Definition of Transactional vs. Transformational Leadership

By Indeed Editorial Team

Published May 16, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Different managers within organizations can use different management styles, including a hands-off style to allow team members to work independently and a micromanagement style to monitor each member's work. A manager can also use different motivational techniques and strategies to boost the performance of employees or achieve an organizational change. Understanding the distinction between transactional and transformational leadership can benefit you if you're pursuing a career in management. In this article, we discuss the correlation between transactional vs. transformational leadership, learn the definition and behaviours of each type of leadership, discover their strengths, and explore which leadership style is better.

Transactional vs. transformational leadership

If you're working as a manager within an organization, you may wonder what the difference between transactional vs. transformational leadership may look like in practice. Transactional leadership focuses on the role of organization, supervision, and group performance within an organization. These leaders concern themselves with the day-to-day progress towards a goal and operate within any existing boundaries of structures, processes, and goals. Transformational leaders aim to enhance the engagement and motivation of their team members by directing their behaviour to a shared vision, and these leaders are more change-oriented by challenging the organization's current state.

What is transactional leadership?

Middle management level personnel within an organization commonly use transactional leadership. In this form of leadership, managers are usually direct and tell their team members exactly what to do and set the key performance metrics and expectations for the team to meet. This type of management involves practising management-by-exception, which means that the organization already sets work objectives and standards. Still, the management waits for a problem to occur before reacting to them. Transactional leaders maintain the organization's vision and help continue to fulfil the organization's mission.

The term transactional refers to the leader motivating their team members through the exchange of rewards for top performance. Transactional leaders can use a variety of incentives to motivate their teams to perform at their best. These leaders rarely aim to guide the organization to a market leadership position. They primarily concern themselves with ensuring that everything performs efficiently on a daily basis.

Transactional leadership examples

In an organization where the company executives expect their managers to follow a specific set of rules, and there's little emphasis on innovation, transactional leadership works best. These leaders find success working on projects that use specific processes. There may also be a possibility of seeing transactional leadership throughout your life. For example, teachers who give good grades in exchange for excellent academic performance are transactional leaders. Other types of organizations that use this leadership style include military and sports coaching.

Key transactional leadership behaviours

A transactional leader promotes success with rewards, focuses on performance, and maintains compliance expectations that the organization sets. These leaders manage and supervise their team members and facilitate group performance. The transactional leader role is mainly passive because it sets assessment and policy criteria and only intervenes when there are performance problems or if there are needs for exceptions. Organizations can expect a transactional leader to do the following:

Set goals and guide what the organization expects, and how the organization rewards the team's efforts
Constructive performance feedback
Increase routines and procedures efficiency
Standardize practices that can help their organization become more productive and efficient
Respond to any deviations from outcomes that the organization expects and seeks actions to correct and improve performance

What is transformational leadership?

Transformational leadership focuses on more than managing the day-to-day operations within an organization. It creates strategies for taking the department, company, or team to new levels of success and performance. This style of leadership focuses on motivation, team-building, and collaborating with team members at different levels with an organization to achieve positive changes. Transformational leaders can set goals and incentives to encourage their team members to higher levels of performance while also providing new opportunities for professional and personal growth for each team member.

Transformational leadership elements

The primary elements of transformational leadership center on the concept of the four I's, which are:

Idealized influence

A transformational leader behaves as a role model for their team members. These leaders embody the values that the rest of the team learns and internalizes. They guide their team members by providing them with a sense of challenge and meaning. Transformational leadership's foundation promotes consistent values and vision. The following are some ways that a transformational leader fosters the spirit of commitment and teamwork:

Promote an inclusive vision
Lead using example
Show strong goal commitment
Create confidence and trust with employees
Represent organization's culture, goals, and mission

Intellectual stimulation

A transformational leader persuades their team members to be creative and innovative. The concept of intellectual stimulation comes from leaders who can establish a safe space for their team to experiment with and share ideas. This behaviour includes:

Encourage employee creativity
Aim for innovation
Empower team members to disagree with leadership
Encourage appropriate risk-taking to reach goals

Inspirational motivation

A leader with an inspiring vision can challenge their team to leave their comfort zone, provide meaning for team members' tasks, and communicate optimism about goals. A team can drive forward when the leader provides meaning and purpose. Communication skills support the visionary aspects of leadership that make the organization's vision precise, understandable, engaging, and powerful. Team members can invest more effort in their tasks, and their managers can encourage them with optimism about the future to help them believe in their skills. Inspirational motivation behaviours include:

Helping employees to improve outcomes
Explaining how the company can change over time
Building a sense of purpose among the team
Connecting individual team members with organizational goals
Assisting the employees to achieve a greater extent of success than they expect

Individualized consideration

How a leader attends to the needs of team members, acts as a coach or mentor to the team, and listens to their concerns is the focus of individualized consideration. This can include the following:

Empathizing and discussing the needs of individual team members
Making an interpersonal connection with the team
Showing genuine compassion
Encouraging ongoing development and personal growth among the team members

Comparison between transactional and transformational leadership incentives

The rewarding and motivating of team members plays a part in the fundamental differences between transactional and transformational leadership. Using an incentive perspective to compare these two leadership styles, you can use two different exchanges between leaders and their team members. This approach can define the differences in the relationship between the managers using each leadership style. The following are two different levels of exchanges that may occur:

Low-level exchanges: This is an exchange that's easy to detail. The organization may consider low-level exchanges to include days off, salary, benefits, and work hours, typically in writing.
High-level exchanges: This exchange pertains to personal commitments, trust, support, loyalty, acceptance, protection, and other unique traits. These exchanges can be challenging to specify and measure as they revolve around an abstract personal relationship.

Transactional leadership focuses on low-level exchanges, and transformational leadership is the opposite and revolves around high-level exchanges.

The strengths of transactional and transformational leadership

A transactional leader can quickly address the minor details of an operation. These leaders handle all the elements that combine to build a strong reputation for the organization in the marketplace while keeping the team members productive. Transformational leadership can help to make the strategic development of a small organization. A smaller organization can aim for ambitious goals through the help of a transformational leader, and the organization can achieve success rapidly through the team-building skills and vision of the transformational leader.

Which type of leadership is better?

Different styles of management can suit different situations. For example, a transactional leader can be effective when it comes to the managers of minimum-wage employees. A shift supervisor can be more effective if they concern themselves with ensuring that all the team members are working smoothly, rather than spending time creating better ways to improve efficiency. In another example, a sales manager or CEO can be effective if they practise transformational leadership. An executive manager sometimes can communicate and design large strategic missions and pass them to transactional leaders to implement the details.

An organization may require the use of both types of leadership styles as a way to counterbalance one another and achieve development goals and growth. A transactional leader can ensure that their team members work efficiently to produce results today. A transformational leader can inspire innovation and look at what the team can accomplish tomorrow.