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793FEATURE ARTICLE
Correspondence to: Dr. Anastasia A. Katou, Lecturer in OB and HRM, Department of Marketing and Operations Management, University of Macedonia,540 06 Thessaloniki, Greece, 0030-2310-819921 (phone), akatou@uom.gr.
Published online in Wiley Onl ine Library (wileyonlinelibrary.com)
2012 Wiley Periodicals, Inc. DOI: 10.1002/tie.21504
The Link Between HR
Practices, PsychologicalContract Fulfillment,and Organizational
Performance:The Caseof the Greek Service
SectorBy
Anastasia A. Katou
Pawan S. Budhwar
The purpose of this study is to investigate the impact of human resource (HR) practices on organiza-
tional performance through the mediating role of psychological contract (expressed by the inuence
of employer on employee promises fulllment through employee attitudes). The study is based on a
national sample of 78 organizations from the public and private services sector in Greece, including
education, health, and banking, and on data obtained from 348 employees. The statistical method
employed is structural equation modeling, via LISREL and bootstrapping estimation. The ndings of
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794 FEATURE ARTICLE
Thunderbird International Business Review Vol. 54, No. 6 November/December 2012 DOI: 10.1002/tie
However, most literature refers to the employeremployee
relationship in terms of attitudinal consequences and less
on its effect on organizational performance (Nelson &
Tonks, 2007; Pate, Martin, & McGoldrick, 2003).
Psychological contract research has tended to focus
on the implications of psychological contract violationrather than psychological contract fulfillment (Grimmer
& Oddy, 2007; Nelson & Tonks, 2007). Psychological
contract violation occurs when employees believe that
the organization has failed to fulfill its promises (also
see Baker, 2009). This study, however, is focused on the
employer promise fulfillment as perceived by employ-
ees, who are likely to reciprocate by fulfilling their own
promises (Conway & Briner, 2005; de Jong, Schalk, &
de Cuyper, 2009). This is because it is argued that the
outcomes of the psychological contract are more strongly
related to the fulfillment of promises than to promises
per se (Lambert, Edwards, & Cable, 2003).However, it is further argued that:
When psychological contracts are sound and perceived
to be honored, it does not necessarily mean that
performance levels will be enhanced. Rather, when a
contract is not sound and is perceived not to be hon-
ored or is somehow unbalanced, then it will act as a
de-motivator and result in various levels of withdrawal
behavior (Sparrow, 1998). It must be said, however,
that there is a conceptual ambiguity surrounding the
causal association in the employment relationship, and
the actual empirical relationship for this relationshipis scant (Guest, Conway, Briner, & Dickman, 1996).
(Westwood, Sparrow, & Leung, 2001, p. 624)
Research has also suggested, though perhaps not
strongly empirically tested, that HR practices may be a
key predictor of employee perceptions of the psycho-
logical contractboth employer and employee fulfill-
ment of their obligations. Specifically, it is argued that
a major function of human resource management is to
Introduction
Psychological contract is defined as an individu-
als system of belief, shaped by the organiza-
tion, regarding terms of an exchange agreement
between him/herself and the organization (Rousseau &Greller, 1994, p. 385). Psychological contract is impor-
tant because previous research has shown it to influence
important employee and organizational outcomes, such
as employee attitudes and organizational performance.
Specifically, it is argued that changes in psychological
contract may have an impact on employee attitudes such
as motivation, commitment, and satisfaction (Robinson &
Morrison, 1995; Shore & Tetrick, 1994; Sparrow, 1998).
Accordingly, changes in employee attitudes may have an
influence on organizational performance (Boselie, Dietz,
& Boon, 2005; Guest, 1997; Paauwe & Richardson, 1997).
the study suggest that employee incentives, performance appraisal, and employee promotion are
three major HR practices that must be extensively employed. Furthermore, the study suggests that
the organization must primarily keep its promises about a pleasant and safe working environment,
respectful treatment, and feedback for performance, in order for employees to largely keep their
own promises about showing loyalty to the organization, maintaining high levels of attendance, and
upholding company reputation. Additionally, the study argues that the employee attitudes of motiva-
tion, satisfaction, and commitment constitute the nested epicenter mediating construct in both the HR
practicesperformance and employeremployee promise fulllment relationships, resulting in superior
organizational performance. 2012 Wiley Periodicals, Inc.
Psychological contract is
important because previ-
ous research has shown
it to influence important
employee and organizationaloutcomes, such as employee
attitudes and organizational
performance.
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The Link Between HR Practices, Psychological Contract Fulllment, and Organizational Performance: The Case of the Greek Service Sector 795
DOI: 10.1002/tie Thunderbird International Business Review Vol. 54, No. 6 November/December 2012
FIGURE1 An HR PracticesPsychological ContractOrganizational Performance Linkage Framework
HR Practices
Resourcing Training Rewards Relations
Employee
Attitudes
Satisfaction Commitment Motivation
Organizational
Performance
Effectiveness Efficiency Development Innovation Quality
Employer
Promises
Fulfillment
Transactional Relational
Employee
Promises
Fulfillment
Transactional Relational
Organizational Contingencies: Ownership, Size Individual Contingencies: Gender, Age, Seniority, Position
Psychological Contract Fulfilment
The unmediated HR Practices effect?
The unmediated Employer Promises Fulfillment effect?
cultivate a positive psychological contract that will lead
to greater employee commitment and satisfaction and
thus to improved organizational performance. Particu-
larly, Suazo, Martinez, and Sandoval (2009) describe the
means by which human resource practices can create psy-
chological contracts, and argue that research on HRM
practices as antecedents to psychological contracts is in
need of further development (p. 160), something that
we propose to investigate in this study. On the whole,
taking into consideration that the psychological contract
in this study is reflected on the degree that employee
promise fulfillment is influenced by employer promise
fulfillment, we further assume that HR practices are ante-
cedents of employer and employee promise fulfillment
(Suazo et al., 2009).
Although the concept of psychological contract has
been largely investigated over the past years, more
research is needed in order for it to become a reasonable
framework for understanding the interactions betweenemployers and employees (Guest, 2004). Specifically,
there is a lack of empirical work in the field (Pate
et al., 2003) investigating causal orderings between the
relationships involved (Aryee, Budhwar, & Chen, 2002;
Cropanzano & Mitchell, 2005; Coyle-Shapiro & Shore,
2007), and there is a need for more studies examining
both employer and employee perspectives of the psy-
chological contract (Baker, 2009). Therefore, the study
aims to test a model hypothesizing a mediating role for
employee perceptions of both employer and employee
fulfillment of their psychological contract obligations in
the relationship between HR practices and organizationalperformance.
Moreover, considering that there is poverty of
research on psychological contract outside Western econ-
omies (Westwood et al., 2001, p. 648) we also propose
to extend previous US-centric psychological contract
research into a previously untested cultural/societal
context, such as the Greek services sector. Greece is a
peripheral country in the European Union that both
influences, and is influenced by, the Balkan and the Black
Sea countries. The Greek, Balkan, and Black Sea coun-
tries cultural and economic context is rather differentfrom the West European countries context. Therefore,
it would be interesting to extend the debate on the role
of human resource management (HRM) and psychologi-
cal contract in improving organizational performance to
countries such as Greece.
Overall, there is a lack of previous psychological con-
tract research treating organizational performance as the
ultimate dependent variable (de Jong et al., 2009). There
is also a lack of psychological contract research referring
to employer and employee promise fulfillment (Grimmer
& Oddy, 2007; Nelson & Tonks, 2007). Further, there is
a scarcity of research considering that HR practices areantecedents of employer and employee promise fulfill-
ment (Suazo et al., 2009), especially for non-Western
contexts investigating the HR practicespsychological
contractorganizational performance relationship (Pate
et al., 2003). Therefore, the aim of this study is to inves-
tigate the impact of HR practices on organizational
performance through the mediating role of psychologi-
cal contract, expressed by the influence of employer on
employee promise fulfillment in the Greek service-sector
context.
Research Model and Hypotheses
Building on the contributions of Guest and Conway
(2004) and Purcell, Kinnie, and Hutchinson (2003),
Figure 1 presents an operational model linking HR
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796 FEATURE ARTICLE
Thunderbird International Business Review Vol. 54, No. 6 November/December 2012 DOI: 10.1002/tie
Relational contracts involve long-term, less specific, and
monetary- and non-monetary-in-nature beliefs such as
job security, loyalty, training and development, career
development, commitment, and trust (Cavanaugh &
Noe, 1999; Robinson, Kraatz, & Rousseau, 1994; Rous-
seau, 1990).
Psychological contract literature, further, argues thatfulfillment of the employer promises will be reciprocated
by employee satisfaction, commitment, and motivation
(Coyle-Shapiro & Kessler, 2000). For example, Robinson
and Rousseau (1994) and Guest et al. (1996) support the
view that employer contracts influence job satisfaction
and organizational commitment. Bies and Tripp (1995)
argue that the state of the psychological contract in terms
of fulfillment or breach will result in positive or nega-
tive employee attitudes, respectively, which in turn will
have an impact on employees in fulfilling their promises.
Coyle-Shapiro and Kessler (2000), Robinson (1996), and
Sturges, Conway, Guest, and Liefooghe (2005) supportthe view that employer promise fulfillment is positively
related to employee commitment, supporting addition-
ally that these attitudes will bring significant benefits
to the organization in the form of increased efficiency.
Generally, in cases where employees are satisfied, com-
mitted, and motivated, they will keep their promises to
the organization.
Accordingly, we hypothesize that:
Hypothesis 1: Employee attitudes will mediate the relationship
between employer promise fulfillment and employee promise
fulfillment.
The HR Practices System
It is argued that HR practices, such as employee resourc-
ing, development, rewards, and relations, influence psy-
chological contracts by shaping employer and employee
practices, psychological contract, and organizational per-
formance. The proposed operational model assumes
that the state of the psychological contract mediates the
relationship between HR practices and organizational
performance. Specifically, the model is constituted by two
related systems: the psychological contract system and the
HR practices system. The first system refers to psychologi-cal contract that is expressed by the relationship between
employer promise fulfillment (e.g., transactional, rela-
tional) and employee promise fulfillment (e.g., transac-
tional, relational) mediated by employee attitudes (e.g.,
satisfaction, commitment, motivation). This system is
based on the notions of reciprocity and social exchange,
whereas if the employer upholds his side of the bargain,
this will make employees satisfied, committed, and moti-
vated, and so they will reciprocate by upholding their
side of the bargain (Coyle-Shapiro & Kessler, 2003; Rous-
seau, 1995). The second system refers to the relationship
between HR practices (e.g., resourcing, development,rewards, relations) and organizational performance (e.g.,
effectiveness, efficiency, development, innovation, qual-
ity). This system is based on the high performance HR
practices concept, whereas HR practices influence orga-
nizational performance because of psychological contract
fulfillment (Rousseau, 1995). In particular, the specific
systems of the proposed model are explained below.
The Psychological Contract System
Employees keep their promises according to the behavior
of the good employer, or the history of the orga-
nization in keeping its promises to employees (Purcell& Hutchinson, 2007; Rousseau, 1995). Specifically, in
the context of the employment exchange relationship,
employees keep their promises if employers also keep
their promises (Coyle-Shapiro, 2002; Coyle-Shapiro &
Kessler, 2003). Reciprocityconstitutes a core component in
the psychological contract, meaning that employees posi-
tively respond to favorable behavior from their employ-
ers (Rousseau & McLean Parks, 1993). In cases where
employees believe that employers have broken their given
promises, this will have a negative effect on employee
promises fulfillment (Coyle-Shapiro & Kessler, 2000).
In the proposed model, employer and employee
promise fulfillments are two related parts of psychological
contracts. However, although psychological contracts are
highly subjective (McDonald & Makin, 2000), there are
some common features that categorize psychological con-
tracts into transactionaland relationalcontracts (MacNeil,
1985; Rousseau, 1990). Transactional contracts involve
short-term, specific, and monetary-in-nature beliefs such
as competitive wage rates and performance-based pay.
Generally, in cases where
employees are satisfied,committed, and motivated,
they will keep their promises
to the organization.
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The Link Between HR Practices, Psychological Contract Fulllment, and Organizational Performance: The Case of the Greek Service Sector 797
DOI: 10.1002/tie Thunderbird International Business Review Vol. 54, No. 6 November/December 2012
and thus on organizational performance (Cavanaugh
& Noe, 1999; Guest & Conway, 2004).
Overall, based on the social exchange theory and
the theories of reciprocity, the coherent story explain-
ing our proposed model supports the view that the state
of the psychological contract mediates the relationship
between HR practices and organizational performance.Furthermore, in terms of the proposed model, the cat-
egorization of psychological contracts into transactional
versus relational may be used to clarify the empirical
contribution of the study by measuring the degree of the
influence on organizational performance of the various
items that constitute employer and employee promise
fulfillment. This is because the study area for testing the
proposed model is Greece, where the current economic
crisis from 2008 onward has affected its workplace, by
substantially increasing its unemployment rate due to the
downsizing of organizations, by significantly changing the
nature of jobs, due to the preference of organizations touse more flexible employment contracts, and by consider-
ably changing processes and production technology, due
to the efforts the organizations put in order to produce
more innovative products that will meet the constant
change of markets. Thus, considering the psychologi-
cal contract system, the proposed model may also add
promise fulfillment (Suazo et al., 2009). Specifically,
employee resourcing, being the beginning of the employ-
ment relationship, transmits the employment terms and
conditions of the organization to the potential job
applicants (Rynes, 1991). The emphasis the organiza-
tion is putting on employee training and development
usually reflects the view that the organization considersemployees as being part of its permanent employment
(Gomez-Mejia, Balkin, & Cardy, 2004). Each of the com-
ponents of employee rewards is capable of producing
psychological contract by establishing the belief that the
organizations employees are worth their long-term sala-
ries (Gomez-Mejia et al., 2004). Good employee relations
produce positive feelings in employees, who accordingly
keep their promises to organizations (Robinson et al.,
1994). Consequently, HR practices are likely to influence
psychological contracts. This is because the appropriate
use of HR practices will create a positive organizational
environment that will influence the degree of employerand employee promise fulfillment (Marchington, 2001;
Purcell et al., 2003; Suazo et al., 2009). Thus, HR prac-
tices determine the status of psychological contracts by
shaping the day-to-day behaviors of the members in an
organization (Rousseau, 1995).
Consequently, a major function of HR practices is to
cultivate a positive psychological contract that will lead to
improved organizational performance (Pate et al., 2003;
Suazo et al., 2009). This means that HR practices produce
positive psychological contracts, reflected in the positive
attitudinal reactions with respect to organizational com-
mitment (Rousseau, 1990; Robinson & Rousseau, 1994;Robinson et al., 1994; Lemire & Rouillard, 2005), work
satisfaction (Sutton & Griffin, 2004), and motivation
(Lester, Claire, & Kickull, 2001), which consequently
will improve organizational performance. Therefore, we
hypothesize that:
Hypothesis 2: Psychological contract fulfillment will mediate
the relationship between HR practices and organizational
performance.
Contingencies
Several organizational contingencies, such as ownership
(e.g., public, private), and size, and individual contin-
gencies, such as gender, age,years in organization (senior-
ity), and position in organization (e.g., management,
worker), may influence the HR practicespsychologi-
cal contractorganizational performance relationship.
This means that organizations do not operate in a
vacuum, but contingencies may have a positive or nega-
tive impact on HR practices and psychological contract
Overall, based on the socialexchange theory and the
theories of reciprocity, the
coherent story explaining
our proposed model supports
the view that the state of the
psychological contract medi-ates the relationship between
HR practices and organiza-
tional performance.
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798 FEATURE ARTICLE
Thunderbird International Business Review Vol. 54, No. 6 November/December 2012 DOI: 10.1002/tie
involvement, communication) referring to the usual four
key areas of resourcing, development, reward, and rela-
tions, developed by Armstrong (1996). The items were
measured on a scale ranging from 1 (low use) to 5 (high
use). Specifically, the respondents were asked, How
would you rate the use of the training and development policy
in your organization?
Fulllment of Employer Promises
The construct of fulfillment of employer promises com-
prised ten items, following the Chartered Institute of
Personnel and Development (CIPD, 2008) psychological
contract fact sheet, which contains items from both the
traditional and the new psychological contract. Specifi-
cally, items that have been used in the past to reflect the
transactional nature of employer promises in the psycho-
logical contract were pay commensurate with performance
and an attractive benefits package, while items that have
been used in the past to reflect the relational nature ofemployer promises in the psychological contract were
opportunities for training and development, opportunities for
promotion, recognition for innovation for new idea, feedback
on performance, interesting tasks, respectful treatment, reason-
able job security, anda pleasant and safe working environment
(McDonald & Makin, 2000). Responses were made on
a five-point scale ranging from 1 (very low) to 5 (very
high). Specifically, the respondents were asked, How
would you rate the fulfillment of the employer prom-
ises with respect to the opportunities for promotionin your
organization?
Fulllment of Employee Promises
The construct of fulfillment of employee promises com-
prised ten items, following the CIPD (2008) psychological
contract fact sheet, which contains items from both the
traditional and the new psychological contract. Specifi-
cally, items that have been used in the past to reflect the
transactional nature of employee promises in the psy-
chological contract were work hard, maintain high levels
of attendance and punctuality, and work extra hours when
required, while items that have been used in the past to
reflect the relational nature of employee promises in the
psychological contract were uphold company reputation,
show loyalty to the organization, develop new skills and update
old ones, be flexible, be courteous to clients and colleagues, be
honest,and come up with new ideas (Robinson et al., 1994).
Responses were made on a five-point scale ranging from
1 (very low) to 5 (very high). Specifically, the respondents
were asked, How would you rate the fulfillment of the
employee promises with respect to working hard in your
organization?
information to the literature by measuring the strength
of the influence of employers on employees promise
fulfillment in terms of the transactional and relational
associations.
Method
Sample
Data for this research were collected in April and May
2008 by means of a questionnaire survey that was admin-
istered to the employees of public and private firms in
the service sector, including education, health, and bank-
ing, covering the entire country of Greece. The samplers
were 120 executives attending development programs
at a Greek business school who helped to collect data
from their organizations. The samplers were asked to
concentrate on six respondents from each firm; two at
the management level (one from the HRM/Personnel
Department and one from the Finance Department) andfour at other employees level (i.e., 720 questionnaires
altogether). This is because psychological contracts are
based on the perceptions and beliefs of individuals
(McDonald & Makin, 2000). Thus, with respect to respon-
dents, the study refers to multiple actors (e.g., managers,
employees) and to multiple raters (e.g., different raters
per unit of analysis) (Boselie et al., 2005), consider-
ing that all structural variables reflect perceptions of
individuals. Three hundred forty-eight usable question-
naires were returned from the employees in 78 firms, a
response rate of 65 percent at firm level and 48 percent
at employee level.Of the sample of 78 firms, 61.5 percent had 20 to
100 employees, and 38.5 percent had more than 100
employees; 42.3 percent were public and 57.7 percent
were private. Of the sample of 348 respondents, 48.3
percent were male and 51.7 percent were female. The
average age was 38.9 years old, and the average senior-
ity was 10.3 years. The job status of the respondents was
management 25.0 percent and other employees 75.0
percent. The sector category of the respondents was 32.8
percent public and 67.2 percent private. Finally, 69.8
percent of the respondents were from firms having 20 to
100 employees, and 30.2 percent from firms having more
than 100 employees.
Measures
HR Practices
The construct of HR practices comprised 12 items (e.g.,
recruitment, selection, flexible work arrangements, work
design, performance appraisal, training and develop-
ment, compensation, promotion, incentives, participation,
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TABLE
1
MeansandStanda
rdDeviations,ConsistencyandReliabilityMeasures,andBivariateCorrelationsforAlltheVariablesUsed
Mean
(standard
deviation)
Cronbach
Alpha
Percentage
ofvariance
explained
Construct
Reliability+
1
2
3
4
5
6
7
8
9
10
11
1
HR
practices
3.429
5
(0.843
85)
0.922
57.46
0.940
[0.754]++
2
Employerpromise
fulllment
3.509
7
(0.901
77)
0.930
67.44
0.958
0.732*
[0.812]
3
Employeepromise
fulllment
3.835
2
(0.743
38)
0.897
60.43
0.924
0.544*
0.641*
[0.743]
4
Attitudes
3.668
6
(0.951
79)
0.875
87.59
0.930
0.580*
0.681*
0.680*
[0.903]
5
Organizational
performance
3.975
7
(0.850
33)
0.911
83.35
0.944
0.666*
0.783*
0.729*
0.754*
[0.882]
6
Ownership
0.481*
0.410*
0.352*
0.369*
0.480*
1
7
Size
0.258*
0.258*
0.283*
0.288*
0.295*
0.256*
1
8
Gender
0.057
0.009
0.033
0.161*
0.081
0.049
0.202*
1
9
Age
0.028
0.028
0.069
0.058
0.002
0.029
0.054
0.329*
1
10
Seniority
0.128**
0.111**
0.115**
0.119**
0.117**
-0.201*
0.058
0.248*
0.732*
1
11
Position
0.274**
0.284**
0.068
0.121**
0.206*
0.191*
0.143*
0.199*
0.500*
0.317*
1
*Correlationissignicantatthe0.01level.
**Correlationissignicantatthe0.05level.
+C
onstructreliability=
(
)
+
i
2i
2
i
i
2
i
i
-1
/
whereli=standardizedloading.
++D
iagonalguresinbracketsrepre
sentsquaredrootaveragevarianceextracted(AVE).
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DOI: 10.1002/tie Thunderbird International Business Review Vol. 54, No. 6 November/December 2012
validity (Hair et al., 2008). Construct composite reliabilitywas
assessed by examining the calculated composite reliability
scores (Pavlou & Gefen, 2005). The figures in Table 1
indicate that the degree of construct reliability is accept-
able, since all reliability scores exceed 0.90. Construct
discriminant validity was assessed by examining whether
the correlation coefficients between pairs of constructswere significantly different from unity, and by examining
whether the square root of each factors AVE is larger
than its correlations with other factors (Gefen & Straub,
2005). Table 1 presents the correlation coefficients of
all constructs used in the study. It is seen that the cor-
relation coefficients are significantly different from unity,
and they are smaller than the square root of each factors
AVE, providing thus evidence for separate constructs.
Although the correlation matrix highlights some high
correlations, multicollinearity among these constructs is
not a serious concern since all relevant checks such as
condition index (largest CI = 5.484 less than 10), toler-ance values (smallest TOL = 0.356 significantly greater
than zero), and variance inflation factors (largest VIF =
2.806 less than 10) did not suggest evidence of significant
multicollinearity (Kleinbaum, Kupper, & Muller, 1988).
Similarly, the Koenker and Basett (1982) chi-squared test
(x 2(1) = 0.696 not significant at 0.05 level) indicated that
there is no heteroskedasticity in the error terms.
To reduce the common method bias threat in the
survey design, we asked multiple respondents from each
organization to answer the questions of the questionnaire
(Lindell & Whitney, 2001). However, taking into consid-
eration that some correlation coefficients were ratherhigh, Harmans (1967) single-factor test was used to
examine the likelihood of common method bias threat.
According to this test, the simultaneous loading of all
items in a factor analysis revealed six factors, and not just
one, with the first factor covering only 18.106 percent of
total variance explained, indicating thus that the com-
mon method bias in the data was rather limited.
Statistical Analysis
To test the raised research questions of the proposed
framework, the methodology of structural equation mod-
els (SEMs) or latent variable models (Hair et al., 2008)
was used, via LISREL and bootstrapping estimation (see
Jreskog & Srbom, 2004). SEM is effective when testing
models that are path analytic with mediating variables,
and include latent constructs that are being measured
with multiple items (Luna-Arocas & Camps, 2008). We
used bootstrapping because this method is considered
to be the most appropriate method for testing mediation
due to the fact that it does not require the normality
assumption to be met (Shrout & Bolger, 2002). However,
the general rule for SEM, that is, that the number of
observations needed for each parameter is estimated to be
between 8 and 12 observations (Hair et al., 2008), is not
fulfilled in the present study. Although we could fulfill this
rule by following procedures (Aryee et al., 2002) to reduce
the number of items by creating fewer indicators for eachconstruct, we decided not to do so in order to have a gen-
eral picture about all the items used in the study.
We assessed the overall model fit following Bollens
(1989) recommendation to examine multiple indices,
since it is possible for a model to be adequate on one fit
index but inadequate on many others. We used the chi-
square test (with critical significant levelp> 0.05) and the
normed-chi-square ratio (with critical level no more than
3), the goodness of fit index (GFI; with critical level not
lower than 0.80), the normed fit index (NFI; with critical
level not lower than 0.90), the comparative fit index (CFI;
with critical level not lower than 0.90), and the root meansquared error of approximation (RMSEA; with critical
level not more than 0.08) (Bentler, 1990).
Results
Table 1 presents the means and the standard deviations
of all the constructs used in the study, derived as weighed
averages of confirmatory factor analyses applied to each
group of relevant items. Furthermore, Table 1 displays
the bivariate correlation coefficients between all con-
structs used in the study. We observe strong, positive, and
We observe strong, posi-
tive, and significant correla-
tions between HR practices,
organizational performance,
employee attitudes, andemployer and employee prom-
ise fulfillment, supporting the
hypotheses of the study.
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The goodness-of-fit indexes confirmed the validity of
this less parsimonious operational model (chi-square =
1870.60, df = 1260,p-value = 0.000, normed-chi-square =
1.48, RMSEA = 0.037, CFI = 0.99, NFI = 0.93, GFI = 0.83).
In this case, we also considered that the value of the
normed-chi-square is less than 3, in order to support the
validity of the model.Comparing the results of the more parsimonious model
(Figure 2) and the less parsimonious model (Figure 3),
we see that the fit statistics of the results in Figure 3 are
better than the results in Figure 2. Thus, we conclude
that the complete model may be more preferred than the
more parsimonious model, and, consequently, the rest of
the study is devoted to the results of Figure 3. Consider-
ing that both the direct and the indirect standardized
effects are significant, we see that employee attitudes
partially mediate the relationship between employer and
employee promise fulfillment. Additionally, consider-
ing that all indirect standardized effects of the variablesinvolved in the study are significant, we may infer that
psychological contract fulfillment partially mediates the
relationship between HR practices and organizational
performance. However, we must note here that although
the fit statistics for the model containing direct effects are
stronger, the differences are only very small. Thus, the
model fits the data very well, and therefore it could be
argued for the sake of parsimony that the model, rather
than the more complex model containing direct and
indirect effects, is more preferable.
Special reference should be made with respect to the
contingencies used in estimation. Although we acknowl-edge that there is no sound theoretical rationale to
consider organizational contingencies and individual con-
tingencies as distinct factors,we still use these factors for
estimation purposes only in order to isolate the impact
of the independent variables on organizational perfor-
mance (Boselie et al., 2005). Additionally, we must note
here that although we tried all possibilities connecting
contingencies with all the other constructs (Paauwe &
Richardson, 1997), the only significant results obtained
are those reported in Figures 2 and 3.
Discussion
Implications for Theory
The theoretical significance of this study is fivefold.
First, this study confirms and extends existing empiri-
cal evidence concerning the basis of the HR practices
psychological contractorganizational performance
relationship. This is because a major finding of this
relationship is that employee attitudes such as employee
significant correlations between HR practices, organiza-
tional performance, employee attitudes, and employer
and employee promise fulfillment, supporting the hypoth-
eses of the study. With respect to organizational and
individual contingencies, we see in Table 1 that generally
there is a variety of correlations between contingencies
and the rest of the variables used in the study.However, results based on correlations, although
interesting, may be misleading due to the interactions
between several variables. Therefore, in order to isolate
the possible links between the variables involved in the
operational model presented in Figure 1, the estimated
path diagram for this proposed framework is presented in
Figure 2. These results refer to full mediation, where the
links with question marks are not present, reflecting thus
a more parsimonious model. The circles represent the
related latent variables, and the bold arrows indicate the
structural relationships between the corresponding vari-
ables. The numbers that are assigned to each arrow showthe estimated standardized coefficients. All coefficients
are significant at the 0.001 level, except the coefficient
linking individual contingencies with employer prom-
ises fulfillment that is significant at the 0.10 level. The
excellent goodness-of-fit indexes confirmed the validity
of the operational model (chi-square = 1943.96, df = 1262,
p-value = 0.000, normed-chi-square = 1.54, RMSEA = 0.039,
CFI = 0.98, NFI = 0.93, GFI = 0.82). However, it must be
noted here that the chi-squares being significant indi-
cates that the proposed model is not an adequate pre-
sentation of the entire set of relationships. But taking
into account that chi-square statistics may be inflatedby high sample sizes, the value of the normed-chi-
square (i.e., value of chi-square/degrees of freedom)
was used instead. In our case, this value is less than
3, confirming the validity of our model (Pedhazur &
Pedhazur-Schelkin, 1991).
Considering that all the standardized coefficients
are significant and the fit statistics of the model are
acceptable we may conclude that the two hypotheses of
the study are supported. This means that employee atti-
tudes (fully) mediate the relationship between employer
and employee promises fulfillment, and psychological
contract fulfillment (fully) mediates the relationship
between HR practices and organizational performance.
However, Figure 3 represents the estimated path dia-
gram of the complete model presented in Figure 1 (i.e.,
including the links with question marks), reflecting thus
partial mediation. All standardized coefficients in Fig-
ure 3 are significant at the 0.001 level, except the coef-
ficient linking individual contingencies with employer
promises fulfillment that is significant at the 0.10 level.
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FIGURE2 Estimation Results of the Hypothesized Model (Full Mediation)
HR
Practices
Employee
Promises
Fulfillment
Employer
Promises
Fulfillment
Employee
Attitudes
Organisational
Performance
Work
hard
Uphold
company
reputation
Maintain
high
levels of
attendance
Show
loyalty to
the
organisation
Work extra
hours
when
required
Develop
new skills
and update
old ones
Be
flexible
Be
courteous to
clients and
colleagues
Be
honest
Come up
with new
ideas
0.55 0.58 0.40 0.55 0.32 0.48 0.520.38 0.61
Pay
commensu-
rate with
performance
Opportuni-
ties for
training and
development
Opportuni-
ties for
promotion
Recognition
for
innovation
and new idea
Feedback for
performance
Interesting
tasks
An
attractive
benefits
package
Respectful
treatment
Reasonable
job security
A pleasant
and safe
working
environment
0.54 0.55 0.53 0.57 0.46 0.53 0.59 0.55 0.610.52
Recruitment
Selection
Flexible work
arrangements
Work design
Performance
appraisal
Training and
development
Compensation
Promotion
Incentives
Participation
Involvement
Communication
0.34
0.40
0.48
0.59
0.54
0.46
0.59
0.41
0.57
0.51
0.58
0.51
Effectiveness
Efficiency
Quality
Development
Innovation
0.63
0.58
0.62
0.89
0.66
Satisfaction Commitment Motivation
0.94
Individual
Contingencies
Gender
Age
Seniority
Position
Organizational
Contingencies
Ownership
Size
-0.17
0.89
0.49
0.61
0.52
0.91
Chi-Square = 1943.96 df = 1262 p-value = 0.000 Normed Chi-Square = 1.54 RMSEA = 0.039 CFI = 0.98 NFI = 0.93 GFI = 0.82
0.99
0.86
0.61
-0.37
0.50
-0.11
0.58 0.56
0.06
satisfaction, commitment, and motivation, constitute the
heart (Boxall & Purcell, 2002) or the epicenter of thisrelationship. All other relationships are activated around
this epicenter, meaning that employee attitudes are influ-
encing employee promises fulfillment and organizational
performance and being influenced by employer promises
fulfillment and HR practices. Specifically, in view of the
standardized coefficients of the items constituting the
initial driving construct in Figure 3, it is seen that the HR
practices of incentives, performance appraisal, promo-
tion, participation, and training and development have
the highest influence on psychological contract and orga-
nizational performance. These findings not only support
the theory that HR practices have a positive impact onorganizational performance but also extend the literature
referring to the HRMperformance relationship in a non-
US/UK context such as that of Greece.
Second, the study provides evidence of the recipro-
cal influence that occurs in the exchange relationship
between employers and employees. This is because, in
view of the standardized coefficients of the items con-
stituting the employer promises fulfillment construct
These findings not only sup-
port the theory that HR
practices have a positive
impact on organizational
performance but also extend
the literature referring to theHRMperformance relation-
ship in a non-US/UK con-
text such as that of Greece.
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Thunderbird International Business Review Vol. 54, No. 6 November/December 2012 DOI: 10.1002/tie
FIGURE3 Estimation Results of the Hypothesized Model (Partial Mediation)
HR
Practices
Employee
Promises
Fulfillment
Employer
Promises
Fulfillment
Employee
Attitudes
Organisational
Performance
Work
hard
Uphold
company
reputation
Maintain
high
levels of
attendance
Show
loyalty to
the
organisation
Work extra
hours
when
required
Develop
new skills
and update
old ones
Be
flexible
Be
courteous to
clients and
colleagues
Be
honest
Come up
with new
ideas
0.57 0.61 0.42 0.57 0.31 0.49 0.520.41 0.63
Pay
commensu-
rate with
performance
Opportuni-
ties for
training and
development
Opportuni-
ties for
promotion
Recognition
for
innovation
and new idea
Feedback for
performance
Interesting
tasks
An
attractive
benefits
package
Respectful
treatment
Reasonable
job security
A pleasant
and safe
working
environment
0.55 0.55 0.53 0.57 0.46 0.54 0.59 0.55 0.610.52
Recruitment
Selection
Flexible work
arrangements
Work design
Performance
appraisal
Training and
development
Compensation
Promotion
Incentives
Participation
Involvement
Communication
0.34
0.40
0.48
0.59
0.54
0.45
0.59
0.40
0.57
0.50
0.57
0.50
Effectiveness
Efficiency
Quality
Development
Innovation
0.64
0.57
0.61
0.89
0.66
Satisfaction Commitment Motivation
0.59
Individual
Contingencies
Gender
Age
Seniority
Position
Organizational
Contingencies
Ownership
Size
-0.17
0.90
0.49
0.62
0.53
0.56
Chi-Square = 1870.60 df = 1260 p-value = 0.000 Normed Chi-Square = 1.48 RMSEA = 0.037 CFI = 0.99 NFI = 0.93 GFI = 0.83
0.99
0.79
0.65
-0.36
0.50
-0.11
0.62 0.60
0.07
0.42
0.28
in Figure 3, it is seen that the employer promises of
fulfillment with respect to keeping a pleasant and safe
environment, respectful treatment, feedback for perfor-
mance, opportunities for training and development, and
pay commensurate with performance have the highest
influence on employee motivation, satisfaction, and com-
mitment. These attitudes will make employees positively
react by keeping their promises with respect to showing
loyalty to the organization, maintaining high levels of
attendance, upholding company reputation, develop-
ing new skills and updating old ones, and being honest.
This finding indicates that in a country such as Greece,
where individualism is rather low (Hofstede, 1994), and
power-distance is also low (Ng, Sorensen, & Yim, 2009),
psychological contract is relatively strong (Sahinidis &
Bouris, 2008).
Third, the study confirms and extends Rousseaus
(1995) argument on the centrality of reciprocity with
respect to how exchange relationships are governed
(Coyle-Shapiro & Kessler, 2003). This is because the
major property of the conceptual model of the study is
that the relationship between HR practices and organiza-
tional performance is partially mediated by psychological
contract fulfillment, and employee attitudes are partially
nested in this psychological contract. Although extensive
empirical research has been carried out linking HR prac-
tices with organizational performance through employee
attitudes, still little justification has been presented for
how HR practices influence individual attitudes (Allen,
Shore, & Griffeth, 2003). This study considers that the
history of the organization in terms of keeping its prom-
ises to employees, being contingent on the HR practices
employed, shapes both employee attitudes and the degree
of employee promises fulfillment to the organization (see
also Rousseau, 1995). This finding may give some light
to the so-called black-box referring to the mechanisms
that exist between HR practices and organizational perfor-
mance (Hutchison & Purcell, 2003; Purcell et al., 2003).
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Fourth, this study provides evidence with respect to
the importance of transactional versus relational con-
tracts. The average values of the standardized loadings
reported in Figure 3 are equal to 0.56 for transactional
and 0.55 for relational employer promises fulfillment,
and to 0.48 for transactional and 0.52 for relational
employee promises fulfillment. Considering that thereare no significant differences between these values, we
argue that the elasticity of transactional employee prom-
ises fulfillment with respect to employer promises fulfill-
ment is equal to the elasticity of relational employee
promises fulfillment with respect to employer promises
fulfillment in the Greek context. Therefore, we may say
that changes in the fulfillment of employer promises
are equally associated with changes in transactional and
relational employee promises fulfillment. Furthermore,
this finding means that both the transactional and the
relational parts of the psychological contact equally
influence employees. However, it is argued that althoughtransactional contracts constitute an indispensable con-
dition in the employment relationship, relational con-
tracts are more appreciated by employees, due to the
fact that transactional contracts, because they have a
short-term nature, do not influence employees as much
as relational contracts do, which have a long-term nature
(Rousseau & Tijoriwala, 1998; Sturges et al., 2005). This
may not be true in countries such as Greece, where the
unemployment rate has risen fast due to the current
financial crisis. In these cases, although individuals
appreciate the long-term relational contracts, they are
more interested in the short-term transactional contractsto cover their current needs. Additionally, we cannot
argue that our finding contradicts the result of Robin-
son et al. (1994), who found that violation of promises
by employers more strongly decrease the relational than
the transactional promise fulfillment by employees. This
is because in our case the testing refers to the fulfillment
of employer promises that may empower the relations
between employers and employees, while Robinson et al.
(1994) refers to the opposite case where the violation
of employer promise fulfillment will destroy the whole
relationship between employers and employees. There-
fore, our findings support the view that the fulfillment
of psychological contract, or the absence of violations
in psychological contract, may sustain both the trans-
actional and relational employee promise fulfillment.
We agree that transactional aspects of the psychological
contract must be fulfilled before relational aspects can
be addressed (Millward & Brewerton, 1999) because
transactional aspects drive relational aspects due to their
cause-and-effect association (Pate et al., 2003).
Fifth, this study provides evidence with respect to
the universalistic versus contingency models, referring to
the HR practicespsychological contractorganizational
performance relationship. Contrary to the suggestion
of de Jong et al. (2009, p. 347) to search for a univer-
sal theory of psychological contracts, the findings with
respect to contingencies support the view that there isnot any universalistic model,referring to the HR practices
psychological contractorganizational performance rela-
tionship, which if applied to organizations will improve
their organizational performance. In contrast, the study
supports the view that there are contingency modelsdepend-
ing on organizational and individual factors influencing
the HRMpsychological contractorganizational perfor-
mance relationship. Specifically, the positive factor load-
ing of ownership reveals that organizational performance
in private organizations is higher than in public orga-
nizations in the Greek service sector. In contrast, the
negative factor loading of size reveals that organizationalperformance does not follow the economies-of-scale
rule, as it is usually hypothesized (Tzafrir, 2005), and
it supports Delbridge and Whitfield (1999), who argue
that size is negatively related to employee satisfaction
and thus, to organizational performance. Furthermore,
gender and position negatively influence psychological
contract, meaning that the influence of women and work-
ers is lower. Additionally, the findings show that age and
seniority indicate that the influence of older people and
people working more years in the organization is higher.
These results support the positive influences of age and
seniority to organizational performance, through motiva-tion (Guest, 1999), commitment (Scholarios, Ramsay, &
Harley, 1999), and satisfaction (Boselie & Van der Wiele,
2002).
Implications for Practice/Management
The study has clear implications for both managers
and decision makers in the Greek service sector. It
The study has clear implica-tions for both managers and
decision makers in the Greek
service sector.
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Thunderbird International Business Review Vol. 54, No. 6 November/December 2012 DOI: 10.1002/tie
identifies employee incentives, performance appraisal,
and employee promotion as three major HR practices
potentially capable of sending signals that may lead to the
creation of psychological contract fulfillment. Although
it may be difficult to know exactly what constitutes the
psychological contract of an employee (Suazo et al.,
2009), managers primarily must keep their promisesabout a pleasant and safe working environment, respect-
ful treatment, and feedback for performance, in order
for employees to largely keep their own promises about
showing loyalty to organization, maintaining high lev-
els of attendance, and upholding company reputation.
Finally, managers need to develop skills that will allow
them to improve the employee attitudes of motivation,
satisfaction, and commitment, because they constitute
the nested epicenter mediating construct in both the HR
practicesperformance and employeremployee prom-
ises fulfillment relationships, which will improve organi-
zational performance.
Limitations
This study has some limitations. First, the data was collected
using a questionnaire at a single point in time. As a result,
the study does not allow for dynamic causal inferences
(Cavanaugh & Noe, 1999). Second, a potential limitation
of the study concerns the measurement of some latent
variables, such as the attitudes, with only three aggregate
general observable variables that may restrict the validity
of the construct (Luna-Arocas & Camps, 2008). Third, a
limited number of items that usually have been hypoth-
esized to be part of a new psychological contract have beenincluded in the study, due to estimation purposes. Fourth,
to minimize possible common method bias concerns data
should be gathered from independent sources (Podsa-
koff & Organ, 1986). Fifth, the study was applied in the
context of Greece which has unique labor relations and
institutional conditions, and thus the findings from the
Greek sample may not generalize across borders (de Jong
et al., 2009). However, despite these limitations, this study
provides a greater understanding of the process by which
psychological contract mediates the relationship between
HR practices and organizational performance.
Conclusion
Past research has provided extensive evidence on the
positive relationship between HR practices and orga-
nizational performance in an effort to reveal a positive
impact of HR practices (Wright, Gardner, Moynihan, &
Allen, 2005). This study is partially in line with Purcell
and colleagues (2003) high-performance model, where
employee attitudes mediate the relationship between
HR practices and organizational performance, and with
Guest and Conways (2004) psychological contract model,
where HR practices have a major influence on the state of
the psychological contract, indicating that a positive psy-
chological contract will lead to improved organizational
performance. Thus, this study, which considers HR prac-tices to be part of a high-performance organization, is
attempting to provide proof that these practices cause
organizational high performance through psychological
contract fulfillment.
Specifically, with respect to the scope of the study, we
may say that HR practices through psychological contract
have a positive effect on organizational performance in
the Greek service sector, indicating further that this effect
is higher in the private sector. Additionally, the study sup-
ports the observation that changes in the fulfillment of
employer promises are equally associated with changes in
transactional and relational employee promise fulfillmentin the Greek service sector. Moreover, the study supports
the view that employee attitudes (satisfaction, commitment,
Although this study refers
to the causal link between
HR practices, psychologi-cal contract, and organi-
zational performance in the
Greek service sector, future
research should concentrate
on other sectors and con-
texts of different countries,in order to be able to verify
and extend the present
results.
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the present results. This is because contextual factors are
keys to understanding the psychological contract (Pate
et al., 2003, p. 571).
Acknowledgments
An earlier version of this article was presented at the11th International Human Resource Management Con-
ference, June 912, 2010, Birmingham, United King-
dom. The authors thank the two conference reviewers
and the conference participants for their useful com-
ments. Also, the very constructive comments of the
two anonymous reviewers of this journal are greatly
acknowledged.
motivation) constitute the epicenter-mediating construct
in both the HR practicesorganizational performance
and employer promise fulfillmentemployee promise
fulfillment relationships. Finally, the study supports the
view that there is no universalistic model, but, in contrast,
there are contingency models depending on organiza-
tional and individual factors influencing the HR prac-ticespsychological contractorganizational performance
relationship.
Although this study refers to the causal link between
HR practices, psychological contract, and organizational
performance in the Greek service sector, future research
should concentrate on other sectors and contexts of dif-
ferent countries, in order to be able to verify and extend
Anastasia A. Katou is a lecturer in the Department of Marketing and Operations Management at the University
of Macedonia, Thessaloniki, Greece. Her research interests include human resource management, organizational
behavior, and business strategies, with a focus on organizational performance. She received a BA and an MBA
from the University of Sunderland, United Kingdom, and a PhD and a PgD from Cardiff University, Wales. She
has published numerous articles in academic journals, such as the International Journal of Human Resource Man-
agement, Thunderbird International Business Review, Employee Relations, Global Business and Organizational
Excellence, Multinational Business Review, European Journal of International Management, European Manage-
ment Journal, Personnel Review, International Journal of Human Resources Development and Management,
Management Research Review, andJournal of World Business.
Pawan S. Budhwaris a professor of international HRM and Associate Dean Research at Aston Business School.
He is also director of the Aston India Foundation and president of the Indian Academy of Management. He receivedhis doctorate from Manchester Business School. Prior to joining Aston in 2003, he was on the faculty at Cardiff
Business School for six years and at MD University, India, for ve years. Pawan has published over 75 articles
in a number of leading journals (such as theJournal of Human Resource Management, Organizational Behavior
and Human Decision Processes,Journal of International Business Studies, Journal of Organizational Behavior,
Human Relations, Organization Studies, Journal of World Business,Thunderbird International Business Review,
and International Journal of Human Resource Management) on international HRM/OB related topics with a specic
focus on India. He has also written and/or co-edited books on HRM-related topics on Asia-Pacic, Middle East,
performance management, India, developing countries, research methods, major works in international HRM, and
doing business in India. Pawan is on the editorial board of over ten journals and at present is associate editor of
Human Resource Managementand International Journal of Cross Cultural Management.He is also an advisor to
the Commonwealth Commission for scholarships and fellowships and a Fellow of the Higher Education Academy.
He is also a chartered member of the Chartered Institute of Personnel and Development and a council member of
the British Academy of Management.
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