Enter Our Giveaway for a Chance to Win Cash!

Skip to Main Content
Business

What Is Transactional Leadership?

Say you pay to have your lawn cut. That’s a pretty basic example of a transaction: You need a service, you find someone to do it, and you pay them for their work. But transactions are trickier when they’re tied to leading teams. You still need work done and people to do it—and yes, you’re going to need to reward their effort. But the way your team gets work done may or may not require transactional leadership. This leadership style can be just what one project or team needs but suck the life right out of another.

So how do you know if transactional leadership is right for your team—and use it well so you don’t become known as the boss from you know where? Let’s take a look at what it is, examples of transactional leaders, its pros and cons, and what it could look like paired with another leadership style. And then you can decide for yourself if transactional leadership is the best style for driving your team and reaching your goals.

Transactional Leadership Defined

Transactional leadership (sometimes called managerial leadership) is based on a system of order, structure, rules and regulations. Productivity and efficiency trump creativity and innovation. Transactional leaders motivate their teams to achieve goals using a give-and-get method, meaning they offer rewards in exchange for work they believe will help the team reach a goal. Leaders who use this style also give discipline when goals aren’t met.

Chat Icon

Stop doing business as usual! Lead your team, grow your business and create a world-class culture with EntreLeadership Elite. Start your free trial now.

As a quick comparison, transformational leadership is known as a style that inspires leaders and followers to innovate and find creative solutions to big problems together. The transformational leader builds trust and respect with team members and that motivates them to work hard and think smart for greater good.

More on transformational leadership later. First, let’s get crystal clear on transactional leadership.

Think for a second of circus trainers—the ultimate transactional leader of sorts. Great ones can get wild animals to juggle balls, stand on their heads, and even jump through rings of fire. How? The animals trust their trainer, know what to do and are trained to do it well, and love a good reward.

Even though you’re not leading wild animals (we hope), you now know the power of using transactions to encourage peak performance.

Want to know what guides transactional leader in how they drive their teams? Let’s take a look:

A Transactional Leader…

  • Values structured policies and procedures
  • Focuses on short-term goals and getting stuff done
  • Relies on rules and regulations to get work done correctly and on time
  • Thrives on efficiency
  • Behaves rigidly and opposes change
  • Shows left-brained dominance (meaning they’re rational, logical, precise, critical and determined)

Putting faces to this leadership style will make it even clearer. These famous leaders are known for using a blend of leadership methods, but they’ve definitely leaned on the transactional style to help them do some great stuff.

  • Norman Schwarzkopf (aka Stormin’ Norman): U.S. Army general who led forces in the Gulf War
  • Howard Schultz: CEO of Starbucks
  • Nick Saban: head coach of the University of Alabama football team
  • Charles de Gaulle: French army officer who led Free France against Nazi Germany in WWII

Now, let’s talk about the pros and cons of transactional leadership.

Pros and Cons of Transactional Leadership

If your team needs to meet a goal quickly or work together on a complicated, time-sensitive project, consider using the transactional leadership style. Jobs where lots of team members are new or unskilled could also benefit from the transactional style.

Teams that aim for quotas are likely super fans of transactional leadership—think line workers, sales agents, first responders, military service members, sports teams, delivery drivers and call center agents. But to be true super fans, they need a leader who taps into the positive side of this leadership style and uses it to boost company culture.

The Pros

Good transactional leadership …

  • Clearly defines roles and expectations. Team members and leaders with this style know what they need to do to win and what they’ll receive in exchange for their success.
  • Gets everyone on the same page. Goals are usually black and white, so you know what’s expected and whether you’ve hit or missed it.
  • Builds in extra supervision and direction through a process called management by exception. This means you reach out when a team member doesn’t meet the expected performance level or needs correction to improve performance.
  • Focuses on the performance of the business and the team members. So, to keep a handle on how the team is doing, transactional leaders use key performance indicators (KPIs).
  • Removes guesswork and reduces the energy spent in decision-making.
  • Builds confidence and synergy once the team clicks and starts to work well together.

It’s Good Until It’s Not

Every rose has its thorn, right? Well, there’s a prickly side to transactional leadership too. Unfortunately, some leaders default to this style because they don’t believe their team members are self-motivated. Or it could be that they simply want to avoid any risk of losing control. Their fear of what might happen (or not happen) if their workers are left to their own systems and processes outweighs their faith in their team’s ability to think creatively and come up with better ways of serving the business and others.

This micro-managing version of transactional leadership tries to solve the problem of weak team member motivation and other potential risks by building in extreme structure and instruction. But here’s the irony: Transactional leadership actually works best with team members who are highly self-motivated, thrive on external rewards, and live their best lives when following instructions and processes.

As for the unmotivated team member who has to be incentivized to get stuff done . . . their days of staying motivated by rewards are probably numbered.

Any leadership style with tunnel vision or that’s driven by micromanagement has the potential to do more damage than good. Here’s the darker side of transactional leadership:

The Cons

Bad transactional leadership …

  • Toggles between micromanaging and leaving the team in the dark. The leader only reappears if something goes seriously wrong.
  • Focuses on maximizing productivity and day-to-day workflow but fails to innovate for the future.
  • Is so loyal to policy and procedure that it resists needed change.
  • Leaves the person in charge shouldering the burden of hitting goals and motivating progress. They miss out on the momentum and fresh ideas that come from teamwork.
  • Stops you from connecting with team members and limits team development.
  • Creates low self-motivation that infects the whole company culture. If team members don’t feel trusted, valued or poured into, they’ll deliver the bare minimum.

Organizational psychologist and bestselling author Adam Grant said, “Bad leaders believe people work for them. Good leaders believe people work with them. Great leaders believe they work for people.” Finding the secret sauce to becoming a great leader makes all the difference. And that’s where a mash-up of leadership styles could be the solution you’re looking for.

Transactional Leadership Versus Transformational Leadership

Folks who are into studying leadership styles often compare transactional and transformational leadership. If you’re wondering whether you have to choose one style over the other, the answer is no. Great leaders follow set principles, but they also make their own rules.

Step back and ask yourself: What needs to be accomplished? How is my team wired to bring their A game? What’s the best way to help my business, team and customers win? Then it’s time to get to work! And that just might mean bringing transactional and transformational leadership together. We know, that’s a mouthful, but this dynamic duo can pack a powerful punch! Here’s how the two leadership styles compare.

Transactional Leadership

  • Directs others through telling them what to do
  • Creates a structured environment (routine, routine, routine.)
  • Uses strict guidelines connected to company policy
  • Promotes operational efficiency
  • Motivates with external rewards
  • Prefers the status quo (if it ain’t broke, don’t fix it)
  • Reacts to market shifts
  • Emphasizes self-interest and individual achievement
  • Stresses goals and outcomes

Transformational Leadership

  • Inspires others through selling possibilities and serving others
  • Encourages a creative environment
  • Supports new ideas and resourcefulness
  • Prioritizes innovation and strategy
  • Motivates with internal rewards anchored in purpose and fulfillment
  • Encourages outside-the-box thinking and failing forward
  • Tracks market trends
  • Emphasizes group progress
  • Focuses on the mission first (and makes sure the goals support it)

Now, let’s take a look at how they might work together. Say the bread and butter of your business is selling bread and butter. You need your sales team to hit their sales targets continuously, so you transactionally reward top performers with bonuses, trips and public recognition. That’s awesome!

But sales is also about taking care of customers, developing trusted relationships, and building team pride in the why behind your work. So, what if you inspired your team to look beyond the transaction to how they could transform the customer experience—while keeping those incentives coming, of course. This is where transformational leadership comes in and works side by side with transactional leadership.

The quotas still matter. The sales process in place may still be the best way to hit your goals. But empowering your team could take your business, customers and team to a whole new level. As motivational speaker and best-selling author Simon Sinek puts it, “Great leaders give people something to believe in, not something to do.”

What’s Next

Understanding the definition of leadership and the many leadership styles will help you put a pin in the one that works best for you. Check out the free EntreLeadership Leadership Growth Assessment to learn even more about how you can become the leader you were meant to be.

Download the Assessment

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

Related Articles

Great Company Culture
Business

6 Ways to Build a Great Company Culture

As a business leader, your biggest battle is not with your competition or even the fight for more customers. It’s for the hearts and souls of your team members. Because in the long run, if you don’t have them on your side and truly passionate about what you do, your company will never succeed.

Ramsey Solutions Ramsey Solutions
What is a KPI?
Business

What Is a Key Performance Indicator?

No one wins the Super Bowl by accident. It’s the same in business. KPIs, or Key Performance Indicators, help you set the right goals, track your progress, and stay on target for big wins.

Ramsey Solutions Ramsey Solutions