What Is Transactional Leadership? Characteristics, Pros, Cons

There’s a surefire way to make a tedious chore more appealing: Stop for ice cream after it’s complete. By promising yourself a small treat afterward, you create an incentive for a task that needs to be done. 

This is the same principle at the heart of transactional leadership—a managerial approach focused on using goals and incentives to create a clear structure that rewards success. Instead of handing out ice cream, a transactional leader might offer a bonus to employees who meet their quarterly sales goals. Learn more about this leadership approach, its pros and cons, and how it compares to other leadership styles.

What is transactional leadership?

Transactional leadership is a results-oriented management and leadership style. This approach—also known as managerial leadership—uses a formal, hierarchical structure. The transactional model relies on rewards and punishments to motivate employees. Team members receive rewards if they accomplish goals or face consequences if they fail to hit key performance indicators (KPIs). Transactional leaders are responsible for setting goals and monitoring team performance to maintain productivity.

Transactional leadership theory is partially based on sociologist Max Weber’s concept of rational-legal authority, first proposed in his 1921 essay, “The Three Types of Legitimate Rule,” published in his larger work, Economy and Society. In 1978, political scientist James MacGregor Burns expanded on Weber’s work by applying the concept of transactional leadership to organizational theory, describing transactional leadership as a bargain that helps align interests between leaders and their subordinates.

Theorists define the transactional leadership model by these primary characteristics: 

• Contingent rewards: Leaders offer employees rewards contingent upon meeting defined goals or completing specific tasks.

• Active management by exception: Managers monitor employees and may step in and take corrective action before problems occur.

• Passive management by exception: Managers oversee work and step in when issues arise.

How transactional leadership compares to other styles

Different leadership styles offer varying degrees of employee autonomy, structure, and individual consideration. Leadership style also influences how managers approach decision-making, motivation, and communication. Here is how transactional leadership compares to other common leadership approaches: 

• Autocratic leadership: Autocratic leaders are bold authoritarians who make unilateral decisions and expect compliance. Autocratic and transactional leadership styles both rely on rigid structure and hierarchical management. Unlike transactional leadership, autocratic systems don’t always create clear goals or offer rewards for employee achievements.

• Bureaucratic leadership: Bureaucratic and transactional systems both emphasize a structured approach with clear company rules. In bureaucratic leadership systems, managers focus on enforcing protocol for all employees. This system prioritizes group performance and maintaining the status quo over individual consideration. Strict adherence to rules and a long chain of command can lead to slow decision-making in bureaucratic systems, while transactional leadership focuses on individual performance.

• Visionary leadership: Visionary leaders motivate employees through the strength of their passion and vision. They use storytelling, strong communication skills, and charismatic leadership to paint a picture of the future that employees believe in and work toward. Where visionary leadership aims to rally people around a big idea, transactional leadership motivates employees based on personal reward.

• Democratic leadership: Democratic leaders work alongside employees. They solicit feedback and use team input to help make decisions. Democratic leadership relies on highly engaged employees and rewards self-motivation. Transactional management, on the other hand, is more directive; managers focus on issuing corrections and evaluating performance instead of embracing employee perspectives.

• Laissez-faire leadership: Laissez-faire leaders take a hands-off approach. Managers provide minimal oversight and offer employees a high degree of autonomy. This leadership style relies on self-motivated employees willing to exercise personal initiative. By contrast, transactional leadership depends on managerial oversight. A transactional leader closely monitors progress and intervenes when necessary. 

• Servant leadership: Servant leaders prioritize employee well-being and job satisfaction. Servant and transactional leadership both use team goals to provide structure, but they take different approaches to goal setting. With a servant leadership style, managers and team members work together to create goals that balance employee and company needs. Transactional leaders focus on setting goals based on organizational success and emphasize job performance over growth opportunities.

• Transformational leadership: Transformational and transactional leadership styles both emphasize motivation. Transformational leadership uses intrinsic motivation and aims to inspire employees to learn and grow. By contrast, transactional leadership aims to create extrinsic motivation. Transactional leaders use positive and negative reinforcement to incentivize employee productivity. Transformational leaders encourage employees to take risks and question the status quo. Transactional leaders, on the other hand, prefer to make decisions that support the company’s existing structure.

Advantages and disadvantages of transactional leadership

Transactional leadership has the potential to help employees succeed by creating clear expectations. In some cases, however, this approach can stifle creativity or diminish morale. Understanding the advantages and disadvantages of transactional leadership can help you determine if these tactics are right for your team. 

Advantages

The transactional leadership style entails a few concrete benefits: 

• Appeals to human nature: Transactional leadership’s incentive structure appeals to an innate human desire for personal benefit. Offering rewards taps into employee self-interest. 

• Highly structured: Transactional leadership skills can provide clear direction, especially for more junior team members who need a more structured environment to thrive. 

• Effective in a crisis: At times of crisis or change in higher-level leadership at a company—which employees may or may not agree with—transactional leadership can be an effective tool to keep employees focused and motivated to complete their own work. 

Disadvantages

On the other hand, using a transactional leadership system may have unintended negative consequences:

• Stifles innovation: In a transactional system, employees may fear retribution if they make a mistake or question the status quo. If they’re motivated by a desire to avoid discipline, team members may be hesitant to ask for help or suggest potentially innovative ideas.

• Feels like micro-management: Transactional leaders practice active management; they’re constantly tracking progress toward goals and monitoring employee performance. This type of oversight can make employees feel micromanaged, which may dampen motivation.