Academy of Entrepreneurship Journal (Print ISSN: 1087-9595; Online ISSN: 1528-2686)

Research Article: 2022 Vol: 28 Issue: 1

Psychological Contract and Employee Performance in the Nigerian Manufacturing Industry: A Conceptual Review

Opeyemi Joel, Covenant University

Chinonye Moses, Covenant University

Ebeguki Igbinoba, Covenant University

Olokundun Maxwell, Covenant University

Odunayo Salau, Covenant University

Adejana Omobolanle, Covenant University

Citation Information: Joel, O., Moses, C., Igbinoba, E., Maxwell, O., Salau, O., & Omobolanle, A. (2022). Psychological contract and employee performance in the Nigerian manufacturing industry: A conceptual review. Academy of Entrepreneurship Journal, 28(1), 1-11.


Psychological contract has increasingly become a relevant aspect of exchange between individuals and the organisation. The potency of the contract is determined by how employees perceive employers’ fulfilment of their responsibility and obligations as stated in the contract of employment. But despite the importance placed on psychological contract (employee-employer relationship), many industries in Nigeria are still striving to identify inducing strategies for fulfilling employees’ expectations that will aid their performance. Hence, this study critically assessed the relationship between psychological contract and employee performance, emphasising the Nigerian manufacturing industry. But despite the dynamics in human motivation, organisations are yet to explore its benefits to achieving employee performance. The specific objectives were to (i) identify the relationship between transactional contract and job satisfaction; (ii) examine the linkage between relational contract and employee commitment; (iii) determine the relationship that exists between balance contract and employee loyalty, and (iv) examine the linkage between transitional contract and organisational citizenship behaviour. The study adopted social exchange theory and conceptual analysis to explain the issues and predict the difficulties of the psychological contract. The paper concluded that employees become loyal to an organisation only when their expectations of a psychological balance contract are gratified and fulfilled.


Employee Performance, Employee Commitment, Psychological Contract, Social Exchange.


Organisations around the world are established primarily to accomplish set goals and objectives. In order to attain the set goals, the role of human resources management for product quality and profit maximisation cannot be overemphasised. Although human resources are vital in any organisation, a good employer-employee relationship is much more critical. It is essential that management design strategies that make employees more willing and ensure that the contract between them and the organisation are mutually bound. This is necessary because their behaviour and attitudes to work are supposed to be naturally geared towards achieving organisational goals without much prejudice. A psychological contract is the employee’s belief shaped by the corporate terms of exchange between individuals and the organisation (Obakpolor, 2020). The potency of these contracts is determined by how individuals perceive employers’ fulfilment of their responsibility and obligations beyond what is written in the contract of employment.

The development of psychological contract is into two (2) different dimensions. These include the ‘origins’ and ‘early development’ (Faruk et al., 2019: Falola et al., 2020). The origins of the psychological contract cover between 1958 to 1988 while its early development, from 1989 upwards. The origin of psychological contract is traced to Argyris (1960), who first created the concept as an implicit understanding between employees and their foremen. Argyris (1960) explained that the understanding develops so that employees would exchange higher productivity and fewer grievances with job security and good pay. Also, Schein (1980) stressed the strategic value of psychological contracts to include inseparable, complex and management of interaction between the employee and organisation. There was a re-emergence of interest in the concept by Rousseau in 1989. This led to the early development of the psychological contract. This reconceptualisation indicates a transition from the origin of the psychological contract to its early development, which is now considered contemporary research.

This can take the form of the transactional, relational, transitional and balanced psychological contract. Rousseau (1989) postulated that psychological contract is an employee’s belief relating to the shared obligations between themselves and the employer. The significance of the contract primarily focused on a personal sense of obligations rather than mutual expectations. The term psychological contract has been extended to developing countries, where its peculiarity has been linked to factors like culture, organisational communication, organisational change and performance appraisal (Gabriel & Jonathan, 2012: Oluwafemi & Balogun 2015). Psychological contract is a strategy that has the potential of fostering employee performance in an organisation. Employee performance is the record of outcomes attained during a specific period, particularly in developing nations.

As a developing country, Nigeria has created an enabling environment for industries to achieve a sustainable competitive advantage, service delivery, and productivity through technological adoption and innovation (Oaya et al., 2017). Unfortunately, this has generated a lot of discussions as many industries, particularly the manufacturing industry, are still striving to identify inducing strategies for fulfilling employees’ expectations that will aid their performance. These places a lot of responsibility on the Nigerian manufacturing industry considering that the industry provides quality employment and fair wages, hence making a significant contribution to poverty reduction in the country. It is important to note that the Nigerian manufacturing industry also makes goods and services available to citizens at an affordable price, thereby contributing 54% to the gross domestic product of the economy (Falola et al., 2021).

Hence, this study is situated in the manufacturing industry, a sector in the country that is highly technological driven yet with low performance regarding human capital, which is considered essential for optimum functionality of these technologies. This has necessitated a psychological contract in shaping day-to-day employee behaviour to achieve high performance in the industry.

Literature Review

The Concept of Psychological Contract

Psychological contract is employees’ beliefs shaped by the organisation concerning the exchange terms (Obakpolor, 2020). This contract includes employee expectations of what their employer should offer and their effort to work in return (Etodike et al., 2020). This idea suggests that an employee has many expectations from his employer, and the organisation has many expectations of him (Kotter, 1973); Rousseau (1989) postulated that a psychological contract is an employee’s mental model about the mutual responsibilities between himself and the employer. These expectations cover the quantity and quality of work to be done, job evaluation, and obligations and right between employees and their organisations. These expectations are not unwritten, yet they are powerful determinants of behaviour (Gabriel & Jonathan, 2012).

Factors Affecting the Effectiveness of Psychological Contract

The idea behind the concept is that employees commonly feel obliged to contribute more than the defined tasks to their organisation. However, this can only be possible when the human resources function of organisational communication, culture, and performance appraisal are put in place to achieve the effectiveness of psychological contract (Peter 2017: Rousseau, 2011).

Organizational change: Change is inevitable in a permanent changing world, where competition is now on a global scale (Rousseau, 2011). Organisational change occurs due to an ever-changing environment and a response to the crisis in the organisation. Organisations in different industries face a more complex environment than before, especially the manufacturing industry (Magano & Thomas, 2017). The constant introduction of advanced technologies has been on the rise in the manufacturing industry in Nigeria, with their potential to increase output and provide greater flexibility in response to changing market demand (Gabriel & Jonathan, 2012). According to Magano and Thomas (2017), organisations need to be careful when change is essential, especially in the manufacturing industry, where change is constant. They can do this by communicating reasoning and cautioning employees in advance to safeguard the employee-employer relationship (Rousseau, 2011).

Organizational communication: This is receiving and sending messages among interrelated entities to accomplish personal and shared goals (Mia & Basto, 2015). Organisational communication is culturally dependent and highly contextual. This explains how organisations present, represent and constitute their climate and culture (i.e. attitudes, values and goals of the organisation members) (Peter, 2017). Communication of psychological contract content is vital. Rousseau (1989) explained that the belief in obligation between the two parties could be achieved by communication. When the two parties in an employment relationship know what is expected, promises and obligations can be easily recalled and performed. However, the socialisation process is essential for organisations to communicate obligations to employees to shape individuals’ psychological contract. Once employees’ schema is fully formed, it is difficult to change (Peter, 2017).

Culture: Culture is a system of belief, value, attitudes, and behavioural understanding shared by members of a society (Falola et al., 2020). However, the type of contract that employee forms with their employers are greatly influenced by cultural norms, societal values and personality traits. The organisational culture, such as values and standards, also affects how an individual perceives and responds to situations in the workplace (Falola, Ogueyungbo & Ojebola, 2020). Organisations in Nigeria must ensure that the norms and values of the organisation portray the type of contract they want their employee to form with their organisation.

Recruitment and selection: This exercise helps appoint candidates for anticipated vacancies in the organisation. Potential candidates can be influenced by pre-entry information such as the organisations brand and image about employing organisation. The employer can also send unwitting or contrived information about future contractual obligations during the recruitment and selection process (Dineen & Soltis, 2017). With this information, candidates can decide whether or not to pursue employment with the organisation. In the manufacturing industry, recruitment and selection procedures can help prepare employee expectations and obligations leading to the construe of psychological contract shaped by the organisation from the inception (Dineen & Soltis, 2017).

Performance appraisal: This is simply a systematic process of evaluating, quantifying, determining, and examining an employee’s levels of output or performance on a given job description over time and in line with set standards (Chaubey, 2016). Performance appraisal is an essential process in the employment contract. Employees are often conscious about their employer’s evaluation and reward accordingly in the organisation (Kooijmans, 2018). However, when employers do not give their employees the rewards they expect based on their outstanding performance, they will feel a breach of their psychological contract and doubtful of employer promises in terms of benefits, good rewards and opportunities for promotion. According to Peter (2017), this can lead to reduced performance of employees in the organisation.

Psychological contract and employee performance in the Nigerian manufacturing industry: Psychological contract in the manufacturing industry can take the form of the transactional, relational, transitional and balanced psychological contract. The potency of psychological contract in the industry is determined by how employees personally perceive employers’ fulfilment of their responsibilities and obligations beyond the written employment contract. Established studies reveal that psychological contract plays a significant role in achieving higher employee performance, especially for Nigerian manufacturing industry employees (Falola et al., 2020: Onwuemene & Oni, 2017). Presently, this industry is faced with challenges owing to low-capacity utilisation, which averaged 30% and decreasing contribution to the national output, which averaged 6% (Ali et al., 2018). Further possessing increased substantial goods which are unable to compete globally. This has led to large unsold goods records buildup, leading to a hostile and declining growth rate. Studies have shown that for this industry to achieve sustained economic growth, the willingness to invest in material and employer-employee relationship development becomes inevitable (Falola et al., 2021).

Etodike et al. (2020), affirmed that the extent to which the employee believes that the employer has fulfilled its promises significantly contributes to employees’ performance in the industry. Employee performance is how a member of the organisation contributes to realising organisational goals (Etodike et al., 2020). Employee’s performance could be measured with their presence at work, timeliness of output, commitment, quality of production, cooperativeness, the quantity of production and organisational citizenship behaviour (Chaubey, 2016). However, performance in this present study has been identified as a behavioural outcome of psychological contract, which includes organisational citizenship behaviour, employee commitment, employee loyalty, and job satisfaction.

Transactional contract and job satisfaction: Transactional psychological contract is the material and financial exchange for work by an individual employee. In this type of contract, the financial incentive is a source of motivation for employees to perform within a given period. Still, it does not generally translate into outstanding performance (De Hauw & De Vos, 2010). Employees with transactional psychological do not see themselves working in a respective organisation for long because this type of contract is specific, close-ended, and based on economic and extrinsic factors. On the other hand, job satisfaction shows instant affective reactions to every job facet and is usually formed after employee entry into the organisation (Faruk et al., 2019). It progresses more slowly after an employee understands the job and its various facets, including the organisational values and goals. According to Faruk et al. (2019) the understanding that underpins job satisfaction is not instant. It requires acquaintance with the organisational components that are outside the job itself. Extant literature has shown that fulfilling transactional psychological contracts such as pay, benefits, and promotion enhance employees' job satisfaction, especially in the manufacturing industry of Nigeria (Oluwafemi & Balogun, 2015: Peter, 2017). The transactional (benefits, pay and promotion) contract violation leads to decreased job satisfaction (Chaubey, 2016).

Relational contract and employee commitment: Relational contract is based on employee’s recognition, promotion, freedom to be creative, training, job security, work/ lifestyle balance, career development (De Hauw & De Vos, 2010). Employees expect affirmative statements like “good job”, “well done”, “am impressed” by way of recognition or by sending congratulatory messages from their respective or immediate supervisors/managers when they complete a significant project. A relational contract is formed through non-economic and intrinsic factors built on trust and commitment (Curwen, 2016). This means that relational psychological contract is dynamic, open-ended, indefinite and has a broad scope. Extant shows that relational contract fulfilment leads to employee commitment (Allen & Meyer 2012: Ugwu & Ogwuche, 2013). Employee commitment is the extent to which an employee is involved and also identifies with an organisation. This commitment can be affective/emotional (when employee emotionally identifies, gets involved and is attached to the organisation), normative/obligation (when an employee feels obliged to an organisation) and continuance/cost-based (when an employee feels the benefit of staying outweighs the cost of leaving) commitment. This indicates that an upsurge in the fulfilment of expectations will increase the employees’ commitment for higher employee performance (Ugwu & Ogwuche, 2013). Based on this fact, this research propositioned a significant relationship between relational contract and employee commitment.

Balance contract and employee loyalty: Balanced psychological contract comprises both transactional and relational psychological contracts. This type of contract is based on the financial success of the organisation and the opportunities, recognition, career advancement and promotion (Savarinmuthu & Racheal, 2017). A balanced contract is required for continuous employee loyalty and cordial relationship between the employee and the organisation in an employment relationship. Employee loyalty is the commitment or psychological affection to the organisation that develops due to employee increase in satisfaction. This satisfaction is a result of a process of internal evaluation of an employee’s expectations. As a result, the more an employee is satisfied with the working environment, the more sense of commitment is developed towards the organisation (Akhigbe & Ifeyinwa, 2017). Employee attitudes towards the organisation then give rise to the behavioural component of loyalty. An employee who has developed organisational affection is more likely to show loyal behaviours and achieve organisational goals and greater efficiency. Buradum et al. (2017) affirm that employee loyalty reveals dedication, devotion, faithfulness and closeness towards the organisation. Employees become loyal to an organisation only when their expectations of pay, recognition and career advancement are gratified and fulfilled (Buradum et al., 2017).

Transitional contract and organizational citizenship behavior

Transitional, as the name suggests, means the passing phase of the relationship between the two parties in the employment relationship (Falola et al., 2020). This type of psychological contract is majorly a breakdown in contracts. It reflects the lack of commitments concerning future employment and little or no explicit performance demands or contingent incentives. The transactional contract is a cognitive state that reflects organisational and socio-economic changes that are not in line with the already established psychological contract. This cognitive state is apparent during the organisation’s acquisition, mergers, and downsizing (Rousseau, 2011). When a transitional psychological contract is fulfilled, the employee goes the extra mile and exerts more effort to perform beyond expectations. The process of going beyond expectation is called Organisational Citizenship Behavior (OCB). According to Falola, Ogueyungbo & Ojebola (2020), OCB is discretionary employee behaviour beyond the job scope. OCB is a voluntary commitment within an organisation or company that is not part of their contractual tasks. OCB can be altruism (when members of an organisation voluntarily help one another in their work). It can also be conscientiousness (when employees exhibit discretionary behaviour beyond the organisation’s minimum role requirement, such as obeying rules and regulations and working extra-long hours). Courtesy (when employees show gestures to prevent interpersonal problems such as consulting others before taking any actions that would negatively affect them). Sportsmanship (this is the willingness to tolerate the inevitable inconveniences and impositions of work without complaining) and civic virtue (when employees constructively get involved in the organisation’s political process and contribute to this process by frankly and freely expressing opinions, attending meetings). Organ (2018) postulated that transitional psychological fulfilment of psychological contract leads to the employee’s reciprocal organisational citizenship behaviours. Similarly, employees are expected to reduce these behaviours if they experience that the organisation does not meet their obligation.

Theoretical Review

The following theory is used as the underpinning theory for psychological contract and employee performance in the manufacturing industry.

Social Exchange Theory

Peter Blau propounded this theory in 1964. According to Peter Blau (1964), social exchange is defined as “individual voluntary actions motivated by the returns they are expected to bring from others’’. The assumption of the expected outcome was based on the principle of exchange. According to him, the exchange of material and social resources is an essential aspect of human interaction. In organizations, employees-employers act in a way that both reciprocate the actions of one another, creating a balanced exchange/reciprocity. Balanced exchange is the simultaneous reciprocity of items of equivalent value. This can be seen when office - mates exchange holiday gifts. If any party to the exchange does not reciprocate, a feeling of imbalance is created between the contributions of the parties involved (Blau, 1964). The giving party will act likewise by withdrawing benefits to create a balance so that the relationship may continue.
This principle of social exchange theory applies to psychological contract and organizational performance. This is because social exchange theory is one way of explaining this relationship and operationalizing employee-employer exchange. The employee in any employment relationship expects to have good pay, job security and promotion in exchange for their effort, time and competencies. However, an imbalance in this exchange process will create feelings of the breach. When employees perceive inequality in the exchange process, they respond with negative emotions like frustration and increased deviant behaviour to reduce imbalance to achieve balance.


This study adopted a review research design. Recent articles on psychological contract and employee performance in some databases like SAGE, EBSCO, Elsevier, among others, were reviewed extensively in this study. The research method adopted is conceptual analysis. Conceptual analysis is a helpful technique of inquiry, especially when the objective of the analysis is to analyse various concepts into their different parts to gain a better understanding or more knowledge of a particular philosophical issue in which the concept is involved (Olokundun et al., 2018). Therefore, this paper reviewed extant literature on psychological contract and employee performance in the Nigerian manufacturing industry to better understand and understand the relationships between the concepts.

Conceptual Model

Its contribution to knowledge depicts the usefulness of this study through the extant review of literature from the work of (Argyris, 1960: Rousseau, 1995: Falola et al., 2020).

Figure 1: Conceptual Model.

The model above shows a conceptual relationship between psychological contract and employee performance. Based on this model, four relationships regarding psychological contract and employee performance have emerged, as established in the model.

Conclusion and Discussion

This study demonstrates a high relationship between psychological contract and employee performance in the manufacturing industry. It is imperative to note that psychological contract has become a focal point of emphasis based on their implications for facilitating employee and employer relationships. This study proposes a conceptual model that shows the positive relationship between psychological contract and employee performance in the manufacturing industry. To this end, this study suggests a conceptual association between transactional contract and employee job satisfaction. This aligns with the work of Peter (2017) and Chaubey (2016), which indicates that fulfilled transactional psychological contract such as pay, benefits and promotion enhances employee job satisfaction. The study also proposes a conceptual linkage between relational contract and employee commitment. This supports the studies of Ugwu and Ogwuche (2013); Allen and Meyer (2012) that indicates that an increase in the relational contract fulfilment leads to increased employee commitment to the organisation. In the same vein, this study proposes a conceptual relationship between balance contract and employee loyalty. This confirms the studies of Buradum Ojiabo and Alagah (2017); Oludayo et al. (2018), showing that employees become loyal to an organisation only when their expectations of a balance psychological contract are gratified and fulfilled. Finally, this study proposes a conceptual linkage between transitional contract and organisational citizenship behaviour (Falola et al., 2020); Organ (2018) supported this view, postulating that transitional contracts lead to the employees' reciprocal organisational citizenship behaviours. Based on the proposed conceptual model, this study suggests that psychological contracts such as transactional, relational, balance and transitional contracts are essential for achieving employee performance, such as job satisfaction, commitment, loyalty, and organisational citizenship behaviour.

Suggestions for Further Study: Although this study proposed a model on the conceptual relationship between psychological contract and employee performance, there is also a need to further empirically test to validate the relationship between the concepts used in this study.

Managerial and Policy Implications

1. Management of the manufacturing industry in Nigeria must ensure an equitable and equal financial and material reward exchange for employees’ labour in the organisation.
2. Human resources managers should engage in effective organisational communication and discussion of obligations between individuals and employers to achieve a mutual functional exchange of relationships.
3. Managers in the manufacturing industry should recognize and appreciate employees when they complete a significant project
4. Manufacturing industry managers should be careful to carry employees along when change is inevitable so that the employee-employer relationship is not negatively affected.


The authors of this paper sincerely appreciate the Covenant University Center for Research, Innovation and Discoveries (CUCRID) for their support in publishing this article.


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