What Is Transactional Leadership?

By Indeed Editorial Team

Updated 12 October 2022

Published 6 June 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Leaders in different organisations employ distinctly different leadership styles. While some prefer a relatively hands-off style, others prefer an autocratic, micromanaging style. Transactional leadership is one such leadership style. In this article, we learn more about this type of leadership and its advantages and disadvantages.

What Is Transactional Leadership?

Transactional leadership is a leadership style that focuses on attaining goals through compliance, organisation and supervision based on a system of incentives and punishments. This approach works well with self-motivated employees who perform their duties as instructed in a very structured and directed environment.

Transactional leadership involves motivating and directing employees by exchanging rewards and incentives for performance. This type of leader does not focus on improving or changing the organisation as a whole. Instead, they aim to achieve short-term and long-term goals while maintaining a routine, conformity and the organisation's status quo. The term 'transaction' refers to the fact that this type of leader essentially motivates employees by exchanging rewards for performance. On successfully completing assigned tasks, the employees are given tangible rewards such as compensation, promotion or job security or intangible rewards such as praise and recognition.

Related: 10 Common Leadership Styles

Who Uses Transactional Leadership?

The type of organisations that prefer transactional style leadership includes well-established companies with fixed methods and operations that require little change in their process. This leadership style is typically followed by middle and upper management in these firms. Many high-level military members, coaches of athlete teams and CEOs of large international companies are known to be transactional leaders. This leadership style is also effective in managing an emergency situation or crisis.

Transactional leadership is effective in organisations and projects that require to be carried out in a specific way. In general, companies in sales or manufacturing operate according to fixed tasks or programs with a single cohesive goal, making this environment more suitable for the transactional style. For instance, a company with a large sales team might use commissions or bonuses as a type of transactional reward.

In creative fields such as marketing or advertising, transactional leadership does not necessarily work. Creative professionals need the flexibility to think out of the box and come up with ideas, slogans or pitches for their product. Transactional leadership follows an authoritative approach, so it often hinders such creative process and may reduce morale instead of motivating individuals.

Related: What Is Autocratic Leadership?

Characteristics Of Transactional Leadership

The core idea behind transactional leadership lies in the notion that leaders who hold authority and power can control their employees to achieve the desired results. Transactional leaders prefer to work within an existing system and think inside the box when solving any problems. Below are some of the personality traits that are common to leaders with transactional style:

Hierarchy

The transactional leadership style places high importance on hierarchy and the corporate structure and culture. According to these leaders, every action within the company goes through a proper process. For instance, if you have an idea to increase sales, you may be required to tell your manager first, who then reports it to top management. Bypassing this process is often seen as defiance and a lack of respect.

Related: What Is The Importance Of Leadership In The Workplace?

Micromanagement

In this leadership style, the day-to-day operations of the business are rigid. The transactional managers believe that it is up to them to make all decisions and expect the employees to follow their instructions and guidelines. As a result, these leaders tend to micromanage employees to ensure everything runs smoothly in the organisation.

Resistance to change

Transactional leadership does not aim to transform any of the company's processes, so they tend to be highly resistant to change. They prefer everything to remain strictly as it is within the business and do not believe in improving the working conditions to make things better.

Practical approach

This is one of the most distinctive features of a transactional style of leadership. These leaders make pragmatic decisions based on the constraints and available information to achieve the organisation's goals. This rarely leads to out-of-the-box thinking.

Related: How To Develop Leadership Skills (With Practical Tips)

Emphasis on self-interest

Both the employee and the transactional leader have something to gain by meeting their quotas or achieving personal goals. It is mainly because they are rewarded when they achieve their target or meet their goals. This often leads to a lesser emphasis on teamwork.

Reactive approach

In this type of leadership style, the focus is on maintaining the status quo within the organisation. This leads the leaders to become reactionaries, where they tend to react to things when they happen and rarely take a proactive approach.

Related: Top Qualities of an Outstanding Leader

Advantages Of Transactional Leadership

Although the rigid structure of transactional leadership may not seem appealing to some, it has few advantages over other types of leadership styles. Here are some of the key benefits of transactional leadership in the workplace:

Goal achievement

Transactional leadership ensures that the goals and vision of the organisation are achieved. The companies with the transactional leadership style have short-term goals in place, which are often more feasible and realistic than long-term goals.

Employee Motivation

Transactional leaders can motivate employees to become efficient and productive based on a system of rewards and punishments. By achieving the targets or goals, employees are often rewarded for their performance. On successfully completing assigned tasks, the employees are given tangible benefits such as compensation, promotion or job security or intangible rewards such as praise and recognition. On the other hand, failure to achieve attracts negative results such as disciplinary action or loss of benefits and compensation.

Related: Leadership Development: Definition, Process And Styles

Effectiveness

In established companies, especially those with fixed procedures or organisations with a young or inexperienced workforce, transactional leadership is highly effective. The clearly defined roles and structure play into this effectiveness, as there is no requirement to toy with existing procedures. This direct approach can also identify problem areas or under-performing employees within the system quickly.

Clear definition of structure and roles

In an organisation with transactional leadership, every facet of a department is clearly defined from top to bottom. As an employee, you are given clear instructions about your role and are expected to follow a chain of command. This removes any ambiguity regarding your roles and responsibilities within the company while eliminating the duplication of work between coworkers.

Related: Difference Between A Leader And A Manager: Essential Points

Disadvantages Of Transactional Leadership

Transactional leadership comes with its fair share of disadvantages. Understanding the disadvantages is important because, as a prospective employee, it is your responsibility to research the managerial style of a particular company before joining them. Asking relevant questions during an interview and conducting detailed research on the company are two excellent ways to determine an organisation's managerial style and leadership qualities.

The disadvantages associated with transactional leadership may not appear in all organisations that employ this leadership style, but it is still essential that employees and managers recognise them. Some of these disadvantages are:

Focus on short-term goals

Short-term goals are required to be balanced and align with long-term goals. But, in organisations with transactional leadership style, there is a greater emphasis on short-term goals, resulting in a lack of preparation or vision for the future, particularly for changes related to market demand or consumer preferences.

Discouragement for creativity and innovation

In this environment, employees are given specific roles and they are expected to complete the required work. This often leaves no room for creativity and forces the employees to work within a rigid framework.

Related: What Is Bureaucratic Leadership And How Does It Work?

Ineffectiveness of the reward system

While some employees are motivated by the reward system, others are not. The sole focus on rewards and punishments does not encourage employee loyalty. In some leadership styles, people may find more satisfaction by reaching a common goal with teamwork or learning a new skill. If you are an employee who gives importance to emotional and social factors and values, transactional leadership does not often motivate you.

Over-reliance on the leader

Even if the leader is knowledgeable and experienced in the industry, an over-reliance on them can cause problems. This dependence on the leader shall put the company into a disadvantageous position, especially if the individual decides to leave the organisation.

High cost of mistakes

Transactional managers have a style of leadership where they avoid making decisions to solve an issue or correct a problem until they have no other option. This can often lead to monetary losses or causes a lack of employee motivation. In several situations, an employee may have been doing their job incorrectly for an extended period without proper oversight. Correcting these types of mistakes can often prove costly for the company.

Related: 7 Leadership Theories for Career Growth

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