Psychological Contract and Organizational Change: Assessing M&As’ Impact on Survivors of Pharmaceuticals in Puerto Rico

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Changes, such as mergers and acquisitions (M&A), involve changes in management, organizational climate, workforce composition, and bring a sense of uncertainty and insecurity to survivors. Survivors refer to employees who remain within an organization after a significant organizational change (Baruch & Hind, 2000) such as mergers and acquisitions. M&A activity is increasing and will continue to grow (Weber, Tarba, & Öberg, 2013).

In the pharmaceutical environment, M&A have proven to be very popular as they have been used both for creating strong companies and for conquering new markets; currently this industry is one of the most expansive and profitable industries in the world (Condrat & Boboia, 2012). Some of the top U.S. and global pharmaceuticals operate in Puerto Rico, and their M&A activities directly affect Puerto Rican employees.

A main support of Puerto Rico’s economy is the manufacturing sector (47.5% of GDP). According to the Pharmaceutical Industry Association of Puerto Rico, (PIAPR, 2013), the biopharmaceutical industry represents 26.5% of the Island’s GDP; 60% of all Island imports, and 98% of all Island exports; and generates over 86,000 jobs (18,000 direct and 68,000 indirect). The importance of this industry supports focusing on the assessment of Puerto Rico’s pharmaceutical sector and its survivors as an object of study, specifically, within the context of M&A.

Although the financial value of the M&A activity is generally easy to calculate, the human value and cost of these transactions are not. Researchers have argued the primary reason M&A fail is the lack of consideration of the human factor (Weber et al., 2013). Survivors are described as experiencing “merger syndrome” (Buono & Bowditch, 1989/2003); hence, the financial results of M&A are hard to explain without considering M&A’s human side (Cho, 2003). The present research addresses the effect of both perceived psychological contract breach (PCB) and psychological contract violation (PCV) on survivors’ attitudes after M&A.

Business disruptions such as M&A affect employees’ perceptions of their psychological contract with their employer. Mergers are used to gain market share, competitive advantage, increased revenues, and risk and product diversifications (Ferrer, 2012). Employees may perceive a PCB as organizations change (Robinson & Rousseau, 1994). Employees’ perceptions of a PCV may engender negative outcomes, such as diminished performance, organizational commitment, job satisfaction and reduced trust (Agee, 2000).

The objective of this study was to investigate from a psychological contract perspective the attitudes of survivors of M&A within the pharmaceutical industry in Puerto Rico. Specifically, the researcher assessed the effects perceptions of PCB and PCV had on job satisfaction (JS), commitment to the organization (CO), and turnover intention (TI) of survivors of M&A, of companies within the pharmaceutical industry that merged five or six years ago.

A literature review on psychological contract theory shows that contracts, whether written or oral, are exchange agreements that bind the transacting parties and regulate their activities and are enforced, or at least recognized, in law (Farnsworth, 1982; cited in Rousseau, 1989). In any employment relationship, there are three main types of contracts: formal (a written agreement between two parties that clearly specify the obligations of both sides), implied (an agreement between two parties based on previous interactions with one another), and psychological (an individual’s subjective beliefs and perceptions regarding the terms and conditions of a perceived agreement that individual has established with another party; Rousseau, 1989). All contracts have a psychological component, which is inherently perceptual and deals with implicit details and perceived obligations beyond those that can be explicitly described in formal legal terms (Pavlou & Gefen, 2005), which result from all contracts being inherently incomplete (MacNeil, 1980). Psychological contract theory posits that a social element exists in contractual relationships, according to the social exchange theory (Agee, 2000; Coyle-Shapiro & Conway, 2005).

The present research is based on the theoretical contribution of Rousseau’s (1989) psychological contract, which marked a fundamental shift in the meaning and functioning of contracts. As proposed, employees perceive a violation to such contracts when the organization adapts to environmental challenges through significant changes. The present study adopted an idiosyncratic perspective of the psychological contract, since Rousseau defined psychological contract as “an individual belief, shaped by the organization, regarding terms of an exchange agreement between individuals and their organization” (p. 9). This belief arises from the perception that a promise has been made, such as of employment or career opportunities, and a consideration offered in exchange for it, such as accepting a position or foregoing other job offers (Rousseau & Tijoriwala, 1998). By definition, psychological contracts exist on an individual level and are based solely upon an employee’s perceptions (Morrison & Robinson, 1997) and begin to form very early in the employee-employer relationship (Baker, 1985); as such, these beliefs may diverge from what is in writing and from interpretations by other parties (Rousseau & Tijorwala, 1998). Rousseau (1995) posited that a key feature of a psychological contract is that the individual voluntarily assents to make and accept certain promises as he or she understands them. It is what the individual believes he or she has agreed to, but not what that person intends, that makes the contract.

The general terms researchers have focused on in the study of psychological contracts are the ends of a contractual continuum; “transactional” and “relational” (Rousseau, 1989, 1995). Transactional terms are exemplified by a “fair day’s work for a fair day’s pay,” focusing on short-term monetizable exchanges. Relational contracts focus on open-ended relationships involving considerable investments by both employees (company-specific skills, long-term career development) and employers (extensive training), and is the focus of the present study because of the long-term, highly subjective, and dynamic nature of the relationship between the survivors of M&A and their employers.

Although the literature uses the terms PCV and PCB interchangeably, this study distinguishes them because even though both constructs are closely related, they are measured differently. A contract breach is the perception of a discrepancy between what was promised and what was actually experienced, while a contract violation is the intense affective experience that frequently follows that perception (Morrison & Robinson, 1997). After either, an employee may experience a reduction in JS or organizational commitment, and increase his or her turnover intention.

The present research is grounded on the framework of the psychological contract theory, which is defined as “an individual belief, shaped by the organization, regarding terms of an exchange agreement between individuals and their organization” (Rousseau, 1989).

The study has evaluated the relationship between perceived PCV and M&A survivors’ job satisfaction, organizational commitment, and turnover intention. Further, the study attempted to evaluate the moderating effect of the economic crisis as a justification or credible explanation that reduces the perception of psychological contract breach and violation on the attitudinal outcomes of survivors of mergers and acquisitions. The present research has proposed four hypotheses to be tested, expressed in terms of null hypotheses (H.) and alternative hypothesis (H.). The latter are the substantive or research hypotheses.

The present research empirically assessed whether organizational change adversely affects employees’ psychological contract. Findings confirmed that an inverse relationship exists between both perceived PCB and PCV and JS and OC, as well as a direct relationship between perceptions of PCV and TI. SEM confirmed the proposed conceptual model, revealing goodness of fit among the variables under study.

Perceived breach and violation of the psychological contract reduces JS. There was a stronger inverse correlation between PCB and JS in F2 than in F1. Communication between employers and survivors of major organizational change, like M&A, may help employees to understand, interpret, and make sense of events. Accordingly, if employers dedicate time to communicate the reasons for the merger decision, this CE reduces the effect of the perceived PCV on employees’ attitudes. In F1, the organization’s agents clearly informed employees of their new plans. According to the responses to the CE indicator, it appears that the lack of effective communication in F2 resulted in employees in F2 showing a stronger inverse correlation between PCV and JS. Communication dedicated to explaining organizational change helped employees to make sense of the changes, as posited by sense-making theory proponents (Weick, 1995). This supports the effect of the moderating variable on employees’ attitudes. Accordingly, when analyzing the SEM results of indirect effect of PCV on JS through CE, separately by pharmaceutical, the effect of the moderating variable was diminished in F2, with a value of -.012 compared to -.123 in F1; consequently, a CE impacts employee attitudes, reducing the effect of PCV on JS. These findings coincide with previous empirical research on PCV and JS, showing an inverse relationship between these variables (Kraft, 2008).

The effect of PCB and PCV on OC showed an inverse correlation for the entire sample, confirming perceived PCB reduced employee’s commitment toward the organization in diverse cultural settings, among different types of employees, from various business sectors (Chiang, Liao, Jiang, & Klein, 2012; Freese, Schalk, & Croon, 2011; Robinson & Morrison, 1995). In F2, the correlation between PCB and OC was moderately significant, having a stronger inverse correlation than in F1. The effect of the moderating variable CE, which was lower than in F1, might explain this difference.

The aggregate value for the entire sample shows a positive, yet non-significant correlation between PCB and TI, but significant between PCV and TI. Findings coincide with previous researchers who revealed that a perceived PCV can increase M&A survivors’ TI. In F2, the correlation between the perceived PCV and TI was significant. This indicates that perceived PCV has a strong direct relationship with employees’ intention to leave the organization and that in multi-faceted employer-employee relations, and within diverse employment characteristics, a PCV significantly increases employees’ TI; however, no correlation existed between PCV and TI in F1 (correlation coefficient = .099). In comparing some elements of employment characteristics of F1 and F2, there were significant differences between both plants. T1 had fewer employees working between 11 and 20 years (41.3%), annual salaries exceeding $50,000 (14.3%) and a smaller percentage of managers (5.7%), compared to T2 (67.3%, 24.5%, and 18.1% respectively, . < .05). Inferences can be drawn from these differences regarding employment attitude toward TI when experiencing PCV; thus, TI may be affected by tenure, position, and compensation.

Hypothesis 4 tested whether the perception of economic crisis as a CE for employers’ merger decision reduced the perception of PCV and its effects on M&A survivors’ attitudes. The CE of an economic crisis was the moderating variable, and the total effects analysis confirmed the predicted inverse correlation between the perception of PCB and PCV on JS and OC as well as supporting the direct effect of PCV on TI. Although PCB had no important effect on TI, it shows an indirect negative effect, which means that the moderating variable might have the tendency to change the direction of the effect of PCB on TI.

One possible limitation of this study was the use of a self-report questionnaire. Several related empirical studies in diverse contexts, however, have validated the measurement instruments used. A second limitation of this study was the mono-method bias, frequently attributed to the utilization of a common method for data collection, such as self-report questionnaires with Likert-type scales. Spector (2006) argued that little scientific data unequivocally supports this view, and there are data to refute it. The inclusion of reverse-scored items in most of the constructs attenuated this threat to validity and contributed to validating the consistency of participants’ responses to similar questions. A third limitation may be due to using a convenience sample. All participants, however, met the characteristics of the sample under study; survivors of M&A within the pharmaceutical sector in Puerto Rico and every employee willing to participate had the same opportunity to do so.

Organizational change is inevitable in fast-pacing globalized business environments and forces companies to find effective and adequate strategies to adapt to them. Understanding employees’ attitudes and behavior patterns is an essential role of strategic and global human resources management in pursuit of organizational performance. An effective integration of all business activities through an adequate alignment of all organization stakeholders’ interests, including attention to human capital and its dynamic psychological contract is of utmost relevance in every employment relationship, especially in the context of organizational change.

Employment relations are moving to transactional, short-term contract agreements with fewer benefits and less job security for employees; measure that represent savings for the company (i.e. Maguire, 2003). Labor-related legal aspects of this tendency should be a source of consideration, as well as the emotional effects on employees’ performance, since that modality may lead to the death of employment permanency and its attendant side effects.

Future research on PCV after a merger should investigate the impact of such organizational change on basic conditions of employment, such as pay, working hours, job opportunities, development opportunities, job demands, new boss, new skills, retraining, and relocation; identifying the practical direct impact of M&A on employees. Based on the findings, tenure, position, and compensation seemed to have an impact on employees’ TI, and could be a subject for future research. The effect of PCB and PCV should be studied and measured in the public sector. In government, a major organizational change occurs every four years after elections. This implies a never-ending sense of uncertainty and adaptation to a new psychological contract. Further research contributing to better management of change and improved employee attitudes is called for. In summary, this study is a useful tool to guide future research considering other factors, moderating variables, and labor sectors to enrich the literature on psychological contract perspectives and to better understand the effects of organizational change.

Changes are inherent to any type of organizations in the present fast-pacing globalized business environments. Their inevitability forces companies to find effective and adequate strategies to adapt to them considering all parts involved. Psychological contract theory is a relevant conceptual framework to study and analyze employees’ reaction to organizational change. An appropriate and successful way to manage and deal with employees’ reaction to major organizational change is to understand the implied and unwritten agreement comprised in employees’ psychological contract. As confirmed in this study and in prior research, the psychological contract conceptual framework is a useful theory to assess the effect of M&A on employees’ attitudes, such as JS, organizational commitment, and turnover intention. Employees’ reaction to organizational change deserves attention from both the academia and practitioners in managerial positions, in order to comprehend the inner dynamics caused by such changes and that inevitable affect organizational performance.

Psychological contract theory contributes to the field by providing explanation of the effect of psychological contract breach and violation upon employees’ outcome. The present study expanded the scope of previous research by including the assessment of the impact of a moderating variable such as a credible explanation to justify employers’ merger decisions on employees’ perceived PCV. Beyond the direct effect of PCV on survivors’ attitudes, there is opportunity for further examination of other indirect effects, which may be equally relevant to the study of organizational behavior. Those yet unidentified factors may comprise mediating components of the so-called “black box,” which, according to Burke and Cooper (2006) consist of human capital, behaviors, organizational culture, organizational climate, attribution focus, and social exchange, among others, and relate to the linkage between Human Resources practices and organizational performance. Understanding employees’ attitudes and behaviors patterns is an essential role of strategic and global human resources management in pursue of organizational performance. An effective integration of all business activities through an adequate alignment of all organization stakeholders’ interests, including the attention to the human capital and their dynamic psychological contract is of utmost relevance in every employment relationship as well as in the context of major organizational change.