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The pros and cons of transactional leadership

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There are many different leadership styles out there, and some work better than others. Some companies put a great deal of faith and trust in a manager’s judgment, allowing them to run their team as they see fit with little oversight. Other organizations demand a clear hierarchical structure based on rewards and punishments to maintain the status quo. This leadership style is called transactional leadership. 

Transactional leadership is a managerial approach that rewards self-starters, competitiveness, and individual achievement while weeding out and disciplining underperforming employees. It’s a traditional leadership style that’s still extremely prevalent in many different industries. But just because it’s common doesn’t mean it’s the most effective way to manage a team or organization. 

Learn about transactional leadership, including its pros and cons, better alternatives, and what you can do to prevent its limitations.

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What is transactional leadership? 

Transactional leadership is a management style focused on supervision, organization, and performance, where leaders promote compliance by followers through both rewards and punishments. This approach is based on a clear structure of tasks and goals, with leaders setting specific objectives and using incentives to encourage desired behaviors while applying corrective measures for non-compliance.

It’s one of the most common forms of leadership—at least, it’s one that most people have experienced at some point in their lives. When employees successfully accomplish a task, they are rewarded. When employees fail to accomplish a task, they are punished. 

Transactional leadership is a hierarchical, goal-based, and results-oriented approach that relies on well-established operations and methods that require little creativity or innovation. Transactional leaders aren’t looking to change things up—they want to maintain the status quo. If an employee tries a new approach or acts upon a daring idea and is unsuccessful, they won’t be appreciated for their innovation; instead, they may be punished for their failure. Transactional leaders are reactive rather than proactive, only taking action if they need to.

Transactional leadership examples

While maintaining the status quo leaves little room for creativity, transactional leadership certainly has its time and place. For example, consider a chain restaurant. The quality of the menu items must be maintained at all times, meaning recipes need to be followed to the letter. If two people order the same hamburger, both hamburgers should look and taste exactly the same when they’re served. Maintaining the status quo in this instance is essential, meaning it’s necessary for leaders to carefully supervise their team and take punitive action if quality slips in any way. 

Transactional leadership is also extremely common in sales. If an employee works on commission and they make a lot of sales, they’ll be rewarded with more money. If they consistently fail to meet their quota, they’ll be punished or fired. A transactional leader working in sales cares primarily about the bottom line, so their thought process is pretty black and white. Did the employee meet their sales quota or not?

The pros and cons of transactional leadership

The effectiveness of transactional leadership varies depending on the industry. While it can work for sales, it doesn’t work very well in creative fields where teams need to be free to innovate, ideate, experiment, and explore. 

Pros of transactional leadership:

  • Success is clearly defined
  • Expectations and job roles are clear
  • Identify problem areas or low-performing employees quickly
  • Easier to make cost-effective decisions
  • Individual employees are motivated to compete and succeed
  • High-performing employees are consistently rewarded

While there are some clear benefits to transactional leadership, many of them fall to the businesses and employers rather than the individuals or teams that work for them.

This leadership style cares more about short-term gains and the here and now rather than building happy, healthy, and reliable teams that are intrinsically inspired to do their best.

Cons of transactional leadership: 

  • Diminished creativity and innovation
  • Reduced collaboration and communication between team members
  • Reduced team morale
  • Increased employee competitiveness and conflict
  • Too much focus on short-term goals
  • Less focus on work-life balance
  • Higher employee turnover
  • Leaders only give feedback when employees are unsuccessful
  • Nothing can be completed without the leader’s approval
  • Extrinsic motivation is weaker than intrinsic motivation

Transactional leadership has seen a decline in popularity over the last decade. The increasing number of millennials in the workplace (about 35% of the United States’ workforce) has caused more and more industries to put an increased focus on work-life balance and the personal fulfillment of their employees—two things that aren’t high on the list of priorities under transactional leadership. 

The COVID-19 pandemic also forced companies to reevaluate the way they do business. Transactional leadership is most effective when managers are able to closely monitor employee progress—something that’s more challenging when employees are working from home. The increasing number of work from home and remote work options is inspiring a more flexible, collaborative, and adaptable leadership style based on mutual respect and trust.

Transactional vs. transformational leadership

Transformational leadership is the exact opposite of transactional leadership. ​​Transformational leaders are forward-looking, believe in continuous improvement, and are always challenging the status quo. 

Transformational leadership is all about being and doing better. This mindset fosters innovation and creativity in the leader, their team, and the business as a whole. Businesses led by transformational leaders adapt and innovate with changing times, cultural shifts, and new technologies. Transformational leaders care deeply about improvement, which means new ideas are always sought out and thoughtfully considered.

Transformational leaders don’t base their decisions exclusively on the company’s bottom line—they are guided by integrity, ethics, and morals. They live and breathe their ideals. Transformational leaders put their values and the values of the company above most other motivations, which, in turn, inspires both their employees and clients to do the same. 

An employee’s motivation to succeed goes beyond simple acquisition and monetary gain; they want to succeed because it is the right thing to do. They’re inspired by their leader’s example, encouragement, and continuous feedback. 

Transformational leadership is something all leaders can aspire to by creating a work environment built on mutual respect, trust, integrity, dedication, enthusiasm, and innovation.

How to prevent transactional leadership limitations

If transactional leadership doesn’t sound like a leadership style you want to emulate, there are plenty of things you can do to become a transformational leader. 

  • Always strive to be the best version of yourself. This will inspire those under your leadership to do the same.
  • ‍Make decisions based on your own code of ethics and values. Follow your moral compass.
  • ‍Be transparent with your communication and share both your successes and failures with your team.
  • ‍Provide continuous, constructive feedback that helps each team member improve without highlighting their flaws.
  • ‍See mistakes and failures as learning opportunities.
  • Establish a trusting work environment where all team members feel safe to speak up and share ideas (even ones that could fail.)
  • Lead with empathy and endeavor to see every situation from multiple perspectives. What disadvantages might another person have that you are unfamiliar with?
  • Build a culture of innovation in your workplace by striving to grow and evolve with the changing times.
  • Give your employees the freedom to work how they work best and trust them to get work done even when you’re not watching.

Marlo is a strategic leader and full-stack marketer with 10+ years of experience developing and leading teams. Outside of work, you can find Marlo in the Bay Area with her daughter, husband, and dog.

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