Transactional leadership may not have the cachet of, say, transformational leadership. It may not generate controversy like the authoritative style. But make no mistake: Transactional leadership is here to stay. Bill Gates is one. General Norman Schwarzkopf is another, along with other members of the military, many of the NFL coaches, prominent CEOs, lawyers of every ilk and many middle managers. 

Despite the negative press, transactional leadership persists. Why? Because in certain situations it works. It may not be the leadership style that spurs innovation. Neither is it the best for triple-digit growth. Even the word “transactional” may seem a little ho-hum compared to the headline-grabbers like visionary and charismatic. But when it comes to building great, international companies and even small local powerhouses, it’s a style worth noticing. 

Definition of Transactional Leadership

Transactional leadership is a style focused on organization, supervision and performance. Transactional leaders value structure, order and predefined rules. These rules are considered necessary to keep the organization running efficiently. The focus is on results and employees are recognized for their contributions according to the company’s reward system. 

This leadership style is based on several critical assumptions, among them:

• People must be monitored to ensure company objectives are met.
• Goals are linked to rewards.
• People are motivated by money and other extrinsic factors. 

History of Transactional Leadership

Transactional theory arose from the works of German sociologist Max Weber in 1947. It’s based on the idea that workers require structure and a directive approach to produce satisfactory results. 

In 1978, James MacGregor Burns expounded on the theory. In his book, “Leadership,” Burns said that the transactional model would work best with a foundation of morality, responsibility and honesty. The approach, he posited, was a two-way exchange: I give you this if you give me that.

Successful Transactional Leaders

Many business experts would argue that Bill Gates is not a transactional leader. After all, Microsoft not only revolutionized the way we work and live, its technological contributions and social impacts have changed the world. What could be more transformational? However, in the early days of Microsoft (and perhaps even still) Gates was known for walking the shop floor, ensuring that operations were on track, efficiencies were in place, and nothing fell through the cracks. He followed a strict chain of command and gave employees little freedom. Yes, he had strong vision. But he knew which skills were needed to achieve his aggressive targets on time and on budget. 

Even Starbucks founder Howard Schultz has been cited as a transactional leader. This is despite the phenomenal way Starbucks almost single-handedly elevated a simple cup of coffee from a commodity purchase to a $7-a-pop guilty pleasure.

Pros and Cons of Transactional Leadership

Transactional leadership, also known as managerial leadership, is primarily focused on the orderly management of groups. Transactional leaders expect followers to be compliant and ensure this by way of rewards and punishments. The approach is generally not forward-looking or inventive. But transactional leadership does have its place. 

If you are aware of the challenges of transactional leadership, you can mitigate the downsides. The cons include:

• Leaders may abdicate decision-making responsibility in favor of following the rules.
• As long as goals are met, leaders may be passive and avoid taking action.
• Given predetermined goals and objectives, creativity and innovation may be stifled.
• There may be little incentive for teamwork and collaboration since the emphasis is on individual performance. 
• Leaders may fail to lead or inspire others and the organization may lose its purpose.

But for organizations where efficiency is important and performance is essential, transactional leadership may offer advantages. For example:

• Rules and standards make this leadership model easy to understand so that confusion is minimized and employees can focus on the job.
• In high-stress jobs, such as first-responders, military organizations and athletics, the structure of transactional style means that everyone knows exactly what they have to do.
• Money and perks do motivate some people.
• Employees know exactly what they must do to keep their jobs and earn rewards.

Characteristics of Transactional Leaders

How do you identify a transactional leader? Here are some of the traits.

1. Extrinsic Motivation

A transactional leader motivates the team through money, recognition or praise. These leaders can become overly reliant on external forms of motivation even if the incentives fail to attract the most productive and creative people.

2. Practicality

One of the most distinct characteristics of a transactional style of leadership is practicality. Transactional leaders are pragmatic in their approach, realistically considering all constraints and obstacles.

3. Opposed to Change

Because transactional leaders rely on order, they can be resistant to change. These leaders can exhibit laser-focus on meeting company goals. For this reason, they may strive to maintain the status quo rather than embrace new ways of thinking or working.

4. Conventional Decision Making

To mitigate risk, transactional leaders may discourage autonomous action. Everyone within their purview is rewarded for doing the expected. This means delivering results and keeping the mavericks in line.

5. Performance-Oriented

The transactional leader monitors employee performance based on established goals and targets. They are quick to notice when employees achieve a predetermined goal and will reward them appropriately. Similarly, they are also aware of poor performance and may withhold rewards or even punish the employee in such instances.

6. Linear Thinking

Transactional leaders excel at achieving organizational goals within the existing systems and constraints. They tend to think inside the box to solve problems. While many may be excellent at handling routine affairs, they may struggle to find flexible solutions.

7. Just-in-Time Management

By definition, transactions are short-term. The transactional leader prefers to handle issues as they arise rather than proactively seeking to solve problems, mitigate risks or identify new opportunities. An emphasis on the numbers and the bottom line may keep leaders so mired in the details that they fail to see the bigger picture.

8. Directive

Transactional leaders are authoritative decision makers, and they embrace this trait as a principal part of their charter. Employees who do well under this style of leadership follow directives and instructions.

9. Structured

The transactional leader places a lot of importance on structure, the org chart and rules. Organizational hierarchies provide a framework, placing the leaders at the top and determining the responsibilities and accountabilities of each role. 

10. Individual Effort

The motivational style of a transactional leader may appeal most to individual performers. Although employees may be assigned to teams, the rigid organizational structure that the leader prefers may place limited emphasis on collaboration in pursuit of broader organizational goals.

What Type of Leader Do You Need?

Consider that approximately 10% of the population is left-handed. But when these left-handers need to use their right hand, they can. If they were not able to do so, it would severely limit their abilities. Management styles are a bit like the dominant versus non-dominant hand. In truth, most leaders are a blend of several styles and core competencies. One will likely be dominant. Although a leader may default to a particular style, when the situation changes, they are able to use the skills they need from other styles. 

Transactional leadership works best in organizations where problems are well-defined and simple, with agreed-upon rules and regulations. Further, everyone knows and agrees on the goals, priorities and methods. Transactional style is not for organizations where there is a change of direction or where creative problem solving is needed. Transactional style works well in the middle management levels because this may likely be where most of the activities are predetermined and the operations fixed. It may also work in well-established companies that do not anticipate a change in strategic direction.

There is no one right way to lead. There is, however, a style that is right for the culture, the phase and the vision of your organization. The right person will complement the existing leadership team and help your company move to the next level. 

Are you looking for an important addition to your company? When it’s time to take your leadership team to the next level, you need a strategy that does not include a pile of look-alike resumes. At Y Scouts, we understand that it’s not just about filling a seat or even finding a certain type. We use our proven leadership model to help you hire on purpose, finding the right fit for your future plans. Reach out today to get started!

This blog was updated for clarity in June 2021.

Y Scouts is the ultimate matchmaker, taking the time to connect purpose to positions. They put as much effort into understanding our needs as they did in finding us high-quality candidates. The end result was a perfect fit that has produced immediate, positive impacts on our business. We’ll surely use Y Scouts again as we continue to grow our team.