Transactional Leadership is a leadership style that focuses on achieving results through motivating people with rewards and punishment – a “carrot and stick” approach to running a business.
This article aims to outline the reasons why it is important. The intention is to give real life examples of how transactional leaders have impacted upon hugely successful organisations. The examples range from politics to tech, showing that this leadership style can be beneficial across industries.
Although transactional leadership can be applied irrespective of industry, there are times when transformational leadership styles may be more suitable. As such, this article also examines the drawbacks of transactional leadership.
What is Transactional Leadership?
Max Weber, a 20th century sociologist, was the first person to define the idea of transactional leadership, which was originally referred to as rational-legal leadership. This leadership style was widely used after World War II in the United States, when the government was focused on rebuilding with urgency and required a high level of structure to maintain national stability.
Transactional leadership is defined by control, organisation, and short-term planning. Leaders who adopt this style rely on a system of rewards and punishment to motivate their followers. It suggests that workers are not self-motivated and require structure, instruction and/or monitoring to complete tasks correctly and on time.
Transactional Leadership often involves:
- Rewards and punishments that are motivating for followers.
- Adhering to the instructions of the leader is the primary goal of followers.
- Followers must be monitored to ensure that performance standards are met.
In the 1990s, researchers such as James McGregor Burns, Bernard M. Bass, Jane Howell, and Bruce Avolio went on to advance Max Weber’s theory on Transactional Leadership and defined three major dimensions of this style:
- Contingent Rewards: Transactional leaders like to link goals to rewards.
- Active Management by Exception: Transactional leaders actively monitor their team’s performance, predict complications, and issue disciplinary actions.
- Passive Management by Exception: Transactional leaders tend to stay out of the team’s way and only intervene when standards aren’t met or when the performance doesn’t meet expectations.
Characteristics of a Transactional leader:
- Extrinsic Motivation
- Critical Mindset
- Adhere to Rules
- Strong Personality
- Directive and Structured
- Setting Expectations Beforehand
Why Is Transactional Leadership Important?
Being clear on expectations
Employees like to know what is expected of them. They shy away from leaders who show ambiguity. However, findings from Gallup (2019) found that only six out of 10 employees know what is expected of them at work, thus making a leader who can set clear expectations an asset to any organisation.
Transactional leaders focus on creating defined processes that are replicable and provide employees with a framework in which they can be successful. These step-by-step guides, built on best practices and experience, help reduce risk and error and improve efficiency, productivity and performance.
Focused on performance and goal achievement
Transactional leaders do not let competing priorities, internal politics, and other distractions get in the way of their team’s performance and achieving their goals. Instead, they’re laser-focused on what needs to be done and how to get there.
Pillar of stability during a crisis
Thanks to their process-driven style, transactional leaders naturally take the lead during a crisis. These leaders understand the importance of aligning actions at a tactical level and can quickly mobilise their people with defined steps that mitigate any additional risk. In addition, with their natural reward and punishment structure, they can communicate the potential impacts the crisis will have on the company so that everyone understands and does not lose sight of what is on the line.
When is Transactional Leadership Effective?
For Small-Medium Enterprises
A transactional leadership style is more effective in small and medium-sized businesses. Under the transactional leadership theory, completion of the assigned tasks results in a reward from the employer. This reward or incentive can either be in a form of recognition, a job promotion, a bonus, or a raise in compensation. On the other hand, if an employee fails to comply with the given tasks, they are punished in the terms of either a loss of benefits or deduction in salary or sometimes even a disciplinary action against the employee.
Most organisations prefer having a mixture of both Transactional and Transformational leadership styles. A transactional leadership style is however more preferred in organisations that are already well established and require a little change in the ongoing processes. Organisations that require huge changes in the company system should rarely opt for this leadership style.
For Large Organizations
In large organisations, the transformational leadership style is more effective than transactional leadership. For example, with senior management, a leadership that focuses more on collaboration, cooperation, and motivation makes more sense than giving them a reward or taking negative action against them. Similarly, CEOs and other senior leaders prefer working as transformational leaders because of the flexibility it comes with. To read more on transformational leadership please click here to read our article on the subject.
Limitations of transactional leadership
Transactional leaders and the corporate structures that support them are not flexible which can frustrate employees who enjoy an atmosphere that promotes individual thought and innovative ideas.
A Lack of Motivation
Transactional leaders are sometimes seen as insensitive by those who work for them. It may look like they are not concerned with the human element of the workplace. If the personal lives or feelings of employees are not a priority, this attitude can come off as cold and uncaring, which can adversely impact the employees’ morale.
A Lack of Leadership Development
The most important thing that matters for transactional leaders are numbers and performance. This can mean there are limited opportunities for training that promotes anything outside of achieving goals.
Creativity Can Suffer
Collaborative ideas that better the company, and opportunities to create solutions for performance issues are not the main concern for transaction leaders. If employees will not be given the freedom to bring creative solutions to problems, this can negatively impact the organization.
Given creativity does always lead directly to results, transactional leaders don’t often care for it. Collaboration and creativity are not easily micromanaged and therefore not promoted under such leaders, this can negatively affect organisations as employees will not be given the freedom to create innovative solutions to problems.
Transactional Leadership vs Transformational Leadership
In order to understand the differences between transactional and transformational leadership, you have to understand their similarities. Both types of leaders have the same goal in mind: to get things done. In the end, both types of leaders expect people to demonstrate the same level of performance.
The difference lies in their method. Transactional leaders want to see results immediately. As such, they expect to be able to monitor their subordinates’ progress as they go. They also want to be able to quantify results to measure how much of a difference they make.
Transactional leaders see the purpose of organisational leadership as getting things done. They are concerned with achieving some end result. Because they are driven by numbers, transactional leaders tend to be more concerned with efficiency.
Transformational leaders, on the other hand, see the purpose of organisational leadership as inspiring others to change and grow as people. They are concerned with a subordinate’s performance on a task, but they are more concerned with the person’s overall well-being.
Transactional leaders are often concerned with their subordinates’ performance. They are equally interested in the outcome of the activity than they are in the process. As such, they tend to have a clear idea of what they want to be done before they even begin.
Transformational leaders, on the other hand, see their subordinates as people. They are interested in how the other person feels about their work. They are interested in what the other person has to say about the work and often encourage subordinates to ask questions or voice concerns. This can lead to a more open and creative environment.
Real life examples of Transactional Leadership
Sir Alan Sugar
Although Sir Alan has been successful in his leadership of the Amstrad organization, the transactional qualities are especially evident in the way he runs his reality TV show, The Apprentice. The show is all about reward and punishment, with people who can follow Sir Alan’s orders being promoted and taken forward, while people who deviate from the required path, usually have to pack their bags.
Tim Parker used transactional leadership to transform a problematic company. He took charge of a British motoring company, AA, in 2004 and quickly noticed the problems the organization were facing. Parker identified issues such as inefficiency, low productivity, and loss of staff members Parker is now one of the richest men in the UK and his wealth is put at £185 million by the Sunday Times Rich List
In 1984, according to the idea of the Italian espresso bar, Schultz opened the first Starbucks Kaif House. Schultz wanted to grow Starbucks, but the owner wanted to stay small. In 1985, Shultz left and opened his own Coffee shop, II Giornale. With the help of investors, he bought Starbucks in 1987 and united two companies.
By 2006, Schlutz was ranked 394 on Forbes Magazine’s list of 400 richest Americans. As a transactional leader, he is responsible for the vision and implementation of the Starbucks model with transactional leadership strengths.
Henry Ford was an American industrialist, business magnate, founder of the Ford Motor Company. He was known for his strict rules and demanding nature. Team members who displeased him were often punished by being given menial tasks or being fired altogether.
Former CEO of General Electric. He was known for setting high standards for employees and putting them under a great deal of pressure to achieve results.
Although transactional leaders offer many benefits, they aren’t always necessarily the best fit for every business; It often depends on the situation the company finds themselves in. If a company is struggling and requires a sudden turn around, then employing a transactional leader could pay considerable dividends. By ensuring they set their targets clearly, accomplishing success can become much more achievable.
Finally, the examples given prove that transactional leaders can have immense impacts to organisations, they can set the organisation on an innovative path towards long term success.