Building high performance employment relationships in small firms

The purpose of the paper is to present research into the employment relationship in small firms and to examine its link to high performance. A psychological contract framework is adopted, it being argued that this supports a more nuanced analysis than existing perspectives on the small firm employment relationship which are limited and do not give sufficient insight into performance issues.

The paper employs a case study approach, carrying out 41 interviews involving both owner managers and employees in three firms. A critical incident technique (CIT) is adopted in the interviews.

The paper finds that high performance derives from a relational psychological contract and that transactional contracts impact negatively on performance. It is also demonstrated that, contrary to what is implied in much of the existing small firm literature, small firms are capable of building relational contracts.

The research in this paper is drawn from a small‐scale study and is not generalisable. It does, however, provide a basis for a more detailed study of the small firm employment relationship.

The research in the paper demonstrates the value of building a relational psychological contract in order to drive high performance. It also gives insight into how this can be done in the small firm context and the importance of the owner manager approach to this.

The paper presents more nuanced ways of exploring the small firm employment relationship than already exist and also considers the issue of performance, which is under‐researched in this context.