It's the job of any leader to motivate and guide their team towards success. This is why choosing the right leadership strategy is crucial. If you're yet to find an approach that works for you, we're here with another option for you to consider: transactional leadership.
You've likely come across this type of leadership style before, either as an employee or as a leader, even if but likely didn't know its name.
Transactional leadership focuses on the exchange of rewards and punishments as a way of maintaining order, achieving goals and boosting motivation.
It's centred on the belief that employees need structure and supervision to achieve goals, which differs from a lot of other leadership styles we've covered. It sits on the opposite side of the scale of transformational leadership styles due to its more process-driven approach.
But what exactly is transactional leadership and how does it differ from other styles? We look at that and more so you can decide if you have the effective leadership skills to make it work.
What is transactional leadership?
Transactional leadership
Transactional leadership is a management style that focuses on supervision, organisation and performance. It's based on a system of rewards and punishments to motivate teams to achieve business goals.
It prioritises achieving specific targets in exchange for work completed, which makes it a great method for reaching short-term goals.
It starts with leaders setting expectations and goals to clarify each person's role. Then when the team member achieves their set goals, they receive rewards. If they don't, penalties apply.
It essentially takes the expectations of a traditional working setup (complete tasks and receive your wages) and heightens it with extra motivators and punishment.
What is transactional theory?
Transactional leadership theory was initially created by sociologist Max Weber in the early 20th century.
Weber theorised that transactional leadership is about a give-and-take relationship between leaders and followers, where rewards and punishments are used as motivation.
In the 80s, Bernard M. Bass built on this by emphasizing the importance of contingent rewards and transactional style exchanges in leadership to fully motivate followers. [SOURCE].
The theory has three main parts:
- Contingent reward: Leaders provide clear expectations and recognise achievements
- Management by exception (active): Leaders monitor performance and take corrective action when deviations occur
- Management by exception (passive): Leaders intervene only when problems become serious
This works best in transactional leadership environments, where we can assume that:
- People are motivated by self-interest
- Organizations function best when there is a clear chain of command
- Employees perform best when roles and tasks are well-defined
As with any leadership theory, it needs a few things to be effective. Things like having a culture that would embrace it, the nature of the tasks and the motivation levels of the employees.
This may sound like an extreme leadership style, which is why combining and being a transactional and transformational leader, can be the answer to success and help the company to be more adaptable.
How a transactional leadership style works
Transactional leadership runs on a system of exchanges between leaders and their teams. Leaders set clear expectations and goals, while employees complete tasks in return for rewards or to avoid penalties.
These are the three key components of this leadership style:
Contingent reward:
- Leaders offer specific rewards for meeting predetermined objectives
- Rewards may include bonuses, promotions or recognition
- Clear link between performance and compensation
Management by exception (active):
- Leaders actively monitor work for deviations from standards
- Immediate corrective action is taken when errors occur
- Focus on maintaining efficiency and preventing mistakes
Management by exception (passive):
- Leaders intervene only when problems become serious
- Less proactive approach to management
- Emphasis on addressing issues after they arise
Here's a real-world example. A sales team exceeding their targets would receive bonuses, based on their performance (contingent reward).
A sales team who were close to achieving their targets would receive corrective action to make sure they are on track for next time (management by exception, active).
A sales team who were way off its target due to mistakes or underperformance needs the leader to step in to understand why this has happened and address the issues (management by exception and passive management).
As we've mentioned, to be an effective leader it does depend on the organizational culture and the nature of the work.
When all of these align, transactional leadership appeals in environments like:
- Crisis situations which need quick decisions
- Environments with routine and repetitive tasks
- Organisations focused on short-term goals and immediate results
While it's great in those situations, it can struggle in others. This style in particular doesn't do so well when innovation and long-term commitment are needed.
This is when leaders can combine the aspects of this style with other managerial approaches to be a more balanced leader and have a transformational leadership stem for example.
Characteristics of Transactional Leadership
This is seen as a strong leadership style due to its structured approach.
There are a few key characteristics that make this approach to leadership and team management different to other traditional leadership styles. We've listed them below.
Goal-oriented approach
Transactional leaders prioritise clear, measurable objectives and create specific, time-bound goals for their team members.
These goals are often linked to organisational targets and key performance indicators (KPIs).
Leaders break down larger objectives into smaller, manageable tasks to make sure each team member understands their role in achieving the overall aim.
This creates a working environment that is driven by results, which is why the tasks and business type need to align with this way of working.
Success should be quantifiable and leaders should track the progress of this success through dashboards and regular check-ins.
Transactional leaders are great at adjusting strategies when goals aren't met and know how to quickly identify bottlenecks and implement corrective measures.
Leaders keep their teams aligned by having a laser focus on the business's objectives.
This goal-oriented mindset leads to increased productivity and efficiency, as every action is geared towards achieving these targets. This does wonders for leadership and trust as well.
Contingent rewards and punishments
Rewards and punishments are the foundation of this leadership style.
Leaders clearly outline the expectations to their team and share the consequences if goals are not met.
This creates a direct link between effort and outcome and motivates employees to meet or exceed targets.
The choice of reward is decided by the leader, but can include one of the following:
- Financial incentives (bonuses, salary increases)
- Recognition (awards, public acknowledgement)
- Career advancement opportunities
- Additional responsibilities or autonomy
At the other end of the spectrum are punishments and corrective actions. These can include:
- Verbal or written warnings
- Demotion or loss of privileges
- Reduced bonus or pay
- Termination in severe cases
These leadership techniques can be great in motivating and pushing forward short-term performance.
However, leaders must ensure the rewards and punishments are fair, consistent and proportionate to maintain team morale and motivation.
What they don't want to happen is to lose team members and increase attrition rates in the process.
Management by exception
Transactional leaders often employ a management-by-exception approach, which comes in two forms: active and passive.
Active management, by exception, means they must monitor their team's performance to check their progress continuously.
It also means that they must be proactive in identifying deviations from standards.
This is where tools are an immense help. If and when deviations happen, transactional leaders quickly intervene and address issues immediately with corrective action.
This hands-off approach can be effective with experienced teams or in situations where micromanagement would be counterproductive.
However, it risks allowing small issues to grow into larger problems before they're addressed.
Transactional leadership in comparison to other leadership styles
With so many different leadership styles out there, it's hard to know which one is right for you.
It depends on things like your skill set, your company culture and the type of tasks your company does.
Sometimes one style suits all those aspects and other times you need a more adaptable leadership style.
Here are some other primary leadership styles that are worth considering even if you use parts of them to create your own personalized leadership approach.
Servant Leadership
Servant leadership puts the growth and well-being of team members first.
Unlike transactional leadership, which focuses on exchanges and rewards, servant leaders put their team members first.
They aim to develop their team's full potential which often comes at the sacrifice of their own interests.
Key differences:
- Motivation: Servant leaders inspire through empowerment, while transactional leaders motivate through rewards and punishments
- Focus: Servant leadership emphasises personal growth and development, whereas transactional leadership concentrates on task completion and efficiency.
- Decision-making: Servant leaders encourage shared decision-making, while transactional leaders typically make decisions on their own.
- Long-term impact: Servant leadership often results in higher employee engagement and loyalty, while transactional leadership may lead to short-term productivity gains.
Servant leadership works well in organisations that value employee development and long-term relationships.
Affiliative leadership
Affiliative leadership focuses on creating emotional bonds and harmony within the team. This type of leader prioritises people and their emotions to create a positive work environment.
Key differences:
- Approach to conflict: Affiliative leaders resolve conflicts through understanding and compromise, while transactional leaders use punishment.
- Communication style: Affiliative leaders use open, empathetic communication, whereas transactional leaders often communicate directives and expectations.
- Team dynamics: Affiliative leaders focus on building strong relationships, while transactional leadership emphasises individual performance.
- Flexibility: Affiliative leaders adapt their approach to suit their team's needs, while transactional leaders have a consistent system of rewards and consequences.
Affiliative leadership is effective in high-stress environments or during times of change.
Participative Leadership
This leadership style is centred around shared decision-making as participative leaders seek input from their team when making decisions.
Key differences:
- Decision-making process: Participative leaders involve team members in decisions and transactional leaders typically make decisions independently.
- Employee empowerment: Participative leadership focuses on autonomy and initiative, whereas transactional leadership relies on clear directions and supervision.
- Innovation: Participative leadership can lead to more creative solutions, while transactional leadership may stifle innovation in favour of procedures.
- Team engagement: Participative leadership results in higher team engagement and ownership of roles, compared to the procedure-focused approach of transactional leadership.
Participative leadership works best in tech startups, academic institutions and creative agencies where input is valued.
Advantages and disadvantages of transactional leadership
There are many leadership styles and they all have benefits and challenges. Transactional leadership is a more structured approach with clear objectives and performance-based rewards, but it can be tough to adapt and change when needed.
Pros and cons of transactional leadership
Transactional leadership provides a clear structure and defined expectations which can make it effective in certain situations.
It works well in crisis management, where quick decision-making is needed and procedures are essential.
It is also beneficial in organisations with routine tasks because it maintains consistency and efficiency.
Using contingent rewards motivates employees to reach their targets, which can increase productivity. By linking performance directly to compensation, transactional leaders create a system that encourages goal achievement.
This can lead to short-term improvements and help organisations meet their immediate objectives.
Employees under a transactional leader are measured by Key Performance Indicators (KPIs).
By using these, every person's performance is tracked which makes it easy to evaluate.
This helps leaders to understand each person's contributions and enables them to identify areas for improvement quickly.
This is especially useful in industries where quantifiable metrics are essential, such as sales or manufacturing.
This leadership style has no space for ambiguity.
Leaders are required to be clear with communication, roles and expectations. This means that employees understand their responsibilities and the consequences of their actions, which can lead to a more stable work environment.
This clarity means reduced conflicts and more streamlined operations.
Transactional leadership limitations
Despite the advantages, transactional leadership has its limitations.
Its focus on short-term goals and immediate results can interfere with longer-term planning.
Employees may prioritise meeting immediate targets over developing new ideas or improving processes which can stunt growth.
The rigid structure of transactional leadership stifles creativity and individual initiative. Employees may feel discouraged from thinking outside the box as they're solely focused on their rewards and goals.
Transactional leadership's focus on rewards and punishments can create a transactional mindset among employees.
Team members may become motivated by their rewards, rather than bonding with their colleagues or having a sense of purpose in their work.
This can result in reduced job satisfaction, higher attrition rates and a more disjointed team.
The style's emphasis on monitoring and correction can create a tense atmosphere as employees are worried about doing the wrong thing.
Employees may feel more stressed and overwhelmed and can be more likely to make mistakes.
Very few people thrive in an environment like that.
Transactional leadership examples
Some leaders have made this leadership style their approach of choice and have had amazing organizational success.
Here are some well-known examples:
- Bill Gates (Co-founder of Microsoft) employed a transactional approach by establishing clear goals and expectations that drove innovation and efficiency, helping Microsoft become a leader in the software industry.
- Jack Welch (former CEO of General Electric) is known for his rigorous performance evaluation system, which created a culture of accountability and led to GE's growth during his time as leader.
- Vince Lombardi (head coach of the Green Bay Packers) is known for his strict discipline and performance standards. He focused on clear goals and accountability which led to multiple NFL championships in the 1960s.
- Charles de Gaulle (former President of France) was known for his transactional leadership in the post-World War II rebuilding of France. He focused on hierarchy and goals which led to a more structured governance.
How to have effectiveness as a transactional leader
If you think this leadership style would work for you and your company, here are our steps for how to become a transactional leader.
Start by working on your communication skills, to make sure you can share expectations.
Transactional leaders excel at being precise and sharing clear objectives and performance standards.
Practice delivering concise, unambiguous instructions to your team. This will benefit both you and your team.
Establish a robust system of rewards and consequences. Work with your HR department and senior leadership on specific incentives and penalties. Make sure these are fair and comprehensive.
Enhance your monitoring and evaluation capabilities. Transactional leadership requires close oversight of employee performance.
Look into and implement tools and processes to track progress regularly and work on providing timely feedback.
Improve your crisis management skills. Transactional leadership works well in high-pressure situations so make sure your leadership skills can keep up with the demand.
Develop strategies for maintaining order and productivity during challenging times.
Conclusion: Setting yourself up for success
While transactional leadership might not be for everyone, it can be effective in certain situations or when it is paired with another approach.
If your organisation needs to achieve short-term goals or you're dealing with crises, this will be a great leadership style for you and your company.
It's worth remembering that other aspects are impacted because of its structure and punishments, such as attrition rates and employee satisfaction.
You might end up achieving your goals but it may be at the cost of team morale and innovation.
Consider the pros and cons of this leadership style before taking any steps to implement it.
By honing your communication skills, implementing a fair reward system and enhancing your monitoring capabilities, you can set yourself up for success.
As always, keep your team updated and be clear about your expectations to avoid any challenges in leadership.
Ultimately, great leadership isn’t just about hitting targets; it’s about creating a team that can grow, innovate and thrive together.
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