Pros and Cons of Transactional Leadership

Is transactional leadership right for your business? This article explores its key characteristics and explains the pros and cons of this leadership style to help you make a decision.

In the olden days of running a business, we used to talk about management styles. We’ve now moved on to talking about leadership, which is less about ensuring that employees carry out specific day-to-day activities and more about motivating and inspiring your workforce to believe in your company and do their best work.

Transformational leadership is one of the most cited styles of leadership and is crucial in enabling effective change management. It focuses on developing team members and motivating them to reach extraordinary success.

Yet some so-called leadership styles have more in common with the management styles of old than they do with leadership. Transactional leadership is one of these styles. Find out whether it’s an approach that would suit your business below.

Overview: What is transactional leadership?

Transactional leadership is a rewards-and-punishment-based system that is designed to motivate employees to achieve results. It’s a strict system that follows a rigid, pre-defined process: If you achieve what is asked of you, then you are rewarded. If you don’t, then you are punished.

The 3 characteristics of transactional leaders

There are different ways to implement transactional leadership, all of which have different characteristics, ways of operating, and supervising styles. Here are the three subsets of transactional leadership.

Contingent reward

Transactional contingent reward leadership uses rewards and recognition as a way to motivate employees. Under this system, leaders constantly monitor employee performance and reward them when they meet their goals. This contrasts with a traditional performance review when companies often wait until a set date or period to review goal progress.

Active management by exception

Under the active management by exception style of leadership, managers monitor employee performance to try to spot areas where there are errors, where they are performing tasks incorrectly, or where they are failing to meet performance standards.

Active management by exception leaders take corrective action as soon as they spot a problem. This style of management doesn’t focus on areas where an employee is performing well or where everything is going smoothly.

Passive management by exception

Passive management by exception is a laissez-faire management style where leaders constantly monitor employee performance but avoid taking action to correct problems and mistakes until they have no other option.

The problem with this style of passive leadership is that mistakes are more difficult to correct and take more time and effort to rectify when you wait so long to do anything even after you have spotted an issue.

Advantages of transactional leadership

If you implement transactional leadership in the right way, your business will experience many benefits, which we’ll detail below.

1. Creates a sense of fairness

In any group setting, there are often accusations of favoritism. Certain employees feel like they are being treated unfairly, or their coworkers are being rewarded just because the manager likes them better.

With transactional leadership, feedback is fair and based on metrics, rather than a manager’s opinions or feelings. Under this approach, all employees are measured and rewarded in the same way. Managers can use this data to decide who to promote and who to give projects to.

You can use HR software to automate the process and make it easier to manage.

2. Easy-to-understand system

A rewards-and-punishment system is easy to understand and isn’t open for interpretation. Employees know what they have to achieve and by when if they want to receive a reward, and they know what the consequences are if they don’t achieve these goals.

This system of strict structure and order suits some employees, as they don’t have to worry about any other projects and can focus on the tasks they have to achieve to receive rewards.

3. Employees can see their impact on the business

If employees are working toward certain goals that are tied to business growth, then they can easily understand the impact they are having on the business. They know that if they meet or exceed their goal, it will help their company run more efficient operations, create a new product line, or boost revenue.

Disadvantages of transactional leadership

Rewards don’t work for everyone, and this kind of system can stifle creativity. Here are more details about why transactional leadership might not be right for your company.

1. Lack of focus on building relationships

Transactional managers focus on using rewards to motivate employees and boost satisfaction. They don’t focus on working conditions, such as an employee’s relationship with their manager, which can be critical drivers of engagement and satisfaction.

The manager-employee relationship is crucial to staff retention; it's been reported that 57% of employees have left a job because of their manager. If your leaders are only focused on making sure employees meet their goals and don’t take into account creating a satisfactory work environment, then you may lose good employees to other companies.

2. Difficult to find rewards that motivate all employees

We’re not all motivated by the same factors. Some of us see more money as a reward, others appreciate time off, and others want perks such as premium health insurance or a flexible working structure.

Some people are not motivated by rewards; they are motivated by doing a good job, helping their customers, or making a difference in the world. As a result, a reward system may not work as an incentive for these employees.

Additionally, our motivations aren’t fixed. For example, if you develop a health issue, your motivation might switch from more money to better health insurance or more vacation days. Companies can’t always find a reward that will suit everyone for the entire time they work at your company.

3. Discourages creativity

If a business is to innovate and thrive, then employees and leaders need to be able to make mistakes and fail without worrying about the consequences. Transactional leaders punish their staff for not meeting their goals and do not leave any room for failure or creativity.

In this environment, employees are not encouraged to come up with new ideas. Instead, leaders insist they stick to the strict system and pursue the goals they have been tasked with at the cost of any other ideas.

For example, Google allows its employees to spend 20% of their time working on side projects. This approach has been shown to boost creativity and encourage innovation, but this kind of approach is not permitted when a company employs a transactional leadership approach.

4. No long-term vision

Transactional leadership focuses on short-term goals and planning and fails to look at the big picture or plan for the future. While constantly achieving goals can be beneficial in the short term, with quick wins and immediate outcomes comes a failure to recognize that businesses need five-year plans.

Any business needs to know where it is going and take steps to get there. While these steps won’t necessarily lead to immediate results, they will provide the foundation for future growth.

5. Poor leadership development

If you want to implement business succession planning, then you need to develop both employees and managers so they can step up to the plate when a position becomes vacant. If a manager’s sole focus is monitoring staff performance, while employees are only tasked with meeting specific goals, then you will not have provided sufficient learning and development opportunities for either one.

Flexibility is key

There are many different styles of leadership. It’s important to choose one that fits the goals of your organizational culture and will benefit your business.

You don’t have to stick with one leadership style for your entire business. Certain styles might suit specific business functions and teams. For example, your sales team might be motivated by monetary rewards and appreciate a transactional leadership style, while your marketing department prefers another style.

It’s important to listen to your employees and be flexible. Instead of choosing one style and running with it, try different approaches and see how your staff responds.