A Shift from Transactional to Transformational Leadership

12 min readAug 11, 2021


Organisations today are operating in an increasingly complex and dynamic environment. Over the last century the world has gone from being an industrial, national, resource based economy to a more global, networked, knowledge based one. The increasing use of technology, opening up of international markets and the move towards a more ‘Global’ trade has intensified competition and given rise to the need for organisational adaptability and ambidexterity. Technological change has created an environment that is continually changing and organisations need to change and adapt with it in order to survive. This has given rise to the discussion that a more ‘holistic’ form of leadership may be more appropriate to guide organisations and employees effectively in the new millennium.

The need for more effective leadership is also expressed through the internal make up of modern organisations themselves, which are also very dynamic and ever changing. Organisations have gone from evolving slowly to radically transforming into a multitude of forms in response to the changing external environment and this in itself has created internal dynamics that require a leadership style which is adaptable, inspirational and can also effectively motivate individuals. The challenge for modern leaders is whether they can successfully integrate both competitive advantage and long-term sustainability through the effective utilisation of all resources.

The purpose of this piece of writing is to relate these viewpoints with regards to transactional and transformational leadership styles in a dynamic environment and provide a discussion on the importance of transformational leadership.

The dyadic relationship between leader and follower and also in the broader context of the whole organisation has been the subject of much speculation and debate within the school of management thought. This interest can be partly attributed to the potential positive or negative impact that leadership can have on economic, business and employee performance. These factors have encouraged management thinkers such as MacGregor Burns, Bernard Bass and Bruce Avolio to build on traditional leadership theories such as democratic vs. autocratic, directive vs. participative and task vs. relationship-orientated leadership styles and develop leadership styles such as transactional and transformational leadership.

Transactional Leadership:

Transactional Leadership style can be described as a two way exchange between leader and follower. A leader who uses this style recognises and clarifies what a follower has to do in order to achieve organisational goals in exchange for a reward. Transactional leadership as consists of three main leadership behaviour’s, namely: contingent reward, management by exception and laissez faire leadership.

Contingent Reward:
Contingent reward is based upon the understanding that both parties receive something of value. Basically, employees upon the attainment of ‘expected’ standards receive an agreed reward. These rewards can be anything from bonuses and promotions to simple recognition of a job well done. However, employees who fail to attain targets are punished through disciplinary procedures and or threats.

Some studies into contingent reward demonstrates results through rewarding employees in a tangible manner for their efforts. However, it cannot be stressed enough that the negatives associated with just contingent rewards cannot be ignored. For example, executives can view performance as being purely in monetary terms. This myopic view can make the organisation lose sight of other stakeholder needs and could potentially disillusion employees.

Studies on intrinsic and extrinsic motivation does support some of the observations about the limitations of contingent reward e.g. such as eliciting only ‘expected’ standards of behaviour. They demonstrate that contingent rewards are at best weak positive reinforcement and in the long term acts as negative reinforcement. A great number of these studies also discuss that extrinsic motivators act to mask intrinsic motivation and therefore the employer can never truly know if the employee is motivated purely by reward and therefore come to depend upon such forms of motivating tools. This form of motivation can also be negative because when the employee gets used to the level of reward it ceases to act as a source of motivation and higher levels will be expected. This could also have a negative impact on the reputation of the leader if the expected rewards could not be delivered. This also suggests that there are also many hidden costs of such contingent rewards, namely distracting from the process of task activity to the attainment of reward and the sacrifice of long term gains in the pursuit of short term pay-offs. Finally, a important take away message from these studies is that intrinsic motivation is very important in all social interactions and must not be undermined by an over-reliance of external motivators.

Management by Exception:
Transactional Leadership is also known for practising management by exception. This can be either passive or active. For example a leader may actively watch for deviations from performance and then correct them or alternatively wait until a deviation from standard occurs and once identified intervenes. Management by exception and also contingent negative reinforcement could be used by management to avoid the time that is required in establishing and effective transactional relationship with followers. This sort of behaviour could also encourage risk aversion and game playing in followers. A useful example of why this may be undesirable is within the context of management behaviour towards budgets. Budgets can be seen as a transactional leadership tool due to its link with management by exception and extrinsic reward systems. In order to achieve performance expectations, management will frequently use ‘game playing’ and cut corners through ‘creative accounting’ to demonstrate that these have been met. Furthermore organisational innovativeness and competitiveness will be reduced over time as management become risk averse through the restrictive nature of such practices. Concerns arise about how followers in the pursuit of the exchange or reward may take short cuts for their own gain. However a transactional approach is effective at attaining lower order objectives, but higher order objectives require a more transformational approach.

In Transactional Leadership laissez-faire behaviour as not really being a form of leadership. In fact class it as ‘non-leadership’. This form of behaviour sees the leader abdicate responsibility and act in a non-commitment and non-confrontational manner. It is suggested that this approach damages organisational goodwill and frustrates hardworking employees. Although this is an extreme form of transactional leadership behaviour it is easy to understand how this could restrict an organisations competitive edge.
However, transactional leadership is actually very important when it comes to managing an organisational successfully and is appropriate within stable markets and hierarchical organisations. Over forty years of research has demonstrated that transactional leadership is an effective means of achieving performance standards and corporate goals. However a common assertion by various management thought leaders is that it is only effective in predicting and extracting ‘expected’ levels of performance from followers and does not explain why some leaders can elicit performance beyond expectations. Also in today’s global competitive environment this transactional approach could be seen as being limited as Tichy & Devenna (1986, The transformational leader. Training and Development Journal, 40 (7) pp. 27–32) suggest: “Transactional leaders were fine for an era of expanding markets and non-existent competition. In return for compliance they issued rewards. These managers changed little”. This is where an exploration of transformational leadership style reveals why it is important in a dynamic environment and how some leaders extract performance beyond all expectations from followers.

Transformational Leadership:

Transformational leaders in contrast are described with emotive terms such as ‘inspirational’, ‘visionary’ and ‘charismatic’. Leaders who exhibit the use of this style are said to go beyond the day to day management of activities through creating and maintaining vision, mission and guidance in order to lead their teams. These leaders motivate their followers to do more than they would normally do i.e. ‘go above and beyond’ the call of duty for the greater good. They transform employees by broadening and elevating their needs, encouraging them to look beyond pure self-interest for the good of the group and also making them aware of the importance of the task and organisational mission. They achieve this through the expression of what are called ‘end values’ which are essentially deeply held personal value systems. Through the expression of these values the leader is said to unite the followers and actually change their goals and beliefs. These leaders also move away from a purely transactional approach by building the confidence of employees to not just achieve targets but to also take on greater responsibilities with a view to building leadership abilities. Transformational leaders are also said to be viewed as the ‘ideal’ type of leader in contrast to the transactional style. These leaders are also said to achieve the goal of moving beyond an exchange process and securing performance beyond expectations through the application of four distinct behaviours. These are: Individualised Consideration, Intellectual Stimulation, Inspirational Motivation and Idealised Influence.

Individual Consideration:
Individual Consideration can be seen in leaders paying close attention to individual employees’ needs and motivations rather than treating all individuals the same. This seeks to build individuals confidence through showing consideration to individual strengths and weaknesses through mentoring as opposed to acting as a mere score keeper. The leader by understanding and recognising follower capabilities encourages the development of potential by personally setting an example and also through the delegation of challenging tasks. This facilitates the development of skills that allow followers to eventually assume leadership positions. Such behaviours also develop organisational cultures that encourages risk taking, innovation and development which is desirable in a highly competitive environment. Transactional leadership as discussed earlier can subdue these qualities.

The advantage of individualised consideration could be seen in the context of globalisation. The way in which successful organisations are restructuring, delayering and moving towards networked-global forms has brought recognition that employees are a means of leveraging business success through concepts such as ‘Diverse’, ‘High Performance’ and ‘Virtual’ work teams. Within this context paying attention to individual strengths, weaknesses and motivating factors can be the difference between success and failure. For example Meredith Belbin recommends that there needs to be 8 roles in order for a team to be truly effective. Each role has its own strengths and weaknesses and an imbalance in combination could result in less than optimal performance. Although this theory has been shown to have limitations, it does serve as a useful example for the need for a leader to understand employee’s characteristics on an almost dyadic level.

Intellectual Stimulation:
Intellectual Stimulation involves stimulating followers to engage in creative, intellectual and innovative thought through encouraging employees to continuously evaluate old and current ways of thinking. The purpose of this is to foster a climate that encourages innovation, raises an awareness of problems and enhances creativity which helps in the continuous improvement and transformation of the organisation. As mentioned earlier, the world is also going from an industrial economy to knowledge based one. As knowledge becomes a source of long term competitive advantage, encouraging employees to be creative, innovative and diffuse knowledge is in the leaders and organisations interest. Studies has demonstrated that the transformational leadership approach to self-managed teams, enabled followers’ knowledge acquisition. Studies into learning orientation of employees and the organisation as a whole have demonstrated that there was a strong positive correlation between learning orientation of individuals and transformational leadership and that transactional leadership was less strongly associated with performance orientation.

Inspirational Motivation:
Inspirational Motivation is the quality that inspires, motivates and raises the follower’s consciousness of the organisations mission and vision. It involves demonstrating enthusiasm in the abilities of followers, articulating a vision and mission and also through the celebration of success. Evidence suggests that inspirational motivation positively increases employee effort, ethical behaviour, learning orientation and project success. From a business perspective achieving a higher performance from each employee through no additional expenditure i.e. in the form of monetary rewards, should make perfect sense. The transformational leader through vision and mission also ‘binds’ employees together through the rapport building effect that these have. These acts of building vision by the leader encourage employees to aspire to work towards something greater than the individual self.

Motivation encouraged by transformational leaders is not just through articulating vision but also by showing trust in the abilities and judgement of the followers. Through this the employees learn to develop higher levels of autonomy and long term team performance is increased. Interestingly the motivating effect of this form of leadership can also be felt in non face to face contact e.g. virtual and geographically distant teams. This was demonstrated in a study by Kevin Kelloway et al (2003, Remote transformational leadership. Leadership & Organization Development Journal, 24 (3) pp. 163–171) who tested the effects of ‘remote’ transformational leadership on motivation and performance against transactional and lassie faire styles of leadership. The results demonstrated that the subjects could clearly distinguish the different styles of leadership. The subjects responded positively to the transformational characteristics of intellectual stimulation and charisma as opposed to the transactional management by exception. This has very significant implications for leaders of organisations that are spread over vast geographical locations, which is increasingly the case as a direct result of globalisation. The importance of effective motivation can also be seen in an article by Jordan-Evans & Kaye (2002 Retaining Employees. Business: The Ultimate Resource, Bloomsbury Publishing, London, pp. 196–197) where they describe how employee talent may become the only differentiator between an organisation and its competitors. They hypothesise that there will be a global shortage in talent within the next 15 years and that retention of these highly skilled employees will be a significant challenge. Within this article they recommend that effective motivation, inspiration and an open atmosphere were important in achieving the goal of employee retention.

Idealised Influence:
The concept of Idealised Influence is based on the premise that once the other three I’s are satisfied the followers will seek to emulate the characteristics and be willing to follow the leader. The trust earned, confidence built and vision formed all serve to set standards and a mission for the organisation. It is a fact that in the modern turbulent economic environments organisations are experiencing the need for constant reorganisation and change. Leaders are expected to act as change agents and overcome resistance to the organisations initiatives. Within this context the positive influence exerted by a leader can make the difference between success and failure. This importance of idealised influence is also highlighted in an article by Odom & Green (2003, Law and the ethics of transformational leadership. Leadership & Organizational Development Journal, 24 (2) pp. 62–69). In this article they describe how organisations such as Enron encouraged unethical behaviour which ultimately ended in their demise. They suggest that transformational leadership would have prevented such an event occurring due to the leaders focus on moral development of followers and not just on the bottom line. Ultimately the example set by leaders will influence the culture and behaviour’s of the organisation.

Although this style of leadership is likely to be considered appropriate in today’s turbulent climate, transformational leadership is most likely to be accepted in environments that are changing and in organisational structures that are non-bureaucratic, hierarchical. It must be said that transformational leadership must not to be considered a substitute for a transactional approach. It ‘augments’ this style and enhances the leaders ability to work towards the attainment of theirs, their followers, and the organisational goals more effectively. This is supported in a study by John Humphrey (2002, Transformational leader behaviour, proximity and successful services marketing. Journal of Services Marketing, 16 (6) pp. 487–502) in which a positive correlation in influencing service unit outcomes was noted when contingent reward was used with transformational leadership. This suggests the need for a leader to balance both styles of leadership to achieve the best result.

We can conclude that the current dynamic markets, restless employees, changing organisational structures and working practices clearly require a more enlightened form of leadership. A purely transactional leadership style was appropriate in an era where markets and the economic, social and technological changes were relatively stable. All organisations regardless of size and location now face competition globally through developments in technology such as the internet and more efficient supply systems. Clearly just the contingent reward systems and management by exception would no longer be acceptable in today’s ‘on-demand’ proactive culture. The inflexibility and costs that this approach could cause would drastically reduce an organisations competitive advantage and chances of survival. Transformational leadership in contrast seems to hold some promise in improving an organisations competitive edge. It takes a long term view with regards to employee satisfaction, development, motivation and retention as the transformational leader realises that these are where an organisations future and long term sustainable competitive advantage arises from. Although there is suggestion that this style of leadership is not appropriate in all situations it is hard to imagine a situation where a leader who adopts a transformational approach which augments a transactional one would find it hard to adapt and successfully achieve organisational objectives. Therefore all organisations need to consider transformational leadership as an important part of their arsenal in leveraging both hard and soft organisational objectives.

(N.b.: This is a republish of my content from Steemit.com: A Shift from Transactional to Transformational Leadership — Steemit)




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