On the theory of psychological contracts in family firms.

Author:Ward, Stephanie G.


Issues of fairness, justice, trust, integrity, and agency relationships are widely discussed in the family business literature as they relate to family member and non-family member employees. To date, however, psychological contracts have not been utilized to address the obligations between employees and the family firm. Psychological contracts are individual beliefs in a reciprocal obligation between the individual and the organization including perceived promises, valued payments, and acceptance of exchanges. Examining psychological contracts in family firms is essential in light of these two unique groups. This paper addresses the topic by providing a theoretical model of the role of psychological contracts in family firms supported by propositions. We believe this provides a more comprehensive approach to issues such as fairness, trust, and justice because of the element of reciprocity, where mutual and cooperative relationships are examined.


With more than two-thirds of all organizations being family owned and/or managed (Gersick, Davis, Hampton, and Lansberg, 1997), it is essential to examine the management practices within those firms. Furthermore, it is important to determine the impact of specific human resource practices on performance, as illustrated by Astrachan and Kolenko (1994), who empirically examined the human resource practices in 600 family owned businesses. Their findings suggest that the effective use of HR practices provides a competitive advantage in the marketplace, particularly showing positive correlations with gross revenue and CEO personal income levels.

This paper aims to provide a theoretical model for examining the role of psychological contracts in family firms, more specifically focusing on two unique groups, family and non-family members. Psychological contracts are individual beliefs in a reciprocal obligation between the individual and the organization (Rousseau, 1989). A review of the literature is provided, first on human resource practices in family firms and then on psychological capital, which centers on the definition, contract formation, and contract fulfillment. The theoretical model is then introduced supported by our propositions and followed by a conclusion and call for empirical research.


Many family-owned businesses must rely on non-family member employees to operate and be successful. Thus, a significant challenge family-owned businesses face is effectively managing non-family members (Chua, Chrisman, & Sharma, 2003). This includes attracting and retaining high quality employees who contribute to the success of the firm and other typical HR processes such as staffing, compensating, conducting performance appraisals, applying company policies and procedures, and granting promotions. Furthermore, Corbetta and Salvator (2004) assert that family firms must implement HR practices that provide non-family members with a strong sense of psychological ownership. Therefore, it is not only imperative to assess HR practices in a general sense, but also as they relate to two unique groups, family and non-family members.

As Mitchell, Morse, and Sharma (2003) contend, non-family members may oftentimes find themselves in complex and uncertain situations because they are part of the business system but not the family system. What leads to the uncertainties and complexities stems from a variety of issues such as how decisions are made (Blondel, Carlock, & Heyden, 2000), a perceived environment of bias and favoritism (Schulze, Labatkin, & Dino, 2003; Lubatkin, Shulze, & Dino, 2005), the direct involvement and influence of family members (Astrachan, Klein, & Smyrinos, 2002), as well as fairness and procedural justice issues (Cropanzano & Greenberg, 1997; Barnett & Kellermanns, 2006).

While James (1999) finds that explicit formal contractual relationships (i.e. written agreements) can be more effective in family firms than implicit informal relationships (i.e. unwritten agreements), the latter of the two always exists where issues of fairness and trust may be more prevalent, especially in firms where nonfamily members lack "status" in the family system. This status disparity could lead to "ingroup-outgroup" perceptions such as questioning the trustworthiness and fairness of the family business system and/or individual family members (Barnett and Kellermanns, 2006).

Issues of trust, integrity, and fairness have been addressed in the literature as they relate to family firms, especially on the topic of succession management. For example, Steier (2001) contends that while trust in those holding positions of authority plays an important role in any organization, it actually provides family firms a unique competitive advantage because it is so indigenous in the relationships that exist. Once a firm grows and succession management occurs, trust becomes an even more important coupled with effective communication (Morris, Williams, and Nel, 1996). In a similar vein, an empirical study by Chrisman, Chua, and Sharma (1998) found that integrity rated among the most important attributes of a successor in family firms.

While issues of fairness and justice have been addressed in family business research (Baldridge & Schulze, 1999; Blondel, et. al, 2000) as well as trust and integrity (Steier, 2001; Morris, et. al, 1996; Chrisman, et. al, 1998) in addition to agency relationships (Corbretta & Salvato, 2004; Schulze, et. al, 2003a; Schulze, et. al, 2003b; Schulze, et. al, 2001), psychological contracts have not yet been examined. Our paper presents a theoretical model and propositions to address psychological contract formation and fulfillment in family-owned businesses. Specifically, we suggest how non-family employees may form contracts different from family members, how mutuality and reciprocity affect contract breach, specific factors that moderate the contract breach-violation relationship, and the ultimate effect that contract violation can have on the...

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