunities to build relationships with team members, learn and grow, and to connect with us through regular check-ins. If we survey new employees over this period, and analyse this data, we can use it to improve future processes.
Nurturing employee engagement
The employee-manager relationship sits at the heart of a person’s engagement at every stage of their life cycle within an organisation. As the new starter becomes a fully-fledged team member, and the psychological contract evolves, we must define and redefine their role through ongoing involvement in goal setting, meaningful feedback and regular performance reviews.
If we know what motivates an individual and understand their strengths and goals, we can continue to engage and retain them. Highly engaged employees (who are not just satisfied but emotionally committed to our organisation and its goals) are 87% less likely to leave their place of work, according to a Gallup survey. Their organisations are also 21% more profitable that those whose employees are not engaged.
“We should not assume that a lack of motivation is an intrinsic problem,” argues author and speaker Simon Sinek. “As leaders, we should first evaluate whether or not we've created an environment that inspires our employees. In order to spark motivation, people must feel seen and valued.”
Many factors make up engagement. RewardGateway has visualised these as an ‘engagement bridge’, highlighting 10 key building blocks. Although the relative importance of each element depends on the organisation’s context, market and demographics, all need careful consideration at every level of the business.
Here, engagement is founded on the open and honest communication that underpins work relationships – up, down and across the organisation – supporting employee voice and enabling people to understand the ‘why’ behind decision-making. It is bolstered by the company’s purpose, mission and values, – something ‘bigger’ to work towards – and reinforced both by leadership (what the company says it will do) and management (what it actually does in practice). On top of this comes job design and learning, crowned by recognition. These three factors are interlinked, since the best-designed jobs have visibility and development built into them, and are meant to grow people, rather than constrain them.
All this is underpinned by the fundamentals of pay and benefits, workspace and wellbeing, the absence of which can cause the bridge to collapse. These are analogous to Frederick Herzberg’s famous “hygiene factors”, conditions we need to have under control before we can start to motivate people positively.
As managers, we mustn’t underestimate the importance of wellbeing to engagement: wellbeing leads to engagement, while engagement also improves wellbeing. And wellbeing also depends on the qualities of work relationships and a sense of inclusion.
With humans thriving on connection and belonging, we should keep a close eye on our team’s size and dynamics to encourage positive relationships, helping to manage conflict. Studies suggest that the best teams balance member satisfaction with team productivity and collaboration – and have an optimum size of five. The more people we add, the greater the complexity in terms of co-ordination and communication. (At Amazon, Jeff Bezos introduced the two-pizza rule, arguing that no matter how large a company grows, every internal team should be small enough that it can be fed with two pizzas.)
However, the ideal team size mostly depends on our skills as a manager and how we help our people to bond and collaborate. Employees don’t leave companies, they leave people – as the saying goes.
Prioritising professional development
Recognising and rewarding good work demonstrates respect and appreciation for individuals’ efforts and impacts strongly on engagement. Rewards may involve pay rises, promotion or other benefits, but low-cost alternatives can have a significant impact. A personal “thank you”, a company-wide email highlighting team or individual excellence, a team lunch or perhaps something an individual might find motivating go a long way towards making our people feel valued. If we are promoting teamworking and collaboration, we should take pains to encourage peer recognition and praise joint endeavours.
Rewarding (and enabling) high performance with learning and development (L&D) is a win-win for companies, helping us to acquire and enhance skills (and to develop a robust internal talent pipeline) while also motivating people to improve and stay. When comparing organisations, employees may value L&D as highly as compensation in our fast-paced world of work. Just as we are hiring for potential and learnability (LQ), many young people are applying for roles that offer plenty of growth, believing strongly that a successful career depends on frequently updating their skills and knowledge.
Even experienced team members benefit from opportunities for upskilling (to improve their existing skill set and knowledge) or reskilling, to prepare them to move to new roles within the business as it evolves and changes. We may also want to prepare certain individuals for future leadership roles.
As well as holding regular performance reviews, it’s good practice to schedule separate one-to-one development discussions, focusing on the skills each team member individual would like to gain or improve, their career aspirations (within and beyond our organisation) and training activities that may help with this.
When budgets for formal learning are limited, economical activities include on-the-job training under the supervision of an experienced colleague, job-shadowing and secondments within the wider organisation. We could also offer people greater responsibility by delegating tasks that help them to develop skills in areas such as problem solving or leadership, or assign them to a project that gives the chance to work across departments or activities. Tying all training into an employee’s personal development plan (PDP) will; help to record and monitor progress and achievement.
Internal or external mentors can also share their knowledge, skills and or experience, to help employees develop and grow.
Our role in succession planning
We should aim to develop all of our people, not just those recognised as having high potential, creating a culture of lifelong learning: for example, by making learning a core value, role-modelling knowledge-sharing and experimentation, and supporting individual learning and transformation. After all, a high retention rate becomes less positive if skills remain static. “The only thing worse than training your employees and having them leave is not training them and having them stay,” warned business magnate Henry Ford.
Mobility needn’t always be upwards. Some key employees are best suited to their current role, or happy to move sideways, but they will still benefit from personal development and recognition of their value to the company.
To help prepare our organisation for the future, we will need to pinpoint and develop some specific individuals with the potential to step into business-critical roles as short- or longer-term successors. However, there’s also a growing focus on identifying groups of jobs (clustered by role, function or level) and developing pools of (highly adaptable) successors for a variety of roles. Compared to its traditional equivalent, today’s succession planning has a broader vision, greater openness and diversity, and closer links to wider talent management practices.
We can support succession planning by staying abreast of our organisation’s skills and business needs, recruiting and developing people with these in mind, understanding the ambitions and developmental needs of our team members, and investing in training accordingly. We also need to share knowledge about our high-performing people organisation-wide.
Managing constructive exits
In a bid to engage people before they become dissatisfied, some leaders conduct periodic ‘stay interviews’ to find out whether team members are happy. These aim to clarify the things that make people want to keep working for the organisation – and what might be pushing them to leave. Helpful questions range from “Are you valued and listened to?” and “Do you feel fully utilised in your current role” to “What are the prime factors that caused you to leave your last two jobs?”
The answers we receive may help us to build on positive elements and to pick up on frustration factors before they become terminal. This data can supplement the results of employee engagement surveys where our organisations conduct these.
Of course, no matter how hard we work to engage people, not every talented individual can be retained within our organisation. Developing people inevitably means that we are preparing some for roles outside of the business, including with direct competitors. This is a natural part of business; in fact, it’s healthy for people to want gain a variety of experiences in different organisations and sectors. Some might return to us down the line bringing new skills and insights; others may speak highly of us to friends and contacts, bolstering our reputation.
Even where this isn’t the case, we must put our efforts into finding out why good people are leaving – and whether we could have done more to engage and retain them. We owe this to them under the psychological contract – plus exit interviews offer valuable insights into employee experience. They enable us to spot recurring trends, patterns and themes within our organisation’s leavers’ profile, generating data which we can use to inform engagement and retention strategies as part of a culture of continuous improvement.
For example, we can see which positions or departments have a high staff turnover, note seasonal variations to departures, and identify the demographics most at risk of leaving. We can interrogate the reasons people give for moving on and how we might we address these to deter other valued staff from exiting the business.
Glossing over losses may be easier, but it won’t lead to improved retention. Exit interviews also help us to understand the demands and structure of a role which we will now need to recruit for, helping us to create an accurate job description. Nobody knows a role like the person who is currently doing it.
It’s not always down to line managers to lead exit interviews (and it can be tricky if a relationship with an outgoing employee has become tense) but where it is part of our remit, we should go about it in a constructive way. This means putting aside any personal grievances, explaining the process to the leaver in advance, and asking insightful and specific questions, tailored to our organisation, the individual and the circumstances of their resignation. We will want to cover key areas such as:
- Compensation and benefits (including rewards and recognition)
For example, “How important was pay/benefits in your decision to leave?”
- Job design and description
E.g. “What would you change about your job?”
- Management and leadership
E.g. “How could you manager have supported you better?”
- Company culture (and mission)
E.g. “How would you describe the culture of our company?”
- Opportunities and development
E.g. “What opportunities would you like to have been given to develop in your role?”
- Relationships and inclusion
E.g. “Have you felt able to be yourself at work?”
- Working environment and wellbeing
E.g. “What do your colleagues feel about working here?”
It is also worth asking how long the person has been wanting to leave their job and what the company could have done differently to encourage them to stay. Find out what ultimately led them to accept their new position – and whether they would consider returning to the organisation in future if the right role came up.
Patagonia’s Carter suggests taking the conversation back to the beginning, discussing how the employee came to join the company and moving on to explore the highs and lows of their experience, and whether their expectations have been met. Where they haven’t, we should explore what we could have done to address this. Encouraging people to give both positive and negative feedback may overcome their reluctance to provide uncomfortable truths.
Where leavers highlight specific problems, we might ask for their suggestions on potential fixes, as well as asking them what skills and qualifications they think we should look for in their replacement.
Protecting our assets
All this information must then be fed into our strategies to engage and retain existing employees. It may be disheartening to receive challenging feedback, but the harder we try to understand and motivate our people, the easier our own roles will become.
Not only will we be saving our organisation money, reducing disruption to our teams and customers, maintaining productivity and protecting morale, but we’ll be working with happy and proactive colleagues who are as committed as we are to meeting the goals of the organisation. This means we can focus on the job in hand rather than spending unnecessary time replacing the talented people we work so hard to attract and recruit.
We’ve all heard the saying that “people are our strongest asset”. This is only true where employees are engaged and are staying because they want to – not until they can find a job which is better suited to their needs, aspirations and wellbeing.
Test your understanding
- Outline three elements of the psychological contract between employer and employee.
- Describe five key elements that make up employee engagement.
What does it mean for you?
- Consider your own psychological contract with your organisation and what helps to engage you in your work.
- Try conducting a ‘stay interview’ with a team member to find out what they find engaging/frustrating about their role.