Managing employees’ psychological capital

Abstract

Psychological capital is a major construct in positive organizational behavior which emphasizes the need for a more positive approach in the research of individual and organizational performance. The paper presents ample empirical and meta-analytical evidence supporting theoretical proposals that this higher-order factor consisting of hope, optimism, efficacy and resilience has strong implications for work-related attitudes and behaviors, as well as performance outcomes. Investigating what organizations can do in order to develop employee psychological capital – proven to be measurable and open to change, the authors propose authentic leadership development and psychological capital interventions. Implications for managerial practices conclude the article.

Full text

MANAGEMENT 49
MANAGING EMPLOYEES’ PSYCHOLOGICAL CAPITAL
Zdenko CEROVIĆ
Faculty of Tourism and Hospitality Management, Primorska 42, p.p. 97, 51410 Opatija
zdenkoc@fthm.hr
Sanda GRUDIĆ KVASIĆ
Faculty of Tourism and Hospitality Management, Primorska 42, p.p. 97, 51410 Opatija
sandag@fthm.hr
Abstract: Psychological capital is a major construct in positive organizational behavior which empha-
sizes the need for a more positive approach in the research of individual and organizational
performance. The paper presents ample empirical and meta-analytical evidence supporting
theoretical proposals that this higher-order factor consisting of hope, optimism, effi cacy and
resilience has strong implications for work-related attitudes and behaviors, as well as per-
formance outcomes. Investigating what organizations can do in order to develop employee
psychological capital – proven to be measurable and open to change, the authors propose
authentic leadership development and psychological capital interventions. Implications for
managerial practices conclude the article.
Keywords: psychological capital, positive organizational behavior, management, authentic leadership
JEL Code: M10, M54, J24, J53
Introduction
Positivity in the workplace has been recognized in the fi eld of organizational behavior (OB) since its very
beginning and present in the works of its founding fathers such as Abraham Maslow and Douglas McGregor.
However, current economic conditions and a rapidly changing environment facing today’s organizations de-
mand an even stronger emphasis o n a positive a pproach in managing and d eveloping human resources. The
context in which positivity research is now taking place refers to a highly competitive business environment
characterized by globalization and technological advances; changing expectations of employers (e.g. orga-
nizational citizenship behavior vs. in-role performance) and employees (fl exible work settings, professional
development, personal growth, work-life balance and alternative career paths vs. employment based on
seniority security).
Continuing the discourse of positive psychology movement, the school of positive organizational behavior
(POB) provides an organizing frame for current and future research on positive individual and organization-
al outcomes (Luthans and Avolio, 2009). While it recognizes the value of positive constructs traditionally
researched in the fi eld of OB (e.g. procedural justice, organizational commitment, job satisfaction), it also
introduces new and underrepresented concepts such as psychological capital (PsyCap).
Psychological capital, as a multidimensional core construct consisting of hope, optimism, effi cacy and re-
silience, is strongly related to employee performance and other work-related attitudes and behaviors. Going
beyond human capital, that is, “what you know” and social capital, that is “who you know”, psychological
capital – concerned with “who you are” and “what you can become” (Luthans, Luthans and Luthans, 2004,

50 “An Enterprise Odyssey: Saving the Sinking Ship Through Human Capital”
p.46; Luthans, Norman, Avolio and Avey, 2008, p.223; Luthans, Youssef and Avolio, 2007, p.14) is also iden-
tifi ed as a source of sustained competitive advantage based on context-specifi c, renewable and hard-to-im-
itate resources.
The aim of the paper is to show the strength of psychological capital, which can be developed and managed
for the purpose of performance improvement in today’s organizations. To that end, the paper is structured as
follows: after the introduction, a conceptual framework, including positive organizational behavior, psycho-
logical capital and authentic leadership is provided, followed by an extensive description of psychological
capital work-related outcomes. In the next section, the authors investigate the ways in which organizations
can develop and improve employees’ psychological capital. The fi nal chapter draws conclusions and pres-
ents the study’s scholarly and managerial implications.
Conceptual Framework
Positive organizational behavior (POB) is a relatively new fi eld within the organizational behavior, introduced
in the literature almost 15 years ago (Luthans, 2002a; Luthans, 2002b) with the aim of raising awareness of
the importance of a more positive approach to developing and managing human resources in terms of com-
plex economic and societal conditions. Often regarded as the application of positive psychology (Seligman
and Csikszentmihalyi, 2000) to the workplace, positive organizational behavior is carefully defi ned as “the
study and application of positively oriented human resource strengths and psychological capacities that
can be measured, developed, and effectively managed for performance improvement in today’s workplace”
(Luthans, 2002b, p. 59).
Identifi ed as a major positive construct in POB, psychological capital (PsyCap) meets the following inclusion
criteria (Luthans, Youssef and Avolio, 2007, p.8; Luthans, 2010, p.199; Nelson and Cooper, 2007, p.11):
• Based on theory and research: as opposed to popular self-help literature on positivity, psychological
capital is founded in renewed theoretical frameworks such as social cognitive theory.
• Valid measurement: primary survey measure of psychological capital is the Psychological capital
Questionnaire (PCQ) – 24 (Luthans, Avolio, Avey and Norman, 2007; Luthans, Youssef and Avolio,
2007) which contains 24 items that have been developed from the existing measures of each of the
four components. A shorter version is the PCQ – 12 (Avey, Avolio & Luthans, 2010; Luthans, Avey,
Smith & Li 2008). A more recent measure includes an implicit measure of psychological capital named
I-PCQ (Harms and Luthans, 2012).
• State-like: readily open and malleable to development and change as opposed to fi xed traits. Luthans
et al. (2007) depict a trait-state continuum which spans from pure positive traits such as intelligence
and hereditary characteristics to pure positive states such as moods and emotions.
• Impactful on work-related performance: conceptual and empirical research supports the fact that
psychological capital is positively and signifi cantly related to employee performance in the work place.
The latter criterion separates POB from a similar and complimentary approach drawing from positive psy-
chology – positive organization scholarship (POS), which is macro-oriented and not necessarily connected
to performance improvement.
A comprehensive defi nition of psychological capital is as follows: “an individual’s positive psychological state
of development and is characterized by: a) having confi dence (self-effi cacy) to take on and put in the nec-
essary effort to succeed at challenging tasks; b) making a positive attribution (optimism) about succeeding
now and in the future; c) persevering toward goals and, when necessary, redirecting paths to goals (hope)
in order to succeed; and d) when beset by problems and adversity, sustaining and bouncing back and even
beyond (resilience) to attain success” (Luthans, Youssef and Avolio, 2007, p. 3). Conceptual and empirical
research has proven that psychological capital as a core factor has a greater impact on performance than its
four individual components (Luthans et al., 2007). Also, additive value of psychological capital as a relatively
new and state-like construct lies in the fact that it predicts work-related outcomes beyond more established
positive trait-like constructs such as personality traits (Avey, Luthans and Youssef, 2010).
Drawing from the fi elds of positive psychology and positive organizational behavior aimed at understanding
positive features of individual and organizational functioning, and continuing theoretical discussions on the

MANAGEMENT 51
need for a moral and responsible organizational leadership in times of economic and political turmoil and
corporate ethical scandals (Avolio and Walumbwa, 2014), a new style of leadership – called authentic lead-
ership – has emerged. The authentic leadership has been identifi ed as a positive root construct, or the core
that constitutes the basis for all positive forms of leadership (Avolio and Gardner, 2005). It has also recently
been identifi ed as a type of fair leadership (Kiersch and Byrne, 2015).
Paralleling the research on psychological capital, the authentic leadership also represents a higher-order,
multidimensional construct comprised of the following four components: a) self-awareness, b) relational
transparency, c) internalized moral perspective, balanced processing.
The defi nition of authentic leadership is the following: “pattern of leader behavior that draws upon and pro-
motes both positive psychological capacities and a positive ethical climate, to foster greater self-awareness,
an internalized moral perspective, balanced processing of information, and relational transparency on the part
of leaders working with followers, fostering positive self-development” (Walumbwa, Avolio, Gardner, Wernsing,
and Peterson, 2008, p. 94). Authentic leaders are aware of and act in accordance with own values and beliefs,
they are self-confi dent, reliable and trustworthy, and they focus on building followers’ strengths (Ilies, Morgeson
and Nahrgang, 2005). Besides individual (e.g. leaders’) authenticity, authentic leadership encompasses au-
thentic relations with followers (e.g. employees), which are characterized by: transparency, openness, trust and
a strong emphasis on follower development (Gardner, Avolio, Luthans, May and Walumba, 2005).
Psychological Capital Outcomes
Regardless of the “newness” of the construct and critical observations about positive organizational be-
havior only considering a strength-based approach and positive individual-level variables that may be of
limited direct economic value to organizations (Fineman, 2006; Hackman, 2009), numerous theoretical and
empirical studies have proven that psychological capital has a consistent, positive and signifi cant impact
on employee performance, as well as other work-related attitudes and behaviors. Luthans et al. (2007) have
demonstrated that PsyCap as a higher-order construct has a greater impact on employee performance
and job satisfaction than its four individual components. Even more, a study by Avey, Luthans and Youssef
(2010) suggested that psychological capital also predicts important work behaviors and attitudes (e.g. de-
sired organizational citizenship and undesired cynicism, intentions to quit and counterproductive actions)
beyond already established and well-known positive trait-like constructs such as self-evaluation, the Big Five
personality dimensions – extraversion, agreeableness, conscientiousness, emotional stability, openness to
experience (Robbins and Judge, 2012, p.136) and person-job/organization fi t.
Table 1: Outcomes of psychological capital
Outcome Source Direction
Performance Avey, Avolio and Luthans (2011) +
Avey, Nimnicht and Pigeon (2010) +
Gooty, Gavin, Johnson, Frazier and Snow (2009) +
Luthans, Avey, Avolio and Peterson (2010) +
Luthans, Avey, Clapp-Smith and Li (2008) +
Luthans, Avolio, Avey Norman (2007) +
Luthans, Avolio, Walumbwa and Li (2005) +
Luthans, Norman, Avolio and Avey (2008) +
Peterson, Luthans, Avolio, Walumbwa and Zhang (2011) +
Walumbwa, Luthans, Avey and Oke (2011) +
Walumbwa, Peterson, Avolio and Hartnell (2010) +
Firm Financial performance Clapp-Smith, Vogelgesang and Avey (2009) +
McKenny, Short& Payne (2013) +
Job satisfaction Larson and Luthans (2006) +
Luthans, Avolio, Avey and Norman (2007) +
Luthans, Norman, Avolio and Avey (2008) +

52 “An Enterprise Odyssey: Saving the Sinking Ship Through Human Capital”
Outcome Source Direction
Organizational commitment Larson and Luthans (2006) +
Luthans and Jensen (2005) +
Luthans, Norman, Avolio and Avey (2008) +
Well-being Avey, Luthans, Smith and Palmer (2010) +
Avey, Wernsing and Mhatre (2011) +
Culbertson, Fullagar and Mills (2010) +
Luthans, Youssef, Sweetman and Harms (2013) +
Organizational citizenship Avey, Luthans and Youssef (2010) +
Avey, Wernsing and Luthans (2008) +
Gooty, Gavin, Johnson, Frazier and Snow (2009) +
Norman, Avey, Nimnicht and Graber-Pigeon (2010) +
Walumbwa, Luthans, Avey and Oke (2011) +
Creativity and innovations Luthans, Youssef and Rawski (2011) +
Rego, Sousa, Marques and Cunha (2012) +
Sweetman, Luthans, Avey and Luthans (2011) +
Deviant behavior Avey, Wernsing and Luthans (2008) -
Norman, Avey, Nimnicht and Graber-Pigeon (2010) -
Cynicism Avey, Hughes, Norman and Luthans (2008) -
Avey, Luthans and Youssef (2010) -
Avey, Wernsing and Luthans (2008) -
Stress Avey Luthans and Jensen (2009) -
Absenteeism Avey, Patera and West (2006) -
Intentions to quit Avey, Hughes, Norman and Luthans (2008) -
Avey, Luthans and Jensen (2009) -
Avey, Luthans and Youssef (2010) -
Source: The authors’ research
Table 1 provides a summary of the constructs that have been posited to be the outcomes of psychological
capital since 2004, when Luthans and colleagues published their seminal papers on PsyCap (Luthans, Lu-
thans and Luthans, 2004; Luthans and Youssef, 2004).
The aforementioned fi ndings have been confi rmed by a relatively recent meta-analytical (Avey et al., 2011)
on the impact of psychological capital which is based on 51 independent samples including 15 published
journal articles, 2 dissertations and 28 new and, at the time, unpublished data. The results report a positive
and strong PsyCap impact on employee performance, attitudes and behaviors. Table 2 presents the study
results, divided into the following categories: performance, desirable and undesirable attitudes, desirable
and undesirable behaviors.
Table 2: Meta-analysis of psychological capital outcomes
Outcome Correlation coeffi cient (r)
Desirable attitudes Job satisfaction +0,54
Commitment +0,48
Well-being +0,57
Undesirable attitudes Cynicism for change -0,49
Turnover intentions -0,32
Stress, anxiety -0,29
Desirable behaviors Citizenship behaviors +0,45
Undesirable behaviors Deviance -0,42
Employee performance +0,26
Source: Avey, Reichard, Luthans and Mhatre, 2011.
Table 1. Continued

MANAGEMENT 53
The meta-analytic evidence in terms of correlation coeffi cients indicate a positive and statistically signifi cant
relationship between psychological capital and employee performance and desired attitudes and behaviors,
as well as a negative connection between PsyCap and undesirable attitudes and behaviors.
The overall fi ndings presented in this section confi r m the role of Psy Cap as a s ignifi cant motivational propen-
sity leading to desired performance outcomes, and thus justify the organizational efforts in developing and
enhancing employees’ levels of hope, optimism, resilience and self-effi cacy.
Managing employees’ psychological capital for performance
improvement
Achieving sustainable competitive advantage in today’s highly competitive environment requires having con-
text-specifi c, renewable and hard-to-imitate resources. Fred Luthans and colleagues (Luthans, Youssef,
Avolio, 2007) propose that such an advantage can only be accomplished through investing, developing and
managing psychological capital.
Hence, investigating what organizations can do in order to develop and manage employee psychological
capital, the authors propose the following two mechanisms: a) psychological capital training interventions,
and b) authentic leadership development.
Psychological Capital Training Interventions
Unlike personality traits – which are fi xed, and other established positive trait-like constructs connected to
performance outcomes, psychological capital is state-like which means open and malleable to change. This
is supported by the positive psychology literature where research on hope, optimism, resilience and effi cacy
suggests that PsyCap constructs are in fact developable.
PsyCap is developed through brief (up to three hours) and highly focused micro interventions, based on
exercises and group discussions designed to impact the participants’ level of hope, optimism, resilience and
effi cacy, individually as well as the overall level of their PsyCap. Such practice goes in line with most leader-
ship trainings which are short in duration in order to minimize disruption in the work process.
This psychological capital intervention (PCI) model initially proposed and tested by Luthans, Avey, Avolio,
Norman and Combs (2006) has been demonstrated to signifi cantly increase (around 2%) the level of in-
dividual psychological capital. Utility analysis often used in human resource management demonstrated
that such an increase had a very high (over 200%) return on investment – or so-called return on devel-
opment (Luthans, Youssef-Morgan and Avolio, 2015), as well as an impressive fi nancial impact (Luthans
et al., 2006; Luthans, Youssef and Avolio, 2007). Replicating previous research, another crucial study
(Luthans, Avey, Avolio and Peterson, 2010) confi rmed that PsyCap can indeed be developed through im-
plementing short face-to-face training and that such practice leads to a signifi cant employee performance
improvement.
On-line PsyCap training has also been a subject of interest among researchers in the fi eld of positive orga-
nizational behavior. More specifi cally, web-based training interventions have been proposed as an opera-
tionalization of the PCI model that minimizes the time and costs connected to its implementation (Luthans,
Avey and Patera, 2008).

54 “An Enterprise Odyssey: Saving the Sinking Ship Through Human Capital”
Figure 1: Psychological Capital Intervention (PCI)
Source: Luthans, Youssef and Avolio, 2007, p. 215.
To sum up, relevant research in the fi eld of positive organizational behavior confi rms the notion that psycho-
logical capital can be developed through short training interventions that minimize disruption in the work
process and ensure signifi cant performance improvement.
Authentic leadership development
Several years after the concept of PsyCap had been introduced in the literature, a question of whether lead-
ers impact their followers’ psychological capital was raised (Luthans, Avolio, Avey and Norman, 2007). An-
swering this scholarly call, a positive relationship between the leader’s and employees’ psychological capital
has been established in the work of authors mainly interested in the theory of authentic leadership which
has been identifi ed as a positive form of leadership. Moreover, a recent study (Avey, 2014) investigating the
antecedents of psychological capital, has demonstrated that authentic leadership is the second strongest
predictor of PsyCap (after personality and self-esteem), followed by job characteristics and demographics.
Initial conceptual framework of authentic leadership suggests that authentic leadership can be developed
(Avolio and Gardner, 2005; Avolio and Luthans, 2006; Luthans and Avolio, 2003). Positive psychological
capacities combined with a positive organizational context and certain trigger events lead to positive self-de-
velopment (self-awareness and self-regulation behaviors) and the product of the authentic leader. Psycho-
logical capital is thus posited as both an input and an outcome of authentic leadership development. Name-
ly, leader’s psychological capital is considered a fundamental component of authentic leadership, which
consequently refl ects on the employees’ PsyCap development. The key mechanisms through which such
effects are accomplished are: modeling of positive values, psychological states and behaviors or “leading
by example” (Gardner et al., 2005), positive contagion effects (Fredrickson, 2001) and, fi nally, the creation of
positive and ethical organizational context characterized by open and honest interactions and leaders who
are supportive of their employees’ personal and professional development. Wang, Luthans, Wang and Wu

MANAGEMENT 55
(2014, p. 6) argue that this line of reasoning stems from the perspective of complementary congruity theory
which posits that “an individual (e.g. the leader’s) capabilities can fi ll a missing, but needed, component
valued by another individual (e.g. the follower)”.
Representative of the empirical work connecting authentic leadership and employees’ psychological capital,
Clapp-Smith, Vogelgesang and Avey’s (2009) investigation considers only common outcomes of the two
constructs without showing a direct link between them. The fi rst to publish such empirical evidence were
Woolley, Caza and Levy (2011) who confi rmed previous theoretical predictions about the positive effects of
authentic leaders and followers’ psychological capital.
Examining group-level outcomes of authentic leadership, a study by Walumbwa, Luthans, Avey and Oke
(2011) provided evidence of the positive relationship between authentic leaders and collective psycho-
logical capital. Similarly, investigating the impact of authentic leadership on the followers’ performance,
Wang et al. (2014) contributed to a clearer understanding of the mediating role of PsyCap in the observed
process.
Although not directly addressed, authentic leadership is also implicated in the work of Avey et al. (2011)
which considers the relationship between the leader’s and followers’ positivity – operationalized through
psychological capital.
Conclusion
Since its inception a decade ago, psychological capital (PsyCap) has become a mainstream subject in
the fi eld of organizational behavior. Ample empirical and meta-analytical evidence presented in this paper
support the theoretical proposals that this core higher-order factor consisting of hope, optimism, effi cacy
and resilience has strong implications for work-related attitudes and behaviors, as well as performance out-
comes. Going beyond human and social capital, PsyCap has also been identifi ed as a source of sustained
competitive advantage in today’s turbulent global environment.
Measurable and open to organizational leadership and human resource development, psychological capital
can be signifi cantly enhanced through the following two mechanisms elaborated in the paper: authentic
leadership development (ALD) and psychological capital interventions (PCI). More specifi cally, individual
levels of PsyCap can be developed relatively easily, in short training programs resulting in high return on
investment, which can be of great relevance to organizations with limited time and fi nancial resources.
Thus, the study also provides the practical implications for human resource development and performance
management, which can be summed up as: a) selecting and hiring employees and managers based on their
level of psychological capital; b) following the guidelines provided by the PCI model for enhancing both the
managers’ and employees’ psychological capital; and c) authentic leadership development interventions
which train leaders in practices that enhance employees’ psychological capital.
In conclusion, psychological capital as an outgrowth of positive organizational behavior which is measurable
and developable for performance improvement, represents a paradigm shift with the strength to transform
performance and human resource management research and practice.
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