Transactional vs. Transformative Leadership — Which is Better?

When it comes to transactional vs. transformative leadership, what kind of leader should we follow? This question has puzzled us since the dawn of our civilization.

Humans have always strived to find the best individuals to guide humanity toward a better world and life. However, there is still a lot of debate about what that person would look like. James MacGregor Burns, an American historian and political scientist, explored the possible answer to this question and defined two fundamental types of leadership — transactional and transformative leadership. ¹

These two types of leadership are widely different. Transactional leaders create systems that encourage their followers to perform well through rewards and punishments. On the other hand, transformative leaders give their followers a vision for the future and inspire them to achieve the best outcomes. Nevertheless, neither of these two is better than the other, as both are suited for specific scenarios.

Striving to be a leader who offers his followers hope and purpose, as well as making sure to get things done, can be the optimal balance found by using both leadership styles.

What is Transactional Leadership?

Transactional leaders can efficiently move a project forward.

Definition

The transactional leadership style is based on a rewards and punishment system that ensures the completion of certain goals. It requires a strict management structure and a clear set of rules while being best suited for achieving objectives in the short term.

The characteristics of a transactional leader

A transactional leader makes quick decisions and can successfully manage crises that require specific processes. These leaders require minimal input from their team members to make significant decisions.

Transactional leaders use a management-by-exception style, where they don’t get involved in giving directions to their followers unless something goes wrong, and then they immediately take action. Transactional leaders are concerned with keeping the status quo and want things done according to standard conventions.

Transactional leadership examples and evidence supporting it

For example, transactional leadership can be found in schools or universities. Students are encouraged to perform well by being rewarded with good grades or punished with bad grades. Similarly, in a corporate environment, the employees receive bonuses and better salaries as a reward for achieving the company’s goals, and they can be fired if they perform poorly.

Transactional leadership works best when there is a clear hierarchical structure, precise rules to follow, and short-term goals to be achieved. It can easily be implemented in settings such as the military or sales. Transactional leadership is also fitted to help with a business's initial development stages and ensure that everything is set to work smoothly.

Using a transactional leadership style in these environments can be useful for systematically producing good specific results.

Research shows that it can promote work engagement and knowledge sharing at an organizational level. Encouraging knowledge sharing is crucial as it ensures the efficiency and effectiveness of employees, leading to higher levels of productivity and profitability. In addition, work engagement will make employees more likely to achieve the company’s goals.²⁻³

What is Transformative Leadership?

Transformative leaders encourage their teams by inspiring them to be the best they can be.

Definition

The transformative leadership style is based on inspiring and motivating people and is associated with a high degree of coordination, cooperation, and communication. It works well in close supervisory relationships and helps increase a follower’s intrinsic motivation by expressing the importance and value of the leader’s goals.⁴

The characteristics of transformative leaders

Transformative leaders are charismatic and inspiring and can be seen as role models. These leaders nurture their followers' inner talents and encourage creativity and open-mindedness.

Transformative leaders focus on projects achieved in the long term. They encourage their followers to be innovative and have positive expectations of them. They generally share a clear vision for the future with their followers and help them find meaning and purpose in their actions. They are also more open to their team's feedback on important decisions and inspire them to exceed normal performance levels.

Leaders use these four principles ( known as the four I’s) to make transformative leadership work:⁵

• Idealized influence: Building a relationship of trust with their followers and presenting high moral and ethical standards.
• Inspirational motivation: Imparting a clear vision of the future and igniting the intrinsic motivations of their followers, helping them find purpose and meaning by working together for a cause they believe in.
• Intellectual stimulation: Transformative leaders will encourage their followers to innovate, be creative, and self-develop. Having the freedom to pursue a goal they deem significant using novel approaches, they can learn through experiential learning what works and what doesn't, striving toward the best outcomes.
• Individual consideration: Providing personalized coaching and mentoring to their followers helps them nurture their talents and passion. This kind of attention addresses the need for self-fulfillment and self-actualization of the transformative leader’s followers. Having those needs met, they have a clear trajectory, pursuing it from day to day to the greatest levels of achievement.

Transformative Leadership Examples and Evidence Supporting It

An example where transformative leadership can be clearly seen is in the development of the company Apple. Steve Jobs is an iconic entrepreneur who revolutionized our relationship with technology and brought to the general public innovations such as personal computers, iPhones, and others. He had a vision of creating valuable products that people love, encouraging his employees to be creative and actively engaged in designing Apple’s gadgets.

Another example of transformative leadership is evident in the success of Netflix, co-founded by American entrepreneur Reed Hastings. Hastings, along with his co-founder Marc Randolph, launched Netflix in 1997 as a DVD rental-by-mail service but later transformed it into the world's leading streaming platform for films and television series.

Under Hastings' leadership, Netflix has continuously evolved and adapted to changing consumer preferences and technological advancements, such as transitioning from DVD rentals to streaming services and eventually producing original content. Hastings' focus on innovation, long-term vision, and strong company culture has played a significant role in Netflix's success and transformed the way people consume entertainment worldwide.

Transformative leaders have grand visions of the future and manage to motivate others to follow them in making the vision a reality. They create systems with flexible rules and provide constructive feedback and encouragement to their followers. This is a long-term style of leadership, and the followers of these kinds of leaders are generally passionate, dedicated, and creative. They are not the type of people who easily fit in and need to work on projects they find meaningful.

Research shows that transformative approaches tend to create the context for people to grow as professionals, innovate, and build skills, helping them to efficiently achieve the goals they set for themselves.⁷ Another study looked at the effectiveness of transformative leaders' behaviors in complex and international settings involving team projects in an oil and gas corporation. The results show that this type of leadership improved the workers' performance, facilitating better work adjustment and job satisfaction.⁸

A review of 22 studies revealed that transformative leadership positively benefits individuals and the organization they work for. The workers transferred their personal interests to collective interests that are integrated into the interests of their organizations, leading to higher levels of commitment. In addition, the workers take greater ownership of their work and develop a greater sense of acceptance.⁹

Which is more effective: transactional or transformative leadership? Why?

The reliance of the transactional approach on extrinsic motivators makes it unfit for accomplishing long-term goals. Extrinsic motivators include good grades, a salary, and material objects. On the other hand, intrinsic motivation helps people find joy and satisfaction in their work. Research shows that intrinsically motivated employees work harder than those motivated by extrinsic motives and are more fulfilled with their work.¹⁰⁻¹¹

The focus of transformative approaches on inspiration and imparting vision can be great, but the operational details of a business might be overlooked. The followers of a transformative leader might lack focus, disrupt the normal ways of approaching work, and suffer from burnout. Transactional leaders ensure clear progress toward achieving goals, enforce adherence to rules, and set clear expectations.

Instead of thinking in terms of transactional vs. transformative leadership, they can be combined, bringing the best results as they are not mutually exclusive. Transactional leaders can efficiently address a business's operational details and keep the workers productive. At the same time, a transformative approach could provide a vision and a path toward future development.

In the case of Airbnb, a peer-to-peer lodging service, CEO Brian Chesky not only motivates his employees but also personally utilizes the platform to gain firsthand insights and pinpoint areas for enhancement. By staying in various Airbnb listings, Chesky can better understand the users' experiences and adapt the platform accordingly.

The transactional nature of the grading system in schools could also be improved with a transformative approach. Students can be inspired to study not only for grades but also as a result of recognizing the opportunities they will access by performing well in school.

The best leaders can combine the transformative and transactional leadership styles, apply them based on the context, and create the best possible outcomes.

If you want to learn more about leadership and becoming a great leader, consider checking out our Integral Development and Leadership course or email an advisor.

References:

1. Burns, J.M, (1978), Leadership, N.Y, Harper and Row
2. Udin, U., Dananjoyo, R., & Isalman, I. (2022). The Effect of Transactional Leadership on Innovative Work Behavior: Testing the Role of Knowledge Sharing and Work Engagement as Mediation Variables. Planning, 17(3), 727-736.
3. Rahman, M., Daud, M. Y., & Ensimau, N. K. (2019). Learning Management System (LMS) in teaching and learning. International Journal of Academic Research in Business and Social Sciences, 9(11), 1529-1535.
4. Aarons, G. A. (2006). Transformational and transactional leadership: Association with attitudes toward evidence-based practice. Psychiatric services, 57(8), 1162-1169.
5. Homrig, M. A. (2001). Transformational leadership. Retrieved December 5, 2008.
6. Varol, O. (2020). Think like a rocket scientist. Ebury Publishing.
7. Xenikou, A. (2017). Transformational leadership, transactional contingent reward, and organizational identification: The mediating effect of perceived innovation and goal culture orientations. Frontiers in psychology, 8, 1754.
8. Gundersen, G., Hellesøy, B. T., & Raeder, S. (2012). Leading international project teams: The effectiveness of transformational leadership in dynamic work environments. Journal of Leadership & Organizational Studies, 19(1), 46-57.
9. Saad Alessa, G. (2021). The dimensions of transformational leadership and its organizational effects in public universities in Saudi Arabia: A systematic review. Frontiers in psychology, 12, 682092.
10. Grant, A. M. (2008). Does intrinsic motivation fuel the prosocial fire? Motivational synergy in predicting persistence, performance, and productivity. Journal of applied psychology, 93(1), 48.
11. Edirisooriya, W. A. (2014, February). Impact of rewards on employee performance: With special reference to ElectriCo. In Proceedings of the 3rd International Conference on Management and Economics (Vol. 26, No. 1, pp. 311-318).

People also ask:

What is the difference between a transactional and a transformative conversation?

A transactional conversation would involve conveying the leader’s goals and the rewards and punishments implied with achieving the goals. In contrast, a transformative conversation would be inspirational, revolving around how personal growth is tied to pursuing the vision imparted by the transformative leader.

The transactional and transformative conversation differences stem from the characteristics of both leadership styles.

The transactional leadership approach uses a system of rewards and penalties that guarantees the accomplishment of specific objectives. It is best suited for attaining goals in the short term, and it is associated with a rigorous management structure and a clear set of regulations.

Inspiring and motivating others is the foundation of the transformative leadership style, characterized by a high level of coordination, collaboration, and communication. This leadership style emphasizes the significance and worth of the leader's objectives, enhances a follower's intrinsic motivation, and works well in close supervisory relationships.

Which leadership style is best, transformative or transactional?

Both leadership styles can be the best based on the scenario. They both have strengths and weaknesses, and the best approach is to combine them and apply the best practices of either one, given the context.

The transactional leadership style is based on a rewards and sanctions system that ensures the completion of predetermined goals. It is most effective for achieving short-term objectives and is accompanied by a strict management structure and a well-defined set of rules.

The foundation of the transformative leadership style, which is defined by a high degree of coordination, collaboration, and communication, is inspiring and motivating others. This leadership style highlights the importance and value of the leader's aims and functions best in close supervisory relationships.

Transactional leadership would be the most suitable approach if you were to talk about the military, which has a clear hierarchical structure and rules. However, if you were to talk about a company like Apple, where innovation is a fundamental requirement, transformative leadership would be the best choice.

Why is transactional leadership the best?

Transactional leadership can be the best when the context requires adhering to a clear set of rules, a hierarchical structure, and achieving short-term goals. It can easily be implemented in settings such as the military or sales.

Furthermore, given that transactional leaders use a system based on rewards and punishments, it can be an effective method to motivate the leader’s followers to achieve certain results. For example, in the corporate environment, giving bonuses or a higher salary to employees, rewarding good performance, can improve their productivity.

Research shows that transactional leadership can promote work engagement and knowledge sharing at an organizational level. Encouraging knowledge sharing is crucial as it ensures the efficiency and effectiveness of employees, leading to higher productivity and profitability. In addition, work engagement will make employees more likely to achieve the company’s goal.

Nevertheless, transformative leadership would be more well-suited in settings where innovation is a fundamental necessity. For instance, in a company like Apple, where they have to consistently produce novel products, using a transformative leadership style would be more effective than a transactional one.