If you grew up playing sports (or at least watching popular sports movies), you might have been exposed to the stereotypical coach. When players are misbehaving or not practicing hard enough, they’re reprimanded with burpees or running laps. If players aren’t scoring enough, they’re kept on the bench—but if they play well, they’re motivated with more time on the field.

The traditional coaching style depicted above, with clear rewards and penalties and an emphasis on short-term gains, falls under the category of transactional leadership. This approach is rooted in a give-and-take between leaders and followers and can be seen not just in sports but in all sorts of contexts, from military operations to manufacturing production lines and even emergency response situations. Despite this wide variety, there are some key characteristics that are seen across most transactional leadership environments:^1,2

• There are clearly defined rewards for individuals who are self-motivated and follow instructions, along with clearly defined penalties for those who don’t 
• There is an emphasis on productivity and rapid achievement to reach short-term and surface-level goals, with a focus on meeting certain metrics rather than self-improvement
• There is a streamlined structure and hierarchy, where the leader holds ultimate authority over subordinates
• There is an emphasis on transparency and fairness, where leaders ensure that all employees understand their roles and expectations 
• Decisions tend to be reactive, with a focus on troubleshooting immediate problems instead of planning for or taking risks in pursuit of long-term growth
• Since the leaders’ focus is on practicality and productivity, there is a lack of emphasis on personal connection

Although coaching tactics focused on short-term performance may work well in the movies for churning out a series of stellar buzzer-beater or half-court shots, overly punitive coaching strategies often fall short in real life. In contrast, the most successful coaches (or at least the ones remembered most favorably) focus on a different type of goal: developing the athlete as a whole, leveraging a player’s intrinsic motivation, and focusing less on the specifics of points-scored or times run, and more on their overall efforts, ethic, and improvement. A good coach will know each player’s personal strengths and weaknesses and watch them closely to mold them into a better, higher-scoring athlete, all in pursuit of more game-time wins. 

This style of management is called transformational leadership, where teams are incentivized by their genuine passion for the work, their organization, and a belief that their contributions are important. Fortunately, most organization leaders today recognize the value of transformational leadership, which allows for more flexibility, creativity, and trust in one’s team.³

Incentives: Rewards, such as monetary bonuses or public recognition, used in transactional leadership to motivate employees to meet or surpass performance standards.

Punitive Measures: Disciplinary actions, such as warnings or demotions, which are implemented in response to employee underperformance or failure to comply with organizational rules within a transactional leadership framework.²

Contingent Reward: A system in transactional leadership where rewards, like bonuses or praise, are provided when employees meet or exceed established performance standards or complete specific tasks successfully.¹

Hierarchical Structure: Also known as the chain of command, this is the clearly defined order in transactional leadership that emphasizes structured authority, allowing leaders to maintain control and ensure that employees follow established guidelines.

Active Management: A type of management strategy central to transactional leadership, as it involves controlling and monitoring activities and tasks and the performance and outcome at the end.¹

Performance Monitoring: The process of continually assessing employee output and productivity in transactional leadership to ensure that organizational goals are met and issues that may impede success are addressed.³

Goal Orientation: The emphasis on achieving specific, measurable objectives within an organization. In transactional leadership, leaders and employees are aligned toward clear, short-term goals.³

Clear Expectations: The explicit communication of job roles, responsibilities, and performance standards in transactional leadership, ensuring that employees understand what is required to achieve rewards and avoid penalties.

Accountability: A core principle in transactional leadership, where employees are held responsible for their actions and performance, reinforcing a culture of reliability and productivity.

Role Clarity: Ensuring that employees have a precise understanding of their job duties and the expectations within the transactional leadership framework to maintain productivity and compliance.
Compliance: Adherence to rules, procedures, and performance standards that are set by the leader, which is crucial in transactional leadership for maintaining order and achieving consistent results.

Surely, as long as there have been leaders, there have been what we now recognize as transactional leaders who emphasize a give-and-take approach. However, the academic study of leadership has its roots in 1947, when German sociologist Max Weber began exploring different leadership styles and their impacts on leader and follower relationships and performance. In particular, Weber defined three main types of leadership: charismatic, traditional, and bureaucratic leadership. Charismatic leadership authority is rooted in the enthusiasm of the leader, leading with the traits valued by their followers. Traditional authority gains power from the traditions of culture and society. Lastly, bureaucratic leadership—which is most similar to what we now call transactional leadership—flows mainly from the power of laws and political or legal structure. This approach was based on the idea that subordinates needed certain motivations based on structure and a more structured management style to produce results.4 Weber was one of the first theorists to note that leadership itself was situational in nature, meaning that different leadership styles and their levels of success may vary based on the context, time, and characteristics of those being led. 

As time went on, theories of leadership evolved to explain the role of reward and punishment in motivation. In 1978, the political scientist James McGregor Burns published an aptly named book, Leadership, in which he coined the term ‘transactional leadership’ and outlined its contingent rewards dynamic. He defined leadership in general as the power-imbalanced social contract between leaders and subordinates, each of whom has specific goals for the relationship—whether they be shared or unrelated. He was the first to differentiate between transactional and transformational leadership. For Burns, transactional leadership was akin to bargaining, where leaders and followers both act solely based on their own individual interests. In transformational leadership, however, leaders and followers become united in the pursuit of collective goals, working together to achieve outcomes that benefit everyone involved. He was heavily involved in forming a general theory of leadership, now known as the Kellogg Leadership Studies Project, which connects leaders from around the world and educates them on how to achieve these authentic connections. Although Burns acknowledged that there is a time and place for the use of transactional leadership, he asserted that leaders who solely relied on this model needed to employ the approach from a foundation of transparency, morality, and honesty.⁵

A few years later, in 1981, researchers Bernard Bass and Bruce Avolio furthered Burns’ original theory by explaining the psychological aspects of leader and follower instincts and the power of authentic interactions between people. Bass and Avolio were pivotal in defining many of the core tenets of transactional leadership, outlining the role of rewards and punishments in the context of the workplace, unpacking this style’s focus on planning, execution, and compliance, and demonstrating the prioritization of shorter-term needs. The researchers investigated how different leadership styles play out across different types of businesses and organizational cultures.⁶

In the following decade, researchers Bruce Avolio and Jane Howell clarified the concept of transactional leadership and emphasized the idea of rewards and penalties, where employees who met or exceeded productivity expectations could be praised, receive extra benefits, or get promoted, and those fell short of expectations received worse hours or public shaming.⁷ Avolio and Howell’s findings focused mainly on the value of transformational leadership, demonstrating a causal relationship between this approach and performance increases in businesses. They also developed the concept of the three primary dimensions of transactional leadership, which include contingent rewards, active management, and passive management by exception, where managers could adjust workflow based on potential problems and take a slightly more hands-off approach so long as employees were able to work functionally without intensive oversight.

Max Weber

German sociologist first known source for popularizing the concept of bureaucratic leadership in 1947. In his original theory, Weber assumed that subordinates were not self-motivated and thus needed strict oversight to be productive, which aligns with the firm supervision style of transactional leaders.⁴

James McGregor Burns 

As an American historian and political scientist of the mid-1900s who published the influential book Leadership, which helped formalize the academic study of leadership and first introduced the dichotomy of transactional versus transformational leadership. He was particularly interested in creating a general theory of leadership, which led to the Kellogg Leadership Studies Project (KLSP), a 4-year initiative spanning from 1994 to 1998.⁵

Bernard Bass

American scholar renowned in the fields of both leadership studies and organizational behavior at Binghamton University. In his work as an editor and author, Bass was founding editor-in-chief of Leadership Quarterly and author of the Bass Handbook of Leadership. His research focused largely on transformational leadership and its role in basic management processes of controlling, organizing, and short-term planning. His work has inspired numerous leadership legacy programs.⁶

Bruce Avolio

As another American academic in the field of leadership studies, Avolio is a professor of management at the University of Washington. He worked alongside Bernard Bass and Jane Howell analyzing how transactional leadership often relies on a system of rewards and punishments to motivate employees. His current research examines how to accelerate positive forms of leadership and emphasizes the importance of charismatic and authentic interactions between employees and employers.⁷

Jane Howell

Business professor and researcher Jane Howell, along with Bernard Bass and Bruce Avolio, defined the dimensions of transactional leadership in the 1980s and 1990s. Her work contributed to our current definitions of different leadership styles and gave an objective look at the impact of a transactional approach.⁷

Even with all of its shortcomings, transactional leadership can be beneficial in certain contexts. Let’s unpack the positives that can come from its rigidity. 

Practicality 

Let’s face it: when rewards and reprimands are explicit, enforcing expectations becomes much easier. Theoretically, having objective, quantifiable expectations in place—along with corresponding incentives or punitive measures—can decrease the influence of bias in leadership dynamics, as everyone is measured and treated with the same guidelines. 

However, it’s important to note that this ideal doesn’t always hold up when put into practice, as expectations are often inherently biased, and employees from marginalized groups tend to be penalized at higher rates for the same actions as their white male colleagues.⁹ But in an ideal world, employees who can follow instructions and meet their targets are celebrated accordingly, which can improve output and morale. Meanwhile, those who aren’t meeting their goals can be reprimanded or even let go and replaced with more productive team members, potentially improving company efficiency overall. In short, for those of us who thrive in black-and-white environments, clear-cut expectations can be soothing.

Systemization

Not every organization thrives on repetition—but some situations indeed necessitate a systematic output. Since transactional leadership excels at streamlining and automating processes, companies are better able to churn out high volumes and meet production demands. For instance, in the manufacturing world, many factories focus on grinding out thousands or even millions of the same product, day in and day out. Perfect repetition and consistency are not only encouraged but required to ensure the safety and efficacy of the items being produced.²

Crisis Management 

The consistency and rigidity of transactional leadership create the ideal environment for getting a company back on track in times of crisis. This style’s clear-cut rules can provide stability in volatile times where distinctive hierarchies can accelerate decision-making capabilities, helping get companies out of trouble more efficiently. The obvious chain of command in transactional leadership can not only clarify role expectations but also help hold everyone accountable; if every task is clearly defined and allocated, those who are responsible for procedural mistakes can be held responsible. The role and procedural clarity under transactional leadership also mean that employees have clear guidelines in place for how to get back on track when things go awry.²

There are, of course, some obvious pitfalls of a transactional leadership style. Recent research has highlighted the drawbacks of transactional relationships in a variety of contexts. The best way to understand these downsides may be to contrast them with transformational leadership—which is increasingly praised by researchers in the field of leadership studies. 

Stifled Innovation 

As we discussed above, one of the core tenets of transactional leadership is consistency. Maintaining strict procedures and specific goals with tight deadlines can be helpful for short-term results—but this rigidity can stifle creativity by limiting the flexibility required for true innovation. Without room for exploration of ideas, employees are unlikely to have the inclination, let alone bandwidth, to experiment. Companies with inflexible rules and processes make originality difficult, and many employees are unlikely to risk penalization, especially if rewards hinge on getting work done faster and their managers don’t have a history of praising inventiveness.³ Imagine if, for example, IBM had stayed focused on creating cheaper and more durable keyboards instead of breaking boundaries; in this case, the company may have never come up with the now-universal touchscreen phone model.

To fuel these types of breakthroughs, transformational leadership fosters a safe and encouraging environment for employees to express unconventional ideas. By focusing on inspiration rather than transactional exchanges, transformational leaders set performance standards and instill confidence in employees to enhance creativity.⁶ This approach leverages intrinsic motivation, which is more effective for sparking creativity than extrinsic motivators, particularly when external rewards feel controlling or undermining.⁹ Employees who are intrinsically motivated and genuinely passionate about their work are more likely to generate innovative insights.⁷

As an example, consider how many outdoor brands claim to care about the environment—but, in reality, have disappointingly dismal contributions to protection efforts. In contrast, there are a handful of brands, one of which being Patagonia, that focus on hiring individuals with a genuine passion for the outdoors and fostering a culture of environmental stewardship. As a result, the team at Patagonia has pioneered numerous groundbreaking initiatives, such as their 2016 Black Friday campaign, which directed 100% of profits to charity while attracting hundreds of thousands of first-time customers, and their enduring product lifetime guarantee. While these approaches might seem counterintuitive to those fixated on short-term profit growth, Patagonia’s commitment to its products and mission has propelled the brand to global acclaim through these visionary, long-term strategies.⁸

Personal Initiative Isn’t Encouraged

Creativity is valuable in the workplace not just for the potentially lucrative process or product improvements it can bring, but also because it keeps employees motivated and engaged. If an employee takes it upon themselves to find a better way to achieve company goals, transactional leadership structures don’t support embracing their input. Since transactional leadership discourages changing the rules or deviating from the mandated plan, employees have little incentive to find ways to improve existing processes. This might come up in a meeting where a more junior employee holds back from sharing an idea about how to streamline online product sales because they’re scared of speaking up. Perhaps they think their ideas will be criticized or will be reminded that there’s already a system in place that should be followed, as that’s the way things have always been done.

This kind of focus on output and discouragement of employee input can be incredibly harmful to employee morale. Just as Marxist theory suggests, when workers feel like just another replaceable cog in the machine, intellectually separate from the work they’re doing, they’re less innovative, less satisfied, and less attached to the company. Unfortunately for employers, this kind of low employee morale, sparked by transactional leadership’s lack of personal connection and focus on quantifiable output, can mean both less innovation and higher turnover.^2,6,7

Manufacturing 

In a recent study on transactional leadership’s impact on organizational commitment, researchers analyzed the relationship between contingent rewards (such as bonuses or praise given when employees meet performance standards, a common tactic used in transactional leadership) and employees’ willing commitment to the organization.¹⁰ In the manufacturing sector, the researchers compared a group in the factory who received contingent rewards, and those in a control group without any intervention, and found a positive correlation between the contingent rewards and the employees’ commitment. This suggests that in manufacturing, clearly defined expectations, guidelines, and rewards for fulfilling workplace obligations can foster a sense of commitment among employees.

Despite transactional leadership’s relative success in the manufacturing industry, the researchers also found that employees’ commitment was mediated by the level of connection employees felt with their organization and managers. The research team suggested that this could be linked to the predominantly male factory workforce’s potential desire for stronger workplace connections, as men are statistically more likely to experience unmet social needs outside of work, making strong workplace bonds a valuable boost to their morale.¹⁰ Thus, the nature of manufacturing work and transactional environments, which are focused on products rather than people, might still require leadership that can foster a sense of connection and belonging within the organization.

Healthcare Sector

The same research team studied the impact of transactional leadership in healthcare. Similar to the manufacturing study’s setup, the researchers compared a control group of healthcare workers to a group subjected to transactional leadership management styles and found a positive and significant relationship between transactional leadership behavior and commitment in healthcare organizations.¹¹ This suggests that despite its shortcomings, transactional leadership—particularly the aspect of providing clear expectations, guidelines, and contingent rewards—can effectively foster employee commitment in a variety of sectors.

This study revealed a unique emphasis on the need for a sense of competence in the healthcare sector, perhaps because employees likely derive accomplishment from successfully delivering care and receiving appreciation from patients. It’s important for healthcare workers to feel confident that they’re performing their tasks accurately—and transactional leadership can provide clear benchmarks for healthcare workers to find that assurance. In opposition to the manufacturing realm, which in the study was primarily male (92%), the sample of healthcare staff the study looked at was primarily female (88%). The authors hypothesized that female employees might already have strong relational networks outside of work, reducing the need for a feeling of relatedness within the organization. This is just one way in which transactional leadership’s characteristics may play out differently, depending on the context and the people involved. 

Management in the WFH World with Jean-Nicolas Reyt 

In this episode of The Decision Corner podcast, we delve into the impact of our transition away from the world of factory work and production lines. Since the modern workplace often necessitates flexibility, creativity, and intrinsically motivated employees, the value of transactional leadership styles may be diminishing. Listen here to our featured guest and management professor Jean-Nicolas Reyt discuss management in the modern world of remote work. 

Yes, You Are a Cog in the Machine – But, That's a Good Thing 

Although transactional leadership can leave us feeling easily replaceable, this doesn’t necessarily have to be the case. There are several strategies for companies to still emphasize the positives of each employee’s role within this model. Read here from our senior venture associate Monty Tengco to learn more about the psychological impact of recognizing value in all of our roles. 

1. St. Thomas University Online. (2014, November 25). What is transactional leadership? How structure leads to results. St. Thomas University. https://online.stu.edu/degrees/education/what-is-transactional-leadership/ 
2. Kuhnert, K. W., & Lewis, P. (1987). Transactional and transformational leadership: A constructive/developmental analysis. The Academy of Management Review, 12(4), 648–657. https://doi.org/10.2307/258070 
3. Shafi, M., Zoya, Lei, Z., Song, X., & Sarker, M. N. I. (2020). The effects of transformational leadership on employee creativity: Moderating role of intrinsic motivation. Asia Pacific Management Review, 25(3), 166-176. https://doi.org/10.1016/j.apmrv.2019.12.002 
4. Milosevic, I., & Bass, A. E. (2014). Revisiting Weber's charismatic leadership: Learning from the past and looking to the future. Marketing and Management Faculty Publications, 21. https://digitalcommons.unomaha.edu/mrktngmngmntfacpub/21 
5. Burns, J. M. (2003). Transforming leadership: A new pursuit of happiness. Atlantic Monthly Press.
6. Bass, B. M. (1990). From transactional to transformational leadership: Learning to share the vision. Organizational Dynamics, 18(3), 19-31. https://doi.org/10.1016/0090-2616(90)90061-S
7. Howell, J. M., & Avolio, B. J. (1993). Transformational leadership, transactional leadership, locus of control, and support for innovation: Key predictors of consolidated-business-unit performance. Journal of Applied Psychology, 78(6), 891–902. https://doi.org/10.1037/0021-9010.78.6.891 
8. Valor CSR. (2017, July 31). Patagonia’s Black Friday promotion: 100% for the planet. Valor CSR. https://www.valorcsr.com/blog/2017/7/31/patagonias-black-friday-promotion-100-for-the-planet
9. Amabile, T. M. (1998, September-October). How to kill creativity. Harvard Business Review, 76(5), 76-87. 
10. Afshari, L., & Gibson, P. (2016). How to increase organizational commitment through transactional leadership. Leadership & Organization Development Journal, 37(5), 554–570. https://doi.org/10.1108/LODJ-09-2014-0184 
11. Parajuli, A. (2019, June 18). The punishment gap: How workplace mistakes hurt women and minorities most. World Economic Forum. https://www.weforum.org/stories/2019/06/the-punishment-gap-how-workplace-mistakes-hurt-women-and-minorities-most/#:~:text=Research%20points%20to%20a%20disturbing,is%20both%20pernicious%20and%20pervasive