The way you manage your employees determines a lot more than just how well your team functions and whether or not it hits its goals. It also determines how successful your business as a whole is in both the short and long term.
It’s only natural, then, that you’d want to embrace the best management style possible.
But there is no one-size-fits-all approach to leadership that will be “best” in all situations. At the end of the day, the best way to manage your team depends on your business model, the industry you operate within, and the unique dynamic of each individual team.
In choosing a leadership style, you need to understand what motivates your team. One option is transactional leadership, which is used by various corporations and sports teams, including Microsoft, Starbucks, and the Green Bay Packers.
What is transactional leadership?
Transactional leadership involves incentivizing employees, and holding them accountable for their performance, by using rewards and punishments. This approach prioritizes achieving specific goals and measurable outcomes.
The aim is to inspire employees to meet objectives within set deadlines. Employees who consistently meet milestones on schedule may receive a bonus at the end of the quarter, while one who misses the mark may be demoted, fired, or miss out on a bonus.
Transactional leadership style
The transactional leadership style is goal-oriented and prioritizes structure and order. It incentivizes employees to complete work on time to avoid penalties or receive bonuses and is effective in fast-paced environments, such as manufacturing or shipping companies where meeting deadlines is crucial.
It is also often leveraged by sales and marketing teams, where immediate and measurable results are required.
Leaders who follow a transactional approach excel in establishing a system that prioritizes rules, guaranteeing set goals are achieved within the designated time frame while optimizing the use of resources.
However, this type of leadership may not be suitable for settings that place a premium on creativity and innovation. The reason: Creativity and innovation require flexibility to test ideas that may or may not lead to success, so transactional leadership wouldn’t be ideal.
Transformational leadership vs. transactional leadership
Transformational leadership is a leadership style that inspires and motivates followers to reach their full potential. This approach prioritizes personal growth and development over merely achieving goals. Transformational leaders often draw on their own experiences and stories to inspire and empower their followers.
In contrast, transactional leadership concentrates on accomplishing definite objectives and targets. It employs a framework of incentives and penalties and is typically implemented in settings where there is an apparent chain of command.
Although both leadership styles have their merits, transformational leadership is often more advantageous in the long run. This is because transformational leaders prioritize personal growth and development, which fosters a culture of learning and innovation within the organization.
As a result, this approach can lead to greater success, over time, for a business.
Characteristics of transactional leaders
This leadership style tends to align best with team leaders and managers who exhibit certain characteristics, such as:
- Performance-oriented: Transactional leaders prioritize performance and outcomes. They assess the team’s performance and reward or discipline employees accordingly.
- Uses extrinsic motivation: Transactional leaders often rely on money, praise, and recognition as motivators to improve job outcome, vs. internal motivation.
- Resistant to change: Leaders practicing transactional leadership tend to stick to their established ways and may resist considering alternative methods or adopting new action plans.
- Practical in nature: Transactional leaders take a practical and pragmatic approach to their responsibilities. They carefully evaluate any possible obstacles or difficulties in completing their tasks.
- Authoritative: Transactional leaders tend to exercise authoritative power, and make decisions on behalf of their team. They provide instructions that their team members must follow.
- Short-term goals: Instead of proactively seeking to solve problems, transactional leaders address them as they arise.
Key elements of transactional leadership
The key elements of transactional leadership include:
- Clear expectations and rules: Transactional leaders set clear expectations and rules for their employees. These expectations are usually based on previously defined requirements that measure employee performance.
- Reward and punishment system: Transactional leaders use a system of rewards and punishments to motivate workers. This system is based on meeting or exceeding expectations and adhering to established practices and procedures.
- Formal authority: Transactional leaders have formal authority and positions of responsibility in an organization. They’re responsible for managing individual and group performance to meet objectives.
Pros and cons of transactional leadership
Every leadership style comes with its benefits and drawbacks. Here’s a look at transactional leadership’s pros and cons:
- Promotes meeting short-term goals by rewarding employees with good performance
- Encourages fairness and reduces tensions among teams by eliminating favoritism (rewards are based on measurable performance, not relationships)
- Allows companies to meet an influx in demand by encouraging workers to perform at a higher level
- Helps businesses recover after going through a lull in production or a slow season
- Provides a clear structure and order to the team members
- Lacks relationship building, since the focus is on results without regard to working conditions or employee satisfaction
- May not be ideal for long-term goals because it can lead to burnout and resentment among lower-performing workers
- Reduces innovation and creativity, since the focus is on meeting deadlines instead of thinking outside the box
- Can hurt employee satisfaction and morale, particularly for those who don’t earn rewards
- Can make work feel less meaningful, since the end goal is extrinsic reward instead of intrinsic reward
- Could lead to higher turnover rate if employees aren’t happy with work conditions or the competition with other employees
One study shows that in health care settings, transactional leadership should be used for short-term goals, but mixed with other leadership styles to maximize effectiveness. Fortunately, there are ways to improve your transactional leadership in your business.
Tips to implement transactional leadership
Transactional leaders have multiple strategies to improve employee performance and morale in the workplace. Here are several to consider:
Invite employees to participate in goal setting
In transactional leadership, leaders set goals for their teams and give orders to achieve them. However, this can lead to employees feeling disconnected from their work and lacking motivation.
To counteract this, leaders should invite employees to participate in goal setting. Odds are, employees will be more committed to goals when they have input in creating them.
By meeting with employees to discuss what they want to achieve and allowing them to share their ideas, leaders can set objectives that everyone on the team is on board with.
Add purpose to goals and tasks
After establishing goals, leaders direct their teams by assigning tasks and providing a process document. However, this approach can come across as impersonal and uninspiring.
To address this, leaders can infuse their directives with purpose by emphasizing the importance of the work and explaining how it ties into shared company goals. By highlighting the greater purpose behind the tasks, employees are more likely to remain engaged and motivated.
Personalize employee rewards
Transactional leaders motivate their employees by promising rewards upon goal completion. However, the same reward may not be equally motivating for every employee. To ensure rewards are effective, leaders should personalize them for each employee. This can be done by understanding what motivates each employee and offering rewards that align with their interests and values.
For example, one employee may place a lot of value on a cash reward, while another may value more paid time off (PTO) or consideration for a promotion.
Support and encourage growth
Transactional leadership can be a great tool in helping companies achieve their goals. But for lasting success, it’s important to encourage employees to grow and develop their skills.
Leaders should talk to employees one-on-one about their strengths and weaknesses, and what they’d like to improve upon. Coaching sessions allow leaders to help employees build on their strengths and bridge any gaps in knowledge or skills.
By offering guidance and support, leaders can equip employees to take on new challenges and succeed.
By implementing these tips, leaders can adapt transactional leadership to maintain simplicity and clarity in their organization’s management practices while appealing to employees’ emotional needs — similar to what transformational leaders do.
Examples of successful transactional leadership
Transactional leadership may look a little different across industries. Here are several examples to give you an idea of how transactional leadership can be used effectively in different organizations.
A transactional leader in a health care setting may set the goal of increasing patient satisfaction ratings by 5%, and task employees to provide additional follow-up care to each patient after they are discharged. The incentive for meeting this goal could be a bonus or additional PTO.
A transactional leader in a technology company may set the goal of improving customer service response times by 10%, and task employees with responding to customer inquiries within 24 hours of receipt. The incentive for meeting this goal could be a financial bonus or reward points for buying new products.
A transactional leader in a marketing firm may set the goal of increasing lead acquisition by 20%, and task employees with creating targeted campaigns to attract new leads from key demographics. The incentive for meeting this goal could be a raise, better job title, or recognition at the company’s annual awards ceremony.
A transactional leader in a car sales business may set the goal of increasing sales revenue by 15%, and task employees with upselling customers on additional services, such as extended warranties or detailing packages. The incentive for meeting this goal could be an all-expenses-paid trip or a vacation package.
A transactional leader in a retail store may set the goal of increasing sales revenue by 10% over the next quarter. So employees are tasked with upselling additional products or services to customers, such as extended warranties or loyalty programs.
The incentive for meeting this goal could be bonuses, gift cards, or other tangible rewards usable at the store’s merchandise selection.
A transactional leader in a restaurant may set the goal of increasing average customer spend by 10%, and task employees with suggesting higher-priced menu items and offering add-ons, such as appetizers or desserts to customers.
The incentive for meeting this goal could be performance-based bonuses given at regular intervals throughout the year or discounts on meals provided through employee dining programs offered at the restaurant.
Transactional leadership can be an effective way to manage and motivate teams. Setting clear expectations and providing meaningful rewards can foster a sense of accountability and create a positive work environment. But don’t forget to involve your teams in defining goals and incentives so they’re enthused to meet your expectations.