Transactional Leadership: Contingent Reward


Contingent reward leadership is a version of transactional leadership. The contingent reward approach to leadership has both advantages as well as disadvantages, which will be shown with a few examples in this article. I have seen quite a few approaches to contingent reward leadership during my leadership career, and as a CEO, some good, some bad. Before we get to the detailed explanation and the examples, here are a few short answers to get us started.

What is a contingent reward leadership style?

Contingent reward leadership is a straightforward leadership approach of rewarding the followers depending on task fulfillment and outcome. Contingent rewards leadership includes bonuses, promotions, recognition, appreciation, etc., based on a structure that clearly shows the rewards for specific results.

What is contingent reward in transactional leadership?

Contingent reward is one of three approaches of the transactional leadership style. Contingent reward builds on a clear set of rules regulating the match between results and rewards in a clear and concise incentive structure.

Before we expand into the topic of the contingent reward approach to leadership, let me provide you with a short background on the transactional leadership style as a platform. If you already know the basics of transactional leadership, you can scroll down to the detailed chapter on Contingent Reward.

Contingent reward: Introduction to transactional leadership

Transactional leadership can be seen as the more autocratic and less visionary sibling of transformational leadership.

Transactional leadership builds on a clear structure of reward and punishment for different levels of performance. It focuses on results, efficiency, and performance rather than people and relationships. Transactional leadership is often seen as the opposite of transformational leadership.

Transactional leadership expands the bureaucratic leadership style, its historical predecessor, and was conceptualized by Burns in one framework, coupled with the transformational leadership style. The two leadership styles were seen as mutually exclusive until Bass and Avolio developed the model further, adding that a leader can use both styles as appropriate and interchangeably while also adding Laissez-Faire to the mix. (You can find our detailed articles about transformational, transactional, and laissez-faire leadership in our leadership styles portal, together with more than 25 other styles.)

There are three different components, or approaches, of transactional leadership, of which contingent reward is one.

Free E-Book! 27 Leadership Styles explained in 60 pages: Free e-book offer!

The three components of transactional leadership

Here are the three components of transactional leadership:

Contingent reward 

Contingent reward is a straightforward approach to rewarding the followers depending on task fulfillment and outcome. Contingent rewards include bonuses, promotions, recognition, and appreciation, for instance. We will describe this component thoroughly, with examples, in this article.

Active management by exception 

The active management by exception approach of transactional leadership involves controlling and monitoring activities and tasks and the performance and outcome in the end. The leader steps in and intervenes at an early stage prompted by signs of problems or failure. This intervention will result in negative feedback, a reprimand, or another type of punishment.

Passive management by exception

Using the passive management by exception approach of transactional leadership, a leader gives team members more freedom and prompts leadership intervention only when necessary, even if intervention comes later than in the active management by exception case. Similar to in the active case, failure results in a negative reaction towards the failing employee.

Advantages of the Transactional Leadership Style:

  • There is a clear connection between performance and rewards
  • It can be very productive, especially when it comes to short-term results
  • Clear order, structure, and rules, enabling repetition and swift onboarding of new team members

Disadvantages of the Transactional Leadership Style:

  • The sole focus on performance can be demotivating and disengaging
  • Rewards have a limited impact on peoples performance; at some point, other factors start to matter more
  • The strict structure hampers creativity and innovation

There is much more to learn about transactional leadership. Feel free to read our article on this style here: the transactional leadership style, if you are interested.

Contingent Reward Leadership Explained

As mentioned in our brief answer at the top, contingent reward builds on rules and structure around reward for specific results or behaviors.

Contingent reward leadership can work well in environments of more transactional nature or when true motivation, inspiration, and employee engagement are difficult to build. There are numerous jobs people have for the simple reason of making money, and not because of passion or purpose. In those settings, adding a contingent reward system can boost productivity and performance considerably.

The key to a good contingent reward approach to leadership is to provide as much clarity as possible. When employees know exactly what they can get if they meet certain conditions, it can incentivize them to work at great speeds in meeting them. The opposite, unclarity, is not as good as an incentive since people will not know for sure what to expect in terms of rewards, and they might even be unsure of what is expected of them. (Check out our transactional leadership article to learn more about other aspects of this style.)

Situations when transactional leadership: contingent reward can work

Here are a few example situations when the contingent reward version of transactional leadership can fit:

Harvesting agricultural produce example of contingent rewards

Let us take a strawberry farm with manual labor as an example. It is unlikely that the people picking the strawberries are passionate about it or believe in a glorious vision of providing more strawberries for the people. They most likely do this job to get paid and use that money to support their life outside of work. With low passion, low engagement, and low motivation, adding an element of getting an extra $5 for every ten boxes of berries you pick, or similarly, can increase the speed, reward good workers, and incentivize others to do a better job. Without contingent reward, the workers might do a bare minimum since overperformance will not improve their situation anyway.

Transactional Customer Services example of contingent rewards

Manning a customer service desk can be a frustrating job done at strange hours. As in the previous example, this is often “just a job”, and employees potentially like true and profound passion for what they do. Adding a contingent reward approach to the transactional leadership of such an organization can increase performance and quality. Let us say that the employees get a bonus for the number of service tickets they handle within a particular time window. Perhaps add a percentage accelerator to this bonus depending on the quality feedback from customer surveys? Contingent rewards can motivate people to work faster and better, with more tickets handled and happier customers in the end.

Learn more about transactional leadership, including pros, cons, famous leaders, scientific aspects, and more: transactional leadership. If you are interested in more than 25 other approaches to leadership, visit our leadership styles repository.

Contingent Reward Examples

Here are a few examples of the type of rewards that can be used if you lead with a contingent award approach:

Bonus

Giving employees a bonus when they meet certain targets is probably one of the most straightforward contingent rewards there are.

Commission

Some employees earn a fixed or variable commission on how much they sell, produce, or otherwise perform. A salesperson might get 5% of the revenue sold or $100 per sold unit of a certain product. Some people work on commission only, whereas others have basic pay and commissions on top, depending on their performance.

Awards

Many companies issue awards to their employees for meeting specific targets, sometimes more clearly than others. This can be anything from the employee-of-the-month approach to the best new idea being awarded tickets to a paradise island, a dinner voucher, etc.

Promotions

Although a bit rarer, some companies provide clear and concise promotion conditions meaning that once you meet specific parameters, you will get a new title with the associated salary and benefits.

Time off and vacation

Some organizations provide additional days off with pay if employees perform according to certain expectations or reach specific targets.

Stock programs

In more senior positions or start-ups, employees might be eligible for stock programs. According to preset conditions, a specific amount in company stocks is to be paid out to the employee depending on the results. Suppose an employee gets awarded $10 000 of shares this year. In that case, the shares might be frozen for two years until they are finally transferred to the employee, adding a retention element to this contingent reward.

If you want to learn more on how to lead with purpose, inspiration, and motivation, you might be interested in learning about charismatic, visionary, servant, spiritual, or transformational leadership. You can find articles on all of them in our leadership styles portal.

Does the contingent reward approach of transactional leadership work?

Let us conclude this article on contingent reward leadership by considering the short-term and long-term effects that this can bring.

According to science, the contingent reward approach to leadership is a bit more successful than the other two versions of transactional leadership, i.e., passive management by exception and active management by exception. Despite this, transactional approaches only work to a certain level since some people are motivated by rewards while others are not. Many of us seek purpose, motivation, inspiration, and believing in what we do. This can only be put in place by more advanced approaches to leadership, such as transformational, servant, or visionary leadership. (You can read about all those styles in our leadership styles portal.) You cannot pay someone to feel inspired. In the end, transactional approaches tend to limit creativity since the company is likely to get exactly what the contingent reward system asks for, nothing else. It can also lead to an overly strong focus on numbers, KPIs, and other measurements, leading to less emphasis on people and no time spent developing and coaching people to develop into something better.

Contingent rewards are also limited in time. It isn’t easy to reward a salesperson on the sales five years from now, although how a new product is handled today might have a powerful effect on its future.

From a long time in senior leadership positions, my recommendation is to use contingent reward carefully and in specific situations. A variable commission in sales, long-term bonus schemes, etc., can all work if applied carefully. If you are uncautious, it can result in adverse effects, and you often need to regulate the outcome with several parameters. Remember the strawberry workers above? What if they pick the berries so fast and sloppy that they are all damaged once in the boxes, rendering them unsellable? That’s why it is good to have dual targets, such as the number of tickets and quality assessment in the customer help desk example.

In the end, if you want people to achieve something truly amazing, you will need to motivate them in more profound ways than simply giving them a bit more money if they meet certain expectations. True inspiration and motivation are what make people repeatedly go the extra mile, not incentives.

Free E-Book! 27 Leadership Styles explained in 60 pages: Free e-book offer!

Learn more about transactional leadership, including pros, cons, famous leaders, scientific aspects, and more: transactional leadership. If you are interested in more than 25 other approaches to leadership, visit our leadership styles repository.

Refer to the main article on transactional leadership for sources.

Carl Lindberg

Carl is a global business leader that has led 1-2000 people and had financial responsibility of 200-500 MUSD. During his career, he has led employees in twenty different countries and has lived in three continents.

Recent Posts

Click the image above or HERE to join our Newsletter and get the Free E-book now!