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Business Management

The psychological contract of an organisation

An organisation must decide from the outset how it is to deal with employees, before considering how work will be distributed


The psychological interaction between the management of an organisation and the subordinate employees is a rich area of study. A strong understanding of the relationship can lead to improved performance for the company and possibly to improved employee welfare, due to increased work satisfaction. Several theories have been developed, with the aim of describing workplace dynamics and behaviour through BMod theories. Two of these are opposing theories, known as Theory X and Theory Y and deal with the motivational factors that influence employee behaviour. They can be seen as different perspectives of how to deal with employees, but according to their creators, the theories should be looked at as separate, rather than different sides of the same idea. Both could be seen as ‘models’ of employee/employer behaviour, since they deal with a complete system of interaction, similar to how a physical model simulates the behaviour of a physical system. Both Theory X and Y were created by Douglas McGregor in the 1960s.

Theory X has more recently been considered a negative way of dealing with employees. Its premise is that employees are, by nature, reluctant to fulfil the obligations of their job and instead will find ways to avoid work or otherwise reduce their work output in a bid to expend the least amount of effort possible. Theory X posits that for a company to be successful and have productive employees, it will be necessary for the more motivated management staff and owners to coerce the employees into making them work. This requires strict control and monitoring of behaviour in order to detect attempts by the staff to avoid work. Management must keep a careful eye out for sabotaging effects by self-interested employees and find the cause of disruptions, handing out penalties in the belief that a sincere wish to avoid responsibility is the root cause for the majority of trouble.

Theory Y is, in many ways, the opposite to that of Theory X. Rather than taking the view that employees must be forced to do what management want and that they will not, under any circumstances, do anything beneficial for the company under their own direction, Theory Y states that employees actually become more productive when more trust and responsibility is delegated to them. According to Theory Y, employees do wish to work and be productive and the act of doing well at work is itself a strong motivator. In fact, employees will seek responsibility and ways to be productive, if they are allowed to do so. Theory Y has been shown to be more beneficial in creating a productive working environment than Theory X, at least in modern working environments. Nonetheless, Theory X remains relevant, since some managers naturally gravitate to this viewpoint.

According to McGregor: “Man is a wanting animal – as soon as one of his needs is satisfied, another appears in its place. This process is unending.” When choosing between Theory X and Y, the one that best meets the needs of the people involved is likely to be the most appropriate.

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