What Is Transactional Leadership? Definition and Advantages

By Indeed Editorial Team

Updated May 18, 2022 | Published October 7, 2019

Updated May 18, 2022

Published October 7, 2019

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While there are dozens of leadership styles, transactional leadership is a managerial model that rewards self-motivation and reprimands underperformance. In this article, we discuss what transactional leadership is, as well as its advantages and disadvantages so you can decide if it’s the right style for you.

What is transactional leadership?

Transactional leadership is a managerial style that relies on attaining goals through structure, supervision and a system of rewards and punishments. This results-oriented approach works well with self-motivated employees.

Transactional leadership doesn’t focus on changing or improving the organization as a whole, but instead, aims to hit short-term goals while establishing unity and conformity with the company. The rewards or punishments are, therefore, referred to as the “transaction.”

By understanding transactional leadership, you can create a goal-based system if you’re a manager, or choose whether or not you want to be a part of a company based on transactional leadership if you’re a new employee.

Related: 6 Leadership Theories for Career Growth

Who uses transactional leadership?

Transactional leadership is typically used by middle and upper management in a medium- or large-sized company. In most instances, the company is well-established and not searching for change within the organization. The organization also has fixed methods and operations that require little leeway or creativity to get the job done.

In particular, companies in sales usually share a single cohesive goal that’s met when people perform at their highest levels. The recognition of performance by meeting quotas is common in businesses with transactional leadership. For example, a company with a large sales team might use commissions as a type of transactional leadership method.

In creative fields such as advertising or marketing, transactional leadership doesn’t always work. Creative professionals need the flexibility to come up with ideas, slogans or pitches for their products. Transactional leadership follows a strict rubric, so it’s often at odds with creatives and may reduce morale rather than motivate individuals.

Characteristics of transactional leadership

Since transactional leadership relies on a structured approach to achieving goals, it has its own set of specific characteristics. Here are some of the common characteristics of transactional leadership:

1. Hierarchical

Corporate structure and culture are high on the list of importance in transactional leadership. Everything goes through a proper channel and process. For example, if you have an idea to boost sales, you may be required to tell your manager who then reports it to upper management. Bypassing this process is often seen as insubordination.

2. Micromanaging

In transactional leadership, the day-to-day operations of the business are rigid. All decisions are final from the transactional manager, but the responsibility of goal achievement also lies squarely on their shoulders. As a result, transactional leaders tend to micromanage employees to make sure everything runs like clockwork.

3. Passive

Transactional leadership doesn’t aim to change any of the processes of the company. They want everything to stay exactly as it is within the business, which may seem passive or laissez-faire.

4. Practical

Practicality and pragmatism are two of the staples of transactional leadership. They’ll make level-headed decisions based on constraints and available information. This rarely leads to thinking outside the box.

5. Motivation by self-interest

Both the employee and the transactional leader have something to gain by hitting their quotas or achieving personal goals. Therefore, teamwork is often underappreciated or nonexistent. Instead, transactional leadership aims to find the best employees to hit their goals and rise into upper management.

6. Reactionary

Due to the importance of the status quo within the business, transactional leaders are rarely proactive. Instead, they are reactionaries, only making changes within the department or organization when their hand is forced.

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Advantages of transactional leadership

Although the firm structure of transactional leadership may seem unappealing to some, it has some advantages over other types of managerial styles. Here are some of the top advantages of transactional leadership in the workplace.

1. Goal achievement

Transactional leadership facilitates the achievement of goals. Most often, companies with transactional leadership have short-term goals in mind, so the results of this type of leadership can be seen right away.

2. Motivation

Achieving short-term goals can boost motivation quickly. And a rewards system instantly encourages employees to meet quotas and deadlines and work at their full potential.

3. Clearly defined structure and roles

In an organization with transactional leadership, every facet of a department is clearly defined from top to bottom. As an employee, you know your specific role and what’s expected of you at all times. This removes the ambiguity of similar positions within the company, while also eliminating the duplication or overlap of work between coworkers.

4. Effectiveness

This type of leadership is highly effective in well-established businesses or young organizations because it favors universal processes and structure. In addition, this direct approach can identify problem areas in existing processes or employees who may not be the right fit to achieve the company’s short-term goals.

5. A measuring stick for success

In some companies, success is not easily defined. Transactional leadership sets out simple, clear goals and guidelines. To this effect, either employees hit the goals laid out for them or they don’t. This measuring stick for success can help the company fine-tune its processes or increase the rewards and punishments for employees.

Disadvantages of transactional leadership

Like any management system, transactional leadership comes with its share of disadvantages. While these disadvantages may not appear in all businesses that employ transactional leadership, they’re important for both employees and managers to recognize.

1. Focus on short-term goals

Short-term goals are always good to have in any business, but they should be balanced with long-term goals. Without long-term goals or tools like objectives and key results, a company can struggle when met with adversity. Emphasis solely on short-term goals can also result in a lack of preparation or vision for the future, particularly in changes in market demand or consumer preferences.

2. Limited innovation and creativity

The rigid structure of transactional leadership gives employees a specific role. As an employee, you’re expected to complete the required work and little else. Rarely, will a manager ask for your opinion or input on how to improve the procedures and processes of the business. As a result, businesses that practice transactional leadership are often lacking in innovation and creativity.

3. Low morale

While certain employees thrive in a transactional leadership model, others are impacted negatively. Employees may suffer from low morale and/or only perform enough to avoid being fired. This ineffectiveness can manifest itself in the growth of the company, as it may only meet, but not exceed, its expectations.

4. Costly mistakes

Transactional leadership has a passive style of leadership, so transactional leaders seldom provide feedback to employees unless they fail to meet their expectations or quotas. Unfortunately, an employee may have been doing their job incorrectly for weeks, months or quarters without proper oversight. Correcting these mistakes can often prove costly for the organization.

5. Lack of motivation

Not every employee is motivated by rewards. In some managerial or leadership styles, these people may find more satisfaction by reaching a common goal with teamwork or learning a new skill. If you’re an employee that puts a premium on emotional and social factors and values, transactional leadership doesn’t often motivate you.

6. Turmoil among subordinates

Transactional leadership can often turn subordinates against each other. Instead of working as a team, individuals may steal leads or sales from other employees to meet their quotas, creating turmoil throughout the office.

7. Over-reliance on the leader

Even if the transactional leader is knowledgeable and experienced in the industry, an over-reliance on them can cause problems. At some point, some of these managers may begin to listen only to their own voice, simply because they don’t have to answer to any of their subordinates. This can lead to a lack of motivation in the manager themselves or a condescending attitude toward employees.

Transactional leadership vs. transformational leadership

Unlike transactional leadership, transformational leadership aims to change the status quo or motivate employees to take the company to the next level of profitability and success.

Transformational leadership primarily focuses on motivation and collaboration through teamwork at every level of the company, including the organizational hierarchy. This enables you to generate creative or innovative ideas that can boost the image or profitability of the company. This style of leadership encourages personal, emotional and professional growth in addition to monetary rewards.

Small businesses often benefit from transformational leadership as they work out the issues associated with growth and brand-building. Upper management may also find transformational leadership useful to achieve an overarching vision for the company. In hybrid-style companies, they might then pass this vision down to transactional middle managers.

Through transactional leadership, companies reward the best performers and motivate others to do the same.

Read more: What Is Transformational Leadership (And How To Lead With Motivation)

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