Transactional Leadership: Weighing the Pros and Cons

Have you ever received a bonus for achieving a specific target or meeting a milestone? Then you already understand what the concept of transactional leadership is about. It focuses on rewarding people for achieving set goals. There are pros and cons to the transactional leadership model. It can be practical and effective, but it can limit employee development and independent thinking. The most successful leaders know when to use the transactional style and when to shift to other approaches.

What is transactional leadership?

In transactional leadership, giving someone something they value reinforces desired behavior. That might be a bonus, paid time off or a sales incentive trip. Targets are clear, and rewards are immediate. Transactional management can be used to actively monitor manufacturing quotas, sales targets and project timelines. The transactional leadership style also works well when employees already know what they’re doing and don’t have to be nudged along. It’s an effective approach for maintaining the status quo and ensuring employees follow established rules and regulations.

Transactional leadership is particularly useful when leaders establish new targets quickly and need to actively monitor their progress. We see this all the time in business. Customer requirements change. Supply chain issues come up. Market opportunities arise. Competitors try to outflank each other. When the new targets are realistic, well communicated and rewarded appropriately, people can adjust seamlessly.

• Realistic targets – Leaders must establish targets that motivate achievement without burning people out. Heavy workloads and unrealistic job expectations cause a lot of stress, according to the American Psychological Association 2021 Work and Well-being Survey. What happens when people are stressed out? They leave. With 71% of people stressed out during the workday, those using a transactional leadership style should take note.
• Well communicated – People can’t hit targets they aren’t aware of or don’t understand. Ask questions to ensure everyone’s on the same page. Communicate early and often. Let people know how their role contributes to the success of the company. As a side note, people also can’t hit targets if they don’t have the tools to do so. Being a good listener is just as important as being a good talker.
• Rewarded appropriately – It’s vital to ensure the contingent rewards you offer are valued by your employees. A third of people want more money, according to the APA survey. That’s the number one perk. More flexibility, time off and benefits are next. And timing matters. Immediate rewards increase motivatio for tasks that aren’t satisfying in and of themselves.

Of course, the flip side of reward is punishment. Leaders who use transactional techniques must take care not to alienate employees by relying too much on penalties. Is it necessary? Yes. Can it be overused? Yes. People using the transactional style of leadership should balance rewards and punishment between:

• Rewards based on achieving established targets
• Corrective action taken to prevent mistakes
• Corrective action taken when performance goals aren’t met

Transactional vs. transformational leadership

German sociologist Max Weber and American historian James MacGregor Burns recognized that while leaders may adopt either a transactional or transformational approach, successful leaders use both styles. Transactional leadership is an active management approach that relies on well-defined target and reward systems. Transformational leadership is a charismatic but passive management approach that centers on inspiring employees to think independently, innovate and grow professionally. The most effective leaders are well-versed in both and use them in different scenarios.

For instance, an operations manager might use transactional leadership to run the production line and transformational leadership to streamline processes. An IT director may use a transactional approach to meet project milestones and a transformational one to boost innovation. A customer service lead may flip back and forth to hit customer satisfaction targets while exploring ways to improve the customer experience.

Here are the “four i’s” of transformational leadership outlined in the Bass Transformational Leadership Theory:

• Idealized influence – “Walk the talk” by modeling the behavior leaders want to see in others.
• Inspirational motivation – Give people purpose and inspire them to treat the company’s aspirations as their own.
• Intellectual stimulation – Encourage independent thinking by helping people learn, grow and try new things.
• Individual consideration – Recognize the unique contribution each person brings to the table.

Professional coaching hones leadership skills

Transformational and transactional leadership theory are complimentary. Transactional leadership is often the style people employ first when they move into leadership roles. It’s more attuned to managing the business rather than leading it. But as we noted earlier, the most effective leaders are those who know how and when to use both.

Coaching for transactional leadership can help leaders discover what motivates their employees so they can create a meaningful system of rewards. It can teach them more about tying short-term goals to long-term strategies. It can help them pinpoint the right time to shift to a more transformational approach. And it can help them identify people ready to move into leadership roles.

Coaching for transformational leadership styles is more nuanced because the outcomes aren’t as easily measured. That doesn’t make them any less essential. Transformational leadership skills enable companies to unlock people’s potential. It opens the door to innovation. It helps them implement change. Expert coaches can help leaders learn the concept of transformational leadership to:

• Be influential role models who embody the behaviors the company desires and, in doing so, build trust.
• Articulate a vision that makes work meaningful and inspires employees to perform at their highest level.
• Provide individualized support that nurtures a sense of respect and well-being.
• Foster group goals by helping people understand where they fit and how vital they are to the company’s success. 
• Provide intellectual stimulation that encourages independent thinking and helps people grow.
• Build high-performance expectations that are encouraging, not discouraging.

There is a difference between a transactional leader and transactional leadership. The same goes for transformational leaders vs. transformational leadership. Labeling someone a particular type of leader assumes they have no other skills to lean on. That may be the case, but both are teachable. And both are desirable, depending on the circumstance.

At CoachHub, we help people grow personally and become inspirational leaders. We offer a personalized, measurable and scalable digital coaching program that encourages several approaches to leadership. It allows leaders to become more aware of their strengths and work on their weaknesses. It gives them the ability to improve the way they relate to people. Professional coaching can turn doers into leaders, and leaders into trusted mentors and visionaries.