Transactional leadership: All that you need to know

In every grade during my schooling, if I scored the marks my father aspired, he gifted me something I love. If I failed to achieve his desired results, I lost his present for that year. His gift or no-gift methodology motivated me to study hard. 

At the end of my schooling, I realized I topped most of my grades, leaving my classmates far behind.  

That’s precisely what you need to replicate as a transactional leader.

Transactional leadership, popularly known as managerial leadership, is a telling leadership style. Rather than inspiring employees or helping them, you motivate them to perform based on incentives and punishments.

You can achieve this by setting the right rewards and penalties that are standardized as per the performance of employees. This persuades them to deliver exceptional outcomes. 

As a transactional leader, you set the standard of performance as per the requirement of your organization. For instance, for each employee in the sales team, you may set a goal of attaining sales worth a number of dollars (as per your quarterly target for the sales department). 

If your employees achieve the figure, you allocate a monetary bonus; else, you reduce a specific percent of their compensation.

Thus, the transactional leadership style is simply a give and take process. You achieve the organizational objectives by serving the self-interest of your employees. 

Before we discuss how you can apply this style in your organization, let’s first understand its assumptions and components. 

Assumptions of Transactional leadership:

The transactional style of leadership was first described by Max Weber in 1947 and then by Bernard Bass in 1981. 

You need to understand the assumptions of this style to know the environment for which this style is effective. If you believe these assumptions do not match your organization’s culture, you may consider mixing this style with other leadership styles (give link).

With this in mind, let’s have a look at the underlying assumptions of Transactional Leadership:

Employees perform best when the chain of command is definite and clear: 

In one of my newly formed teams, I brought in a few senior folks who had similar levels of experience of about a decade. The idea was that they had the maturity to handle themselves and other less experienced members. Hence, I could use laissez-faire methods and concentrate on other projects. 

However, after a few months, the team’s performance was continuously going down! The less experienced folks had defects in their assignments, they missed deadlines, and the same piece of work was worked upon multiple times by different team members. 

What was wrong? These people were performing well individually in their previous projects.

When I started analyzing, I realized there were ego clashes. Each senior member thought they were leading the team. The difference in opinion amongst them confused the less experienced folks. The hierarchy of the team wasn’t clear to them.

The team needed an organized structure and a clearly defined source of commands. I brought them on the same page, sorted existing issues, and decided on who is going to head the team through consensual discussions in multiple meetings.

There was a set direction once a defined person was leading the team. Hence, the efficiency and productivity of the group went up drastically.

This instance is a classic case of how an unclear chain of commands can hinder the performance of your team. 

Transactional leadership helps in bringing out the best in people by having a precise and definite objective; the clarity of purpose results in improved performance. 

Rewards and punishments are motivators:

To get effective results as a transactional leader, you need to create a system of rewards and punishments– honor employees if they achieve their targets and penalize them if they miss it. The transactional leadership style assumes that this methodology works best to motivate employees and achieve requisite outcomes.

As a transactional leader, you focus only on the lower level needs in Maslow’s hierarchy of needs. The first four levels are deficiency needs (D-needs), and the top-level is known as growth or being needs (B-needs). The requirements at the lower levels of the hierarchy must be satisfied before attending the needs higher up.

Rewards and punishment work as the best motivators for satiating the D-needs of your employees. By recognizing their good through rewards, you increase their self-esteem and encourage them to perform better. Similarly, punishing them for not attaining their goals, pushes them to try harder. 

The primary objective of the employees is to obey the commands of the leader:

The transactional leadership style ensures that the current system, processes, and procedures work at maximum efficiency. It does not allow creativity and out-of-the-box thinking. Hence, it assumes that the primary goal of your subordinates is to follow your instructions without altering the status-quo.

You should abide by the existing structure of your organization to get the best results as a transactional leader. You need to follow the hierarchy in your company and accomplish results as per the current processes. To achieve this, you will need to allocate tasks to your employees and expect them to follow your commands.

Milgram’s Studies on Obedience to Authority reveal the relationship between obedience and leadership. According to the study, authorities, through their power, can push people to obey the commands of even giving a shock to others. 

You can use this study to understand that your instructions to employees are a powerful tool to get desired results from them. If you are clear with your commands, they are bound to follow them.

Subordinates require careful monitoring to meet expectations :

By now, you are aware that your employees need to know the hierarchy of your organization, and they believe that they need to follow your instructions. Also, you have built a system of rewards and punishments standardized across employee performance.

But is that enough?

Not really! Transactional leadership assumes that your employees need external motivation. Hence, if you keep an eye on their work, they will be inspired to do it to the best of their abilities.  

You need to monitor the performance of your employees closely. It prevents any deviation of your employees from their targets and pushes them to stretch themselves to complete their assignments.

You can use various methodologies for monitoring employees like daily task allocation registration, conducting meetings to discuss progress on tasks, and giving feedback. 

Through close monitoring, you will be able to focus your employees on their tasks and imbibe discipline in them. Also, you can review their work and make changes if needed. 

To understand further, you need to have a look at the core components of transactional leadership.

Components of Transactional Leadership Style:

The fundamental constituents of transactional leadership are Supervision, organizing, and assessing performance. These form the basis of the style, and you should apply them throughout your organization. Following is a brief description of these elements:


You need to focus on controlling your employees by giving them proper guidance. There have to be clear guidelines that specifically mention what is acceptable and what will be considered inappropriate. Then you need to ensure that your subordinates strictly follow these guidelines.

Supervising your employees need not include close monitoring. However, it can be related but not restricted to the handling of customer data, ensuring the project is on schedule, allocation of assignments, and tasks to group members, among others. 

In my team, for instance, we have a clear guideline of sending an update everyday on the work accomplished in the day. With this process in place, I can track the progress of my team members and guide them if they are stuck and need help. It also allows me to ask them to put extra efforts if they are behind schedule.


You need to be a good organizer of business activities to use the transactional leadership style effectively. These activities can include ensuring an efficient business plan for your organization, setting up meetings to discuss organizational objectives, and creating deadlines to meet them.

You also need to put in place rules, procedures, and standards that your subordinates need to follow. Your organizational structure is the backbone of setting up these aspects. What this means is, you will need to consider the hierarchy, policies, and protocols of your organization while deriving the regulations for your employees.

When you set up standards and expectations, you increase the efficiency and productivity of your employees. 

For example, you can distribute a list of activities that your employees need to follow.  This can include their minimum working hours, deadlines of assignments, and minimum standards of products or services that you expect them to deliver. When your employees perform to meet these objectives, they are bound to be efficient.

Assessing performance:

In the first two components, you have set the expectations from your employees as per organization standards and supervised employees to check if they are meeting those expectations. 

What’s next? What if your employees meet those expectations, and what if they don’t?

You need to evaluate the performance of your employees.

The driving factor of this style is a reward and punishment system based on how well your employees have performed in the objectives you have set. You need to evaluate their output and decide whether it deserves punishment or reward.

For instance, many IT organizations have a variable component in the compensation of their employees. This component, which is a certain percentage of the salary of employees (typically five to ten percent), is linked with their performance. If the employees achieve organizational goals, they get their variable components; else it is discarded.

With such mechanisms, you can assess employee performance and reward them as per their efficiency and productivity.

Now, you are aware of the assumptions of the transactional leadership style and also know its basic building blocks. The next step is to apply this leadership in your business. The following are some guidelines you can use. 

How to apply transactional leadership:

As can be seen in the figure below, your interaction with your employees in transactional leadership can fall into four different categories- contingent rewards, Active Management by Exception (AMBE), passive management by exception (PMBE), and laissez-faire.

Let’s discuss the categories one by one:

Contingent Reward

The incentives that you give your employees for meeting specific goals are contingent rewards. They motivate your employees and provide positive reinforcement for a job well done.

To have the system of contingent rewards in place, you need to set goals for your employees. It is suggested you follow the SMART principle while setting-up goals as explained below:

Specific:  You should clearly define expectations in your goal. Avoid using generalised sentences like ‘we want to generate profit.’ You are better off stating the figure of profit like ‘we want to produce a profit of a million dollars’

Measurable: You should clearly define your goal with the help of quantifiable entities like quality, quantity, and cost. It helps in easily tracking your target. Avoid saying, ‘we want to increase social influence to generate profit.’ Instead, specify exactly how you want to increase social influence. You can state, ‘we want to have a profit of a million dollars by generating fifty-thousand leads through social media websites.’

Attainable/Achievable: Make sure your goal is challenging but attainable at the same time. In the example ‘we want to have a profit of a million dollars by generating fifty-thousand leads through social media websites,’ you should be sure that ‘fifty-thousand’ and ‘million dollars’ are figures which are attainable. If not, consider more practical numbers.

Relevant/Realistic: Your goal should serve the higher-level goals of the business to be relevant. You need to align the purpose of your goal with the objectives of your business. 

Also, ensure you are aware of the hurdles you may face while working on your goal. Setting realistic targets helps you gain clarity about the roadblocks you may encounter.

Time-bound: Having a defined period to attain your goal helps you to be efficient and productive. You must clearly state the time-frame- ‘We want to have a profit of a million dollars by generating fifty-thousand leads through social media websites in the next quarter.’

Active Management by Exception:

You now have clearly defined goals and rewards for your team. What’s next?

You give the team the resources they need to achieve goals and monitor their progress.

The aim of active management by exception is to ensure that you identify areas where there are chances of mistake and take preventive measures before such a situation arises. 

You need to ensure that your team operates as per the standards to achieve the goal. You should treat any deviation from the acceptable processes and procedures as exceptions. The process of identifying the unexpected is called management by exception. 

To elaborate, let’s continue with our goal of ‘achieving a profit of a million dollars by generating fifty-thousand leads through social media websites in the next quarter.’

If the expected expenses on operations of this goal are $60,000 and your team is operating at $30,000 or $90,000, you need to assess the reason and take corrective action quickly. 

Passive Management by Exception:

The difference between active and passive management by exception is the timing of your intervention. You are proactive when you are exhibiting active management by exception. You closely monitor the tasks your team is performing, and immediately take action when you notice any deviation. 

However, when you use passive management by exception methodology, you allow your team to conduct work as they want and get involved only when the results are different from the expectations. You use the system of rewards and punishments you had set-up, to penalize the team for not meeting expectations and take corrective action.

Passive management by exception is useful where you are sure of your team’s capabilities to achieve the goal. Also, you know that in case of deviation, you will be able to rectify the situation and take corrective measures quickly. 

Laissez Faire:

When you interact with your employees in the Laissez-Faire style of transformational leadership, you simply set the goal and expect results to follow by giving your team the environment to make decisions and the liberty to set up processes. You do not care about their needs.

For instance, you would set the goal of achieving a certain amount of profit in a specific time. After that, you take a hands-off approach and abdicate responsibilities. You leave it up to the team to decide on operating expenses, funding, or any other resource they would require to achieve their target. 

Laissez-Faire interaction creates a relaxed environment for your team as they have the complete freedom to opt for methodologies to achieve their goals. However, it can also lead to your team to lack direction. You should apply this method to self-motivated groups with highly experienced professionals. 

Now, you are aware of how you can apply transactional leadership. Following is an awesome video that can give you more insights:

Where is Transactional leadership style effective?

Once you are aware of the methodologies of a management style, you need to know the situations where you can apply it. Following are a few scenarios where you can use transactional leadership:

  • If there is a crisis in your organization, you need quick results. The crisis can be related to data security, economic or financial stability, or product recalls, among others. Your primary aim in such situations is to get work done from your subordinates as quickly as possible and maintain status-quo.

According to research by Tilburg University, the transactional leadership style has the right characteristics to help your organization get through a crisis. Your coercive power as a transactional leader and the rewards-punishment system you design can influence the desired behavior in a crisis.

  • If you have a system that has similar, regular, and well-defined work with already tested working solutions, you can consider applying a transactional leadership style. You need not encourage employees to search for solutions or have an out-of-the-box creative outlook in these conditions. 
  • As the design of the transactional leadership style maintains the integrity and performance of your group, it is highly effective if you need to execute fixed operations in your business. Also, you can use this style if you require similar activities to be performed in a specific manner every time. 
  • If you need to work for a well-established company with a large work environment, the stress is on the structure of the organization. Hence, transactional leadership, with its straightforward approach, is a perfect choice and can quickly get effective outcomes.

Final Thoughts

Transactional leadership is a great way to maintain order and structure in your organization. With a fair balance of assignments and rewards, you can achieve the desired results from your employees. 

However, you need to hit the right nodes while applying this style, as it can easily border Autocratic leadership. You should not seem to be authoritarian. Creating the right system of rewards and punishments as per employee performance is the key. 

If you focus on achieving clearly defined objectives with regular reviews and stick to the format set-out, transactional leadership can be a great tool in your leadership armory.

Want to expand on the discussion? We would love to hear your opinion. Do let us know how effective you find transactional leadership style in your organization.

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