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The Advantages and Disadvantages of Transactional Leadership

July 05, 2022 Leadership
Lesley Harrison Freelance Writer
By Lesley Harrison

There are many leadership styles, and each one has its devotees. Transactional leadership is a relatively traditional leadership style that focuses on order and structure. But how does this form of leadership work, and which types of business benefit most from it?

What Is Transactional Leadership?

The transactional leadership style was first described in the late 1970s by Max Weber. The idea was expanded upon in the 1980s by Bernard M. Bass in The Bass Handbook of Leadership. Bass highlights two particular forms of leadership in his work: transformational leadership and transactional leadership.

In Transformational and Transactional Leadership: Association With Attitudes Toward Evidence-Based Practice, published in the Journal of Psychiatric Services, researcher Gregory Aarons defines transactional leadership as a style that's based on exchanges between the leader and follower. Aarons says, "Followers are rewarded for meeting specific goals or performance criteria. Rewards and positive reinforcement are provided or mediated by the leader."

Aarons also noted that depending on how effective the leader is, there can be some downsides to this style of leadership. He wrote, "An effective transactional leader is able to recognize and reward followers’ accomplishments in a timely way. However, subordinates of transactional leaders are not necessarily expected to think innovatively and may be monitored on the basis of predetermined criteria. Poor transactional leaders may be less likely to anticipate problems and to intervene before problems come to the fore, whereas more effective transactional leaders take appropriate action in a timely manner."

Key Features of Transactional Leadership

This approach to management makes a few key assumptions:

  • Rewards and punishments are a good means of motivating employees.
  • Employees perform at their best when the chain of command is clear.
  • The main goal of workers is to obey the commands of the leaders.
  • Workers must be monitored to ensure they're meeting the leader's expectations.

In an environment where this style of leadership is used, employees are rewarded for exceeding expectations, such as through quarterly bonuses. They're also penalized for underperforming through reprimands or loss of a bonus. Effective leaders offer additional supervision and training to those who underperform to help them meet expectations.

In the International Review of Management and Business Research, Lecturer James A. Odumero of Osun State College of Technology wrote, "Within the context of Maslow's hierarchy of needs, transactional leadership works at the basic levels of need satisfaction, where transactional leaders focus on the lower levels of the hierarchy."

Reward Styles and Transactional Leadership

Transactional leaders have a few options when it comes to applying rewards and managing their subordinates. These can broadly be split into three categories:

Contingent Reward

This style focuses on achieving results. Workers receive tangible rewards for achieving the goals that were set for them. This leadership style does a good job of appealing to the wants and needs of the employees.

Zakeer Ahmed Khan, Ph. D. et al., wrote in Leadership Theories and Styles: A Literature Review, "Leaders who use contingent reward are expected to show direction to the employees, so the job gets done. In a nutshell, key indicators of contingent reward encompass performance-based material rewards, direction-setting, reciprocity and confidence-building in the team."

Management by Exception (Passive)

With passive management by exception, the leader does not set clear goals or define clear expectations. Instead, they sit back and let the subordinates work on the task at hand, waiting until something goes wrong to take corrective action.

This style of leadership can work well in small teams where everyone is highly skilled and there's little that can go wrong. Employees may feel pleased to be trusted to do their jobs. However, in bigger teams or environments where there is a high turnover of employees, passive management by exception can be ineffective and damaging to morale.

Management by Exception (Active)

The active management by exception style refers to an environment where leaders trust their employees and avoid intervening unless it becomes absolutely necessary. However, they still take an active role in managing the team.

Khan, however, feels this style is suboptimal. He describes this by saying, "There is little sense of adventure or risk-taking, new perspectives or white water strategies in case of management by exceptional leaders. It corresponds need-driven [sic] change culture. To sum it up, management by exception (active) includes trust in workers, poor communication, maintenance of the status quo and lack of confidence."

In situations where the team is generally performing well and the trust in them is not misplaced, management by exception (active) can be effective. When the team works well, everyone is satisfied and the business can continue operating as normal. When intervention is required, the manager is prepared to step in. However, this style doesn't encourage workers to go above and beyond because they don't get rewarded for exceeding expectations.

The Advantages of Transactional Leadership

Transactional leadership works well for larger organizations where strict adherence to best practices is important. Odumero wrote, "Transactional leaders are effective in getting specific tasks completed by managing each portion individually."

This approach is practical and focuses on rules and regulations. Many sports teams use a transactional leadership style, where players are rewarded for following the rules and performing within a fixed set of parameters. Large organizations with a lot of employees who are required to follow consistent procedures can also benefit from this style.

SMB Marketing and software expert Karen McCandless describes the advantages of transactional leadership in an article for Motley Fool.

Rules Are Fair and Easy to Understand

"With transactional leadership, feedback is fair and based on metrics, rather than a manager's opinions or feelings," McCandless wrote. In addition, "a rewards and punishment system is easy to understand and isn't open for interpretation."

This system works well for employees who appreciate a clear leadership structure. They know what's expected of them, and they know they don't have to waste time or energy thinking about other aspects of the project.

Employees Can See the Impact They're Having

Another benefit of transactional leadership is that employees can see how the work they're doing impacts the business overall. If they know when they meet or exceed their targets, it has an impact on the business either by increasing revenue, helping the company secure an ongoing contract or helping them launch a new product.

This insight can be a strong motivational factor for some employees. When employees feel that what they're doing makes a difference, it can improve morale and loyalty.

The Disadvantages of Transactional Leadership

This style of leadership doesn't suit all companies, job roles or employees. A purely transactional leadership style can feel impersonal and also stifle creativity.

Employee Development Can Be Limited

Because of the level of micromanagement that can be seen in many transactional leadership environments, employees don't have a chance to develop new skills. "A transactional leadership style is appropriate in many settings and may support adherence to practice standards but not necessarily openness to innovation," Aarons said.

Managers tend to focus on short-term goals and individual tasks. As a result, these tasks get done well, but there's little emphasis on the future. This may not be an issue if the manager is in charge of an entry-level workforce doing a relatively simple job. However, for more sophisticated jobs, stifling creativity can backfire.

Managers Don't Build Relationships

Because transactional leaders focus on a simple reward/punishment structure, they don't build personal relationships with employees. While some employees are motivated by the clear reward structure associated with transactional leadership, others prefer a more personal touch.

McCandless stated, "If your leaders are only focused on making sure employees meet their goals and don’t take into account creating a satisfactory work environment, then you may lose good employees to other companies."

Transactional Leadership in Action

Many well-known leaders are considered to have a transactional leadership style or to employ transactional tactics in certain situations. Bill Gates is often described as being a transformational leader, but he also uses a strict chain of command, delegating tasks and providing clear instructions to subordinates.

NFL coach Vince Lombardi led the Green Bay Packers to victory many times and used transactional leadership techniques to get the best out of each of his athletes for the benefit of the whole team.

In bigger organizations, leaders often find themselves switching between different leadership styles, depending on who they're dealing with. More fluid and democratic styles can work for certain areas of the business, but it's important to have a clear chain of command for areas where rapid decision-making is required.

Leaders may also switch between styles, depending on the status of the company. In a time of crisis, an autocratic leadership style might be useful to turn the company around and give subordinates confidence that there's a powerful leader in charge. When the company is thriving, there may be more time for a democratic leadership style to be used effectively, with management soliciting feedback from those under them.

Transactional and Transformational Leadership Combined

Bass believes that transactional leadership can be effectively augmented by transformational leadership. Using the two strategies together can offset many of the downsides of transactional leadership while still encouraging adherence to specific standards and promoting a culture where employees follow procedures.

"A transformational leadership style creates a vision and inspires subordinates to strive beyond required expectations, whereas transactional leadership focuses more on extrinsic motivation for the performance of job tasks," Aarons wrote.

He goes on to add, "It is likely that transformational leadership would influence attitudes by inspiring acceptance of innovation through the development of enthusiasm, trust and openness, whereas transactional leadership would lead to acceptance of innovation through reinforcement and reward."

In the paper "Transformational Leadership, Transactional Contingent Reward, and Organizational Identification: The Mediating Effect of Perceived Innovation and Goal Culture Orientations," published in the journal Frontiers in Psychology, researcher Athena Xenikou shared a similar sentiment to Bass, stating that "while transactional leadership qualities can be satisfying and effective, transformational leadership behavior has been shown to add substantially to the impact of transactional leadership on effectiveness as well as followers' satisfaction."

By promoting creativity and giving subordinates some more flexibility, leaders who embrace both a transactional and transformational style promote a happier workforce. The challenge leaders face is identifying which employees respond best to goal setting and clear performance criteria and which ones thrive in a more flexible environment.

Ogbonna shared this sentiment, concluding in his paper that "transformational and transactional leadership theories represent bold attempts by researchers to explain the nature and effect of leadership. Both theories have their various strengths and weaknesses. However, the influence of situational variables on leadership outcomes within the context of both styles of leadership should not be ignored."

Effective Leadership Tips for Transactional Leaders

Managers who lean toward the transactional leadership style may find it beneficial to consider the overall culture of their organization. "You don't have to stick with one leadership style for your entire business," McCandless wrote.

Instead of enforcing one style, look at the job each team is doing and the type of people who are on that team. Sales workers may appreciate monetary rewards and a clear bonus structure; something for which transactional leadership is well suited. Marketing teams may prefer a more relaxed environment, where brainstorming and testing new ideas are actively encouraged.

Whatever style of leadership is chosen, clear communication is essential. Transactional leadership relies on subordinates understanding the orders they're given, being aware of any penalties for underperformance and also knowing the rewards they could receive for good performance.

If the above factors aren't present, transactional leadership risks becoming mere micromanagement, and this could result in poor morale and employees feeling they're too restricted in how they can do their jobs.

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