For nearly a year, the 85,000 people who work for Safeway, the British food retailer, have been living with uncertainty. When William Morrison, a north of England supermarket group, set off a battle to acquire its rival in January, Safeway managers feared an exodus of staff.

Investors assumed that its trading performance would suffer as competition authorities spent months considering potential counter-bids from Tesco, J.

Sainsbury, Asda/Wal-Mart and Philip Green, the retail entrepreneur.

So far, however, Safeway has confounded expectations. Its trading performance has not suffered as badly as some had feared and the predicted haemorrhage of staff has not materialised.

The company says staff turnover is broadly in line with last year’s and has even fallen by 8 per cent in the stores division since January, while customer service, as measured by an independent market research firm, has improved.

Safeway, which is awaiting a fresh offer after Morrison’s path was cleared by the competition authorities, was fortunate in having a loyal workforce. Staff have been with the company for more than nine years on average, and managers for more than 15.

Even so, their loyalty to a retailer that does not pay the best wages in its industry has surprised human resources managers. ‘We sometimes can’t believe it,’ admits Cathy Mercer, head of organisational development.

After Morrison launched its bid, Safeway’s HR team faced the challenge of trying to maintain morale among a large workforce worried about the fate of their company. The response involved a series of measures, involving training, information and incentives. Senior managers have been through a leadership programme to help them withstand the pressure of the bid situation and enable them to reassure staff. Employees have been offered training in new skills, in the absence of long-term job security. The company has started using new ways to communicate with staff in an effort to prevent unsettling rumours. Retention bonuses have been made available, linked to achieving shortterm business objectives.

These efforts illustrate what can be achieved by respecting the ties that bind employees to their organisation, says Valerie Garrow, author of a report, Managing on the Edge: Psychological Contracts in Transition.

‘This is an impressive example of the benefits of managing the psychological contract during change,’ says Ms Garrow, principal researcher at Roffey Park, a management research and training institute. ‘The company has not been able to make promises about the future, as this is still not clear.

However, it has been able to be open in communication, listen to its employees and fulfil obligations.’

Her report, which includes the Safeway story, examines the damage to morale, productivity and creativity that can be caused when these ties are ignored or mis-handled, and how companies can avoid this.

The psychological contract, a term first used in 1960 by Chris Argyris of Harvard Business School, is most simply defined as what employees give their employers and what they receive in return. The employer’s obligations include pay, benefits and training, plus fairness, recognition and consultation.

Employees who feel they are well treated on these measures will offer hard work, flexibility, loyalty and honesty in return.

The contract is informal, unwritten and based on trust. Companies need to understand what shape it is in before implementing any change, says Ms Garrow.

When British Airways staff at Heathrow were told to start clocking on and off with a swipe card this year, they went on a paralysing strike that damaged the airline’s reputation.

‘The procedure represented a threat to the employment relationship, particularly as it was linked to low trust in management intentions,’ she says.

Safeway already knew from internal research that many employees stayed with the company out of loyalty to colleagues.

The agreed bid from Morrison provoked mixed reactions. Some greeted it with excitement; others felt a sense of betrayal.

‘We probably had a number of weeks where individuals didn’t have their eye fully on the ball as they were exploring their own emotions,’ says Rebecca Ivers, head of learning and development.

‘There was an allowance for this and a recognition that people needed time to talk.’ However, about 100 jobs were cut because of a decline in workload following the bid.

Many store staff found it hard to understand how they could be taken over by a smaller company. People had lots of questions: some wanted to know the bid timetable, others to understand the impact on their own financial situation.

A ‘culture team’, working with the HR department, took control of communications.

New channels include a help desk to answer questions by phone or e-mail, ‘colleague councils’ that feed the concerns of store managers to a board director, and an intranet-based ‘morale monitor’ that gathers feedback from managers.

Jim White, HR director, and Fiona Bailey, director for culture, make a weekly ‘state of the nation’ report to the board on how employees are responding to developments. Mr White also reports monthly on the state of morale and customer service ratings.

The HR team also realised that managers and staff needed a different kind of training. They introduced a ‘Looking to the Future’ programme to enable employees to gain new skills. Requests for training have increased by more than 50 per cent since March and staff report that they would rather have this than any other benefit.

Senior managers needed new skills, too. With the future looking foggy, they could no longer be expected to ‘provide a clear vision’. A programme called Leadership Now was designed to help managers understand the impact of the changing situation, encourage open discussion and maintain people’s commitment to the business. To underline the importance with which the board takes this, a director has attended every workshop.

Bonuses are tied to how well managers achieve their new goals.

Ms Garrow says the Safeway case puts into practice the main principles in her report: ‘They kept the relationship with employees going and the mutual expectations were still clear, in spite of the ambiguity of the situation.’

There can be serious consequences when the psychological contract is ignored or broken, she says. Employees of acquired companies can find that the managers on whom they relied to observe the psychological contract have left or been relocated.

‘To the employee, these are the people who have been keeping the tally of the “Brownie points”, or the entitlement to future benefits or rewards in return for past hard work and effort.

Past commitment and loyalty are unlikely to be recognised by an acquiring organisation.’

Employees can react in a variety of ways, depending on how seriously they perceive the breach of contract to be.

They may cut back on what they give the organisation, for example by keeping good ideas to themselves until they have decided whether to stay. They may try to get more from the company by taking sick days, arriving late or even resorting to petty theft.

If they feel the contract has been violated, they may react emotionally by walking out, bad-mouthing the organisation externally, or committing sabotage. Such negative reactions can seriously damage a newly combined company just as it is trying to demonstrate the short-term benefits of the deal to shareholders.

While it awaits a new partner, Safeway will have to continue its efforts to maintain morale. But the HR team are pleased they have managed to hang on to their people. Kellam Greenwood, people potential manager, says: ‘We expected our retention figures to be worse year on year and feel that the combination of all the factors to enhance retention and motivation has worked.’

Questions
Discuss critically the extent to which you:
1 Accept the concept of the psychological contract.
2 Believe that Safeway has effectively managed the psychological contract.
3 Support the idea of a ‘Looking to the Future’ programme.