Transactional Leadership – Explained By A CEO

As a business leader, I can see how transactional leadership has a good fit in the right areas. However, using transactional leadership in non-transactional environments would be asking for trouble. Transactional leadership focuses on tasks, control, and reward and punishment. Transactional leadership comes in three versions, with different levels of management control.

This article will explain the concept of transactional leadership together with its pros, cons, characteristics, and how to use it effectively. You can also learn about the history and some science behind transactional leadership, examples of famous transactional leaders, and typical companies where it could be a good fit. As always, we set the stage with a short and sweet summary.

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

Now let us expand into a bit more detail on transactional leadership and all its aspects.

What is Transactional Leadership?

Transactional leadership is based on a system of rewards and punishment with a strong focus on results, reminding us of Scientific Management. This leadership style assumes low or no self-motivation at all among the employees, so a strict transaction-based system with built-in incentives is used instead, radically different from its sibling style of transformational leadership.

The core of transactional leadership consists of a clearly set exchange between the leader and the employee. A framework of rules and guidelines stipulates what reward or punishment an employee will receive if he or she performs various actions resulting in different outputs. At the end of the day, both parties would gain from the same outcome – the employee gets rewarded for good performance and the leader reaps the benefit of good output. Transactional leadership belongs to the Full Range Leadership Model together with transformational, and laissez-faire leadership, so it is merely a subset of an overall leadership toolbox.

The transactional leadership style depends on the leader’s ability to find appropriate rewards and punishments to influence employees to produce the desired results. The leader must also be capable of giving clear instructions and ensure that they are carried out. Employees who don’t follow the instructions are punished, while those who do are rewarded, all according to the pre-set system.  Keep on reading for examples, and no, we are not referring to physical punishment of any sort. The transactional leader needs to be very sensitive to reactions among the employees and calibrate the system accordingly so that the reward vs performance balance is satisfying all the involved parties. The problems with transactional leadership is often similar to pacesetting, with such a strong performance focus that team stress becomes extreme. (If you have problems with extreme task-focus in your leadership, consider my Pacesetting Leadership Blueprint to lessen the stress impact on the team.)

The three components of transactional leadership

Bass, Howell, and Avolio widened the concept of transactional leadership with their three components or flavors of the leadership style. This image shows how they connect to Laissez-Faire and Transformational leadership in the Full Range Leadership Model.

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.

Active management by exception involves controlling and monitoring activities and tasks as well as 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 gives team members more freedom and prompts leadership intervention only when necessary, even if it means that 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.

A transactional leader can deploy any of the above components and each of them will bring different opportunities as well as requirements.

For instance, the active management by exception gives the opportunity to identify and correct errors at an earlier stage, but the requirement is of course much more time spent by the leader on monitoring and following along, whereas passive management by exception is less time-consuming as long as there are no exceptions.

As explained additionally in the chapter on what science says about transactional leadership further down: Carrot is good, the stick is bad. If you use transactional leadership, you have plenty of reasons to focus on the contingent reward component of this leadership style. Read about examples of contingent rewards, and suitable situations in our article here: Contingent Reward Leadership, a transactional leadership approach. (You can also visit our portal for 25+ additional styles here: leadership styles, or keep reading below.)

What Are the Characteristics of Transactional Leadership?

Transactional leadership characteristics can be grouped into four different areas.

1.   Instructions, rules, and guidelines to create clarity

For transactional leadership to at all work, there need to be clear expectations on what the employees should do and how they should do it. If this is not clear, then how would people know which behaviors are rewarded or punished? Also, the efficiency in transactional leadership comes from the high-level clarity in what to do and how to do it – avoiding waiting times, discussions, solution finding, etc. in favor of hardcore performance.

2.   Reward and punishment framework for incentivizing

Incentives are a major part of any transactional leadership approach. Clear rules on how different behaviors and levels of performance result in what type of reward helps in deploying transactional leadership properly. Punishment could be made clear by stating what constitutes breaking the rules and what behavior is unacceptable.
The framework should inform all employees what they need to do to obtain a bonus and how large it will be. The framework can also specify how bad behaviors affect the possibility of a bonus or how many mistakes you are allowed before there are consequences etc.

3.   Results are the focus, not relationships

Transactional leadership is focused on results, not on relationships. If you do not perform, it will not matter how nice you are, there simply will be no bonus and you might experience deductions or other negative impacts. The strong focus on results indicates some familiarities with pacesetting leadership. After all, results can be measured, and this is a requirement for the transactional approach.

4.   Directive approach and ready to take action

Since detailed instructions, rules, and guidelines are a core component, the employees are more often told what to do and how to do it. Hence, there are elements comparable to commanding leadership. All the instructions and rules are focused on resulting in actions and outcomes – no excess “fluff” is needed since the result is in focus and not relationships. Results are achieved by action, not by sitting around.

You can find articles on commanding and pacesetting leadership in our portal on leadership styles.

What are the Pros and Cons of Transactional Leadership?

As with all leadership styles, there are advantages and disadvantages associated with transactional leadership as well. There is an infographic summary at the end of this chapter for reference.

Advantages of Transactional Leadership

Clarity and efficiency are two obvious potential advantages of transactional leadership. Let’s explore those and additional advantages in a bit higher detail.

1.    Employees who deliver results are rewarded

Transactional leaders are clear about how they operate. Employees will get rewards if they deliver and they will suffer consequences if they don’t. Employees who are willing to work hard and skilled at what they do like this. It also creates a sense of fairness since the better you perform, the better you are rewarded. (Some similarities with Pacesetting Leadership.)

2.    Rewards and punishments are clearly defined

Employees know beforehand what is expected and the associated rewards and punishments. Rewards could be salary, bonus, time off, promotion, recognition, and awards. Punishments can for instance be no bonus, being highlighted as a problem somehow, and even termination.

3.    Short-term goals can be achieved quickly

Unlike the democratic leadership style where decisions are made through collaborative effort, transactional leaders make decisions quickly and usually with minimal consultation. Additionally, close staff monitoring means that mistakes are spotted early and addressed so that they don’t have a ripple effect on the organization. Short-term goals are, therefore, more likely to be achieved quickly.  

4.    There is order and structure

There are certain times in an organization’s business cycle where a strong emphasis on order and structure is necessary and beneficial. Transactional leaders work feverishly to maintain the order and structure an organization needs. Anything that threatens predictability is immediately dismissed. (Refer to Bureaucratic Leadership for order and structure as well.)

5.    It can be very productive

The transactional approach can lead to very high productivity if done right. Broken down tasks, repeatability, the right incentives, high clarity – this can be very effective when deployed in the right way in an appropriate area.

We have separate articles on democratic, pacesetting, and bureaucratic leadership available at our main leadership styles page.

Disadvantages of Transactional Leadership

There are some substantial cons to transactional leadership. Make sure you are aware of them before you use this leadership style, that way you can mitigate the effects

1.    External motivation works up to a point

Some people are motivated by rewards, others aren’t. The strict focus on an approach of concrete incentives to get things done doesn’t encourage employee loyalty. If the only reason to stay with an organization is the possibility of getting a reward, an employee is more inclined to pursue better opportunities outside the organization if such alternatives exist.

2.    Creativity is discouraged

Transactional leaders are more akin to bureaucratic leadership since they follow strictly outlined goals and procedures. Outside-the-box thinking is discouraged. This stifles the creativity of employees and forces them to work within a rigid framework. Organizations with strong transactional leadership do not handle change well.

3.    Employees are blamed for the failure to meet targets

It is expected that employees will successfully complete tasks once instructions are given. Therefore, the leader instinctively casts the blame on employees if the overall goal has not been met. A possible statement this leader would make is, “I gave them clear instructions and they didn’t comply. They should learn from their mistakes. There will be consequences.” This could result in a punishment culture that is detrimental in so many ways. (Tip, read our article How do leaders influence organizational culture.)

4.    Leaders and employees are underdeveloped

Motivation and growth aren’t priorities for transactional leaders. They have a laser-like focus on numbers and results. Therefore, there is little room for either the leader or the employees to grow because there are no opportunities for continuous learning and development. (Consider Coaching leadership for an example of the opposite.)

5.    The leader becomes a bottleneck.

Consistent monitoring of employee output is fundamental to this leadership style. Therefore, the leader becomes a bottleneck as employees await feedback before they can move on to their next task. The employees will also feel micromanaged at the same time, normally not a good thing.

Learn to limit the downsides of this from my Pacesetting Leadership Blueprint to lessen the stress impact on the team.

How to be effective at transactional leadership?

Transactional leadership has its place despite how cutthroat it might seem. The punishment portion is often simply the avoidance of rewards, i.e. no bonus if you fail. We are not talking about public flogging here.

To best fulfill the characteristics of transactional leadership and get going, the following enablers can be useful to have in place.

1.   Create clarity

A transactional leader should have a clear plan for how tasks should be executed. Instructions and tools should be available to enable transactional efficiency. The leaders should be clear on the resources needed and how rewards and punishments will be distributed. Rules on how to behave, how not to behave, connected to consequences, good and bad must be made available together with additional guidelines and policies. (Check out bureaucratic leadership for additional ideas.)

2.   Implement a system for measurement

A system should be in place to ensure that employees know what do to and that they are doing what they’re supposed to do when they’re supposed to do it. Employees should, therefore, be closely monitored so that the leader can have as much information on progress and output as possible. Knowing this is essential to ensure the proper and just distribution of any rewards.

Some leaders may even choose a tracking system or a ticketing system, to be able to follow all activities, determine output and when rewards should be issued and when appropriate intervention needs to be arranged to support an employee.

3.   Ensure Communication

Transactional leaders should effectively communicate their expectations to their employees. This may mean hosting weekly progress meetings, sharing output and productivity measures on an online platform, or whatever works best for the unique needs and preferences of the business. The whole idea is to create as much clarity as possible and communicate well with the team members, so they know what to do, when to do it, and what to expect as a result of their actions. (Refer to our article 17 tips on improved communication for more tips.)

Additionally, feedback is important to help employees keep on track. This is especially true for new hires who need time to adjust and learn the unique requirements of the organization. Remember: carrot, not stick. 

The overarching and most important thing is to use transactional leadership when it is suitable and to use it for that portion of your operations. If you have a warehouse, a call center, and a product development department, then perhaps you should not use transactional leadership in the last one for instance? When you use transactional leadership, use the good kind, i.e. the contingent reward component. This isn`t the easiest thing, so consider taking a class if you need to develop in this area.

Furthermore, do not feel bound to use transactional leadership all the time. Remember that the general recommendation nowadays is to use multiple leadership styles and use them appropriately depending on the circumstances at hand.

Transactional leadership – what does science say?

It might not be a surprise, but studies show that there is a negative correlation between a leader’s management by exception style mentioned above and employee’s extra efforts and commitments. Pretty straightforward – the more punishment in terms of negative feedback an employee gets, the less likely he or she is going to perform beyond expectation or be committed to the organization. The same studies by Bucio et al[1], show a positive correlation between contingent reward type behavior of a leader and extra efforts and commitment by the followers. Similar results have been concluded in other studies as well.

So, in a nutshell: Carrot works, the stick doesn’t, it seems. In the long run, this type of punishment is simply the behavior of a bully. This is unlikely to lead to either commitment or loyalty obviously.

Transactional leadership has also been found to result in:

• Improved perception of trust, distributive justice, commitment, job satisfaction, and procedural justice[2]
• Increased trust in the leader and job satisfaction[3]

According to the literature, most of the positive effects and outcomes are connected to transaction leadership deployed with the contingent reward component. The negative effects of transactional leadership are maximized when any of the management by exception components are used. Again: carrot works, stick doesn’t work. Of the two management by exception components, the passive one is associated with more and stronger negative effects than the active version of the exception component. Read about example contingent rewards, and suitable situations in our article here: Contingent Reward Leadership, a transactional leadership approach.

Transactional leadership vs transformational leadership

The transactional and transformational leadership styles are very different in general as well as in-depth. Otherwise, they would not be suggested in a set of two styles being the polar opposite of each other. This comparison is divided into two areas, one of the more obvious and major aspects, and the other specifically on the incentives connected to the different styles – this is relevant since transactional leadership has such a high focus on rewards.

1.   Overall comparison

The table below shows some big topic areas with a comparison between the two styles. For an in-depth understanding, I suggest you read our article on transformational leadership as well.

2.   Incentive comparison

To compare these styles from an incentive perspective, let us investigate two different groups of exchanges that can occur between a leader and his or her followers. That way we can put the finger on the differences in the relationship between the parties that apply for each leadership style.

Low-level exchanges are the simple and non-complex ones that are easy to detail. Concrete to their nature, they can mostly be specified in written form. Salary, days off, work hours, benefits, etc. are considered as low-level exchanges between the leader and the follower.

High-level exchanges would be the more abstract exchanges between the two parties. This could for instance be trust, personal commitments, loyalty, support, protection, acceptance, and similar things. These exchanges are difficult to measure and specify and often revolves around personal relationships.

Transactional leadership revolves around low-level exchanges whereas transformational leadership is the opposite and focuses on high-level exchanges. Most seem to consider, as mentioned above, transactional and transformational leadership to be polar opposites, i.e. two different sides to the same coin. However, other literature states that there could be an occurrence of both styles within the same setting and the same leader. The low vs high-level exchanges can be in place at the same time.

The transformational leader, focusing on the high-level exchanges, would likely motivate and inspire his or her team members better, resulting in a better long-term outcome. This would require more investment in terms of time to build relationships of course.

For a deeper analysis on this, refer to our article here: Transformational vs. Transactional Leadership.

History of transactional leadership

Transactional leadership was originally called rational-legal leadership in Max Weber’s 1947 study on leadership. James MacGregor Burns expanded on Weber’s work and developed the concept of transactional leadership together with transformational leadership in 1978. These two styles were essentially two different sides of a coin and very different in nature. Burns also added aspects of good personal traits such as honesty, fairness, and sticking to agreements to the characteristics of the transactional leader. Both Weber and Burns contributed significantly to the early work on leadership styles. (Weber created the concept of Bureaucratic Leadership, also known as rational-legal leadership. This is claimed to be the foundation that transactional leadership is built upon. Weber also defined Charismatic Leadership. Both styles are available to you on our leadership styles page.)

The transactional leadership style evolved further in the 80s and 90s when a team of three researchers (Bass, Howell, and Avolio) added three separate components to the Full Range Leadership Model. These components are “contingent reward”, “passive management by exception” and “active management by exception”.

Transactional leadership companies and business examples

What type of organization or company would transactional leadership work well with? I would say the organization needs to meet the following requirements, to begin with:

1. Measurable tasks with measurable outcomes
2. Simplistic tasks or at least not high complexity task
3. High level of repetition

If a company fits these three requirements, it is possible to set up instructions, rules, guidelines, and policies for almost all tasks within operations. Repetitiveness and measurability enable a reward system to be applied as well.

What type of companies meet these requirements? Call centers are one example. In a call center, you have instructions on what to do to handle all calls. There is a transactional nature that can be measured, i.e. how many calls and the quality of those calls. If the topic is high complexity, a typical call center wouldn’t be used anyway.

Given a clear set of rules, guidelines, and expectations, it is easy for employees to understand what they need to do and what type of monetary reward they would get for that. The transactional nature enables lining up career paths with potential promotions as well.

A distribution center where picking, packing, loading, and unloading is performed could be another example. Incentives could be set for how many items, i.e. transactions, an employee handles and there could be deductions in the cases of errors or damaged objects for instance. The same could be extended to some types of delivery companies.

A leader’s personal experience of transactional leadership

During my many years in leadership positions, I have not encountered that many transactional leaders or deployed transactional leadership myself that much. One of the reasons is probably that I have worked in industries with a less transactional environment, making the style less applicable. That said, there are more transaction-heavy spots that could have benefited from a slightly more transactional approach.

The few transactional leaders I have met, have been misplaced and deserve mentioning as examples of what not do to I’m afraid. Both in support functions by the way.

The first example was a finance manager. Having a bit of an autocratic approach as well, this manager liked to use active management by exception. If there weren’t any exceptions, this person did everything possible to find some or enlarge any minor deviations to full-on exceptions. I think that is how this individual identified with the role – finding flaws and problems no matter what. Even though the transactions, in this case, were large and medium-term time-wise, only results counted, and they should preferably be reached in the way this manager preferred.

The other example was an R&D manager that was entirely transactional in his behavior. Regardless of how low the engagement dropped and how much his team members distrusted him, he did not see any problems if his overall goal had been fulfilled on time. He couldn’t even understand why he was asked to change his ways – again, he got the job done as he saw it. If his team members did things in a way he didn’t like, he would scream, yell and scold. 
This behavior was even more devastating in this setting since an R&D department needs innovation and creativity – heavily suppressed by such a manager.

Even though I rarely use transactional leadership, I’m all about productivity.

Who Are Some Examples of Transactional Leaders?

Charles de Gaulle – World War II French General – (1890-1970)

Charles de Gaulle was charged with the responsibility of leading the Free French Forces in their fight against the Nazis and the French occupation. He was also the French Republic’s first president and served in that capacity from 1959 to 1969.

He applied transactional leadership by giving direct orders, expecting full obedience, promoting those who were loyal to his causes, and punishing those who didn’t follow his example. This approach suited the context and helped Charles de Gaulle and his troops win their battles.

Joseph McCarthy – Former American Senator – (1908-1957)

Joseph McCarthy’s leadership as a senator epitomized the innate characteristics of transactional leadership. He was adamant that Communists and Soviet spies had found their way into high-ranking US government positions. His short-term goal was to eliminate these threats and he needed a team to help him do it.

His team would feed him information about potential suspects for which they would be rewarded. The slightest sign of these unwanted vagrants prompted McCarthy to act accordingly. He became so fixated on his goal (which was never truly proven) that he was eventually censured by the Senate in 1954.

Sir Alan Sugar – Former Owner of British Consumer Electronics Company Amstrad – (1947 to present)

Sir Alan Sugar is probably best known for being the business mogul in the hit British spinoff of The Apprentice. Those who can follow Sir Sugar’s instructions are promoted while those who can’t are sent home. The show highlights Sir Sugar’s heavy dependence on rules, norms, and extrinsic motivation to encourage employees to perform effectively[4].

Tim Parker – Former CEO of AA – (1955 – present)

Tim Parker is an example of how transactional leadership can be used contextually to deal with specific organizational challenges. He became CEO of AA in 2004 and was soon after dubbed the “Prince of Darkness”. It is reported that he “pulled up in his Porsche outside [the AA headquarters], went in and fired half the workforce.”

The explanation for this drastic measure paints a solid picture of transactional leadership in action. He did his research upon accepting the leadership role and discovered three fundamental challenges with the company: inefficiency, low productivity, and high employee turnover.

Something had to be done. His punishment came in the form of firing those responsible for the inefficiencies and restructuring the company. It was a time of swift changes and decisive actions motivated by rewards, punishments, and much-needed structure. His actions inevitably led to a huge turnaround at AA with a noticeable increase in company profits.

Further reading

I suggest you visit our leadership styles portal to read about more than 25 other leadership styles, such as transformational, charismatic, visionary, bureaucratic, pacesetting, situational leadership, and many others.

You can also read the article on transformational leadership, and the comparison between transactional and transformational leadership styles.

Read about examples of contingent rewards, and example situations for the contingent reward approach in our article here: Contingent Reward Leadership, a transactional leadership approach or for passive management by exception.

References

“A Handbook of Leadership Styles”, Cambridge Scholars Publishing

https://status.net/articles/transactional-leadership/
https://online.stu.edu/articles/education/what-is-transactional-leadership.aspx https://www.projectmanager.com/blog/transactional-leadership

[1] A Handbook of Leadership Styles
[2] A Handbook of Leadership Styles refers to Pillai et al
[3] A Handbook of Leadership Styles refers to Jung and Avolio
[4] https://www.cleverism.com/transactional-leadership-guide/