Transactional Leadership Style – Where Rewards & Penalties Talk

The transactional leadership style assumes that people do things for compensation, rewards, or any material outcomes. Therefore, transactional leaders focus on designing tasks around reward structures, such as promotions, bonus payments, etc. Bill Gates and Howard Schultz are two famous examples of transactional leadership. Although it sounds greedy, leaders and managers use transactional leadership and management style in their work.


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We have gone through the inception, characteristics, cases you can apply, benefits, flaws, and famous practitioners of transactional leadership style in this article.

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The Inception of the Transactional Leadership Style

We can credit the inception of the transactional leadership style term to the German sociologist Max Weber. In 1947, while he was researching various leadership styles, he referred to “legal-rational authority” in his work, where Weber wrote that subordinates or team members need certain motivations based on structure and a more pushing management style to generate results.

Although Max Weber is generally credited with coining the term “transactional leadership”, James MacGregor Burns expanded upon the concept in his phenomenal 1978 book, Leadership.

“Transactional leadership occurs when one person takes the initiative in making contact with others for the purpose of an exchange of valued things. … Their purposes are related, at least to the extent that the purposes stand within the bargaining process and can be advanced by maintaining that process. But beyond this, the relationship does not go. The bargainers have no enduring purpose that holds them together.”

đź’ˇ Read 15 Types of Leadership article to learn about other leadership styles.


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7 Characteristics of Transactional Leadership Style

We will list the 7 common characteristics of the transactional leadership. However, all comes out from two fundamental characteristics:

  • Contingent rewards. Team leadership defines the targets, goals, and objectives. Team leaders also clarify expectations from the individuals and declare the rewards that will be given if the expectations are met. The rewards can be bonus payments, merits, or recognition.
  • Management-by-exception. Leaders will take proactive or corrective actions based on performance. Typically, there are two types of management approaches here
    • Active Management: in this type of transactional leadership, the leader acts as a micro-manager. The leader wanders around all the time, closely monitors team members, evaluates the situation, and takes action for better performance.
    • Passive Management: The leader steps in only if there is a problem and if the team needs the leader’s support. Like in Laissez-Faire Leadership style.

Now, let’s go through the 7 characteristics of transactional leadership.

1- Focuses on Short-Term Goals

You should have heard the three famous theories about motivation: McGregor’s Theory X and Y, Maslow’s hierarchy of needs, and Herzberg’s hygiene factors. These are famous and phenomenal theories about people’s motivation. The common part of these famous theories is, that people can be motivated by material rewards to some degree. If the material compensations are below the average, this makes people demotivated, however, having generous compensation or rewards will not make people very motivated. People look for other motivational factors such as encouragement, relationships at work, self-actualization, etc.

The transactional leadership style focuses on short-term goals. The management tries to accomplish quick wins around a tight schedule. Therefore, instead of building relationships, encouraging team members, and growing the team, people are motivated by rewards. This resembles the Authoritarian Leadership style.

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2- Rewards and Penalties

The backbone of the transactional leadership style is rewards and penalties. Leadership clarifies its expectations from the beginning with a clear set of goals and targets. Rewards and penalties policies are also declared to the team. While objectives are met, rewards are given to those who deserve them. If there are underperformers or unwanted behavior, the transactional leader will not hesitate to punish them.

3- Transactional Leadership is Resistant to Change

The aim of transactional leadership is to reach the results as soon as possible. They draw a path and expect the followers to go through that path to reach their goals. There is no room for participation, out-of-the-box thinking, or creative ideas. Even if there are quicker ways to reach results, the atmosphere hinders them from unleashing. Transactional leaders favor following conventional and tried patterns rather than trying new ideas or alternatives.

4- Favors Hierarchy

A transactional leadership style requires a clear, rigid, and structured hierarchy. In order to form rewards and penalties policies, organizations need to ensure that everyone knows their place in the line. Subordinates know that they should not step in outside of their roles and responsibilities.


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5- Transactional Leadership Minimizes Relationship Building

The goal of the people under transactional leadership is to reach goals and gain rewards. However, this might be at stake to compete against other team members in the team. In other words, the team members in the same team might be the competitors of each other. Respectively, this minimizes the development of personal connections, blocks team-building, and hinders team development.

6- Transactional Leadership has a Micromanagement Approach

Transactional leadership expects people to follow a certain set of rules while they are performing their work. This means transactional leaders or managers have to do micromanagement. Transactional leaders have to follow the people closely, so they can be sure that while they are trying to gain rewards, they do not break any rules set by the management.

7- Transactional Leadership is Reactive Rather Than Proactive

Transactional leadership is reactive, rather than proactive. Transactional leaders make sure that the team follows the rules and standards set by the leadership. While doing this, instead of looking for future problems that might arise, they only reach the cases when they occur. Because they focus on day-to-day work and if they are performed as per the standards and rules. This prevents them from looking at the bigger picture level and anticipating future problems and being proactive.

3 Example Cases Where Transactional Leadership Is Applied

When we list the characteristics of transactional leadership, it may sound greedy, impersonal, and not collaborative, so that, it is not easy to apply. However, the transactional leadership style is widely used in many industries. Let’s look at the top 3 cases where transactional leadership is applied.

1- Sales Teams

Typically, sales professionals have sales targets. In many cases, they have a base salary, and bonuses based on their sales performance. As they sell more, they earn more. You should have seen the “employee of the month” in many stores. Typically, the best-selling employees are shown as role models to the team, and the others are encouraged to sell more as well.

In order to maximize performance, typically, the sales team divides their customers into accounts, so each member focuses on different accounts. However, as each member has its own targets, they are in relative competition. This minimizes collaboration, sharing tactics among team members, and creativity.

2- Operational Teams

Operational teams are performing similar tasks every day. For instance, customer support teams. The aim of the support teams is to handle the customer inquiries. The support requests are prioritized based on the customer and severity. Then, support professionals take the cases, and their aim is to resolve the issue as soon as possible.

These teams have targets such as tickets resolved per personnel, average resolution time, customer satisfaction, etc. For instance, transactional leadership can reward personnel solving issues under average resolution time over a certain customer satisfaction rating.

3- Real Estate Brokers

In real estate brokerage, in many cases, brokers earn based on the deals they close. Typically, it is a commission over the deal size. So, this is an example of where transactional leadership can be applied as well.

Note that, there are several cases where the transactional leadership approach is applied by the organizations. We’ve just listed three examples to give you an idea.

Top 5 Benefits of Transactional Leadership

You might have felt negative, however, there are several benefits of transactional leadership as well. We will list the top 5 benefits here.

1- Maintains Status Quo

Transactional leadership is an effective way to maintain the current conditions. In some cases, especially when quick results are expected under tight deadlines, stability is required. Because trying different things requires time and failures are possible. When there is no tolerance for failure, and if quick results are expected, transactional leadership can lead the situation.

2- Supports Repetitive Work

If the nature of the work is repetitive, such as production lines, customer support cases, manufacturing, etc, transactional leadership can achieve better results. Because the more people succeed, the more the organization will earn, and reward the employees respectively.

3- Cost Effective

Transactional leadership is a top-down approach. The leaders set the goals and expectations, and the members follow the rules and standards. The goals are clear, rules and policies are clear, and people know the rewards and penalties policies. Therefore, there will not be a need for intermediary roles to guide people.

4- Transactional Leadership Realizes Short-Team Goals

If there are daily or weekly goals to succeed, a transactional leadership style can help you to achieve this. Set the goals and expectations. Declare the rewards and penalties clearly, and let the team to reach the short-term goals.

5- Fosters Quick Resolution Under Crises and Problems

The ultimate goal of the team is to reach the goals, so they can be rewarded. Great leaders can make right decisions under pressure quickly. Therefore, when the team faces an issue, the team will be collaborative to fix the issue. Otherwise, the rewards of all team members are at stake. This fosters quick resolution times under crises and problems.

Top 5 Flaws of Transactional Leadership

We’ve listed the top 5 disadvantages of transactional leadership below.

1- Hinders Creativity & Innovation

Transactional leadership sets the goals and expectations, rules and standards. The rewards and penalties are clear. So, the team does not look for alternative ways to perform their work. This hinders creativity and innovation.

2- Limits Relationship Building

Under transactional leadership, in many cases, the people in the team have similar targets, and when they are trying to get the rewards, they compete with their teammates. This is a relationship-building blocker among the team.

Consider two sales managers who are working in the same team. Let’s say they both have targets to reach $100,000 in sales every month. Their accounts are different, so they target different customers, however, the organization also gives a reward to the top-selling sales manager. These sales managers will not be willing to share their tactics in selling with each other. This will affect the relationship-building among the team.

3- Transactional Leadership Blocks Personal Initiatives

Transactional leadership sets clear boundaries for the people. Even if they want to take initiative or more responsibility, there is no room for this. This can lead the employees to think that they are not important to the organization. Also, it limits the self-development of the people.

4- Creates High Pressure and Stress

The rule is simple under transactional leadership. Work more, earn more. The nature of trying to accomplish more and more every day can be exhaustive. This can create high pressure and stress among the team. Therefore, it can cause demotivation and reduce the performance of the team over a longer period.

5- High Staff Turnover

The teams under transactional leadership are highly competitive, with high standards and goals with tight deadlines. Trying to accomplish these can cause unhappiness in the workplace. In the end, the organization can face a high staff turnover.

Transactional vs Transformational Leadership

Transactional leadership is often compared with the transformational leadership. Therefore, we created a heading for the comparison of transactional vs transformational leadership as well.

We’ve already explained the transactional leadership above. Transformational leaders show integrity, and they know how to develop a robust and inspiring vision of the future. They motivate people to achieve this vision, they manage its delivery, and they build ever stronger and more successful teams.

We’ve tried to summarize the difference of transactional and transformational leadership in the following table below:

Transactional Leadership Transformational Leadership
Responsive to problems, cases, and situations. Proactive. Tries to anticipate the problems before they occur, and take preventive actions.
Abides strictly on the organizational culture, policies, and rules. Tries to find new innovative and creative ways to maximize performance
Encourages people through rewards and punishment. Encourages people by appealing to higher ideals and moral values
Motivates people by self-interest and individual goals. Motivates people in the best interest of the overall group.

Famous Transactional Leaders

While there are several famous transactional leaders, we’ve googled the famous transactional leaders.

Transactional Leadership - Famous Transactional Leaders

We will go through two of these famous leaders, Bill Gates and Howard Schultz.

1- Bill Gates as a Transactional Leader

I think everyone knows who Bill Gates is. Co-founder of Microsoft, billionaire, computer tycoon, and a predictor of future technology. Gates managed Microsoft’s product strategy from 1975 until 2006.

What makes Bill Gates a transactional leader is, that he is not adaptive to communication and employee engagement. He is referred to as one of the famous autocratic leaders as well. To keep track of his team, Gates visits them and asks challenging questions. He keeps asking until he is satisfied. Some even refer to him to be dismissive of others’ ideas.

Bill Gates has demonstrated the importance of clarity of thought and execution for nearly 30 years now. You can read more about other traits of Bill Gates leadership style.

2. Howard Schultz as a Transactional Leader

Do you know Starbucks? I will be surprised if you say “No”. Starbucks is a multinational chain. It is the world’s largest coffeehouse chain headquartered in Seattle, Washington. The success of Starbucks mostly relies on Howard Shultz’s leadership.

Schultz favors and is a strong believer in power, loyalty, staff training, consistency, employee motivation, and fringe benefits. This makes him a strong transactional leader.

Howard Schultz is an American businessman. He served as the chairman and CEO of Starbucks Coffee Company from 1986 to 2000 and then from 2008 to 2017. He managed to turn a small local coffee chain into one of the most recognizable brands in the world under his leadership. You can read more about Howard Schultz leadership style.

Summary

The transactional leadership style is all about motivating people with rewards and punishment. This management theory supports that people do things only in exchange for material benefits. There are seven characteristics of this leadership style such as rewards and penalties, realizing short-term goals, resistance to change, favoring hierarchy, and micromanagement. Three examples where transactional leadership can be applied are sales teams, operational teams, and real estate brokerage teams.

The top benefits of transactional leadership are maintaining the status quo, supporting repetitive work, being cost-effective, realizing short-term goals, and fostering quick resolution under crises and problems. The top flaws of this leadership style are hindering creativity and innovation, limiting relationship building, blocking personal initiatives, creating high pressure and stress, and high staff turnover.

Bill Gates and Howard Shultz are two famous transactional leaders. Gates turned Microsoft into a multinational tech giant and Schultz turned a small coffee store into the biggest global coffee chain store under their leadership.

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