In early 1980, Max Weber was the first sociologist to use the term transactional leadership. He gave a theory called transactional leadership theory, which is based on the idea that employers give their employees something they want in return for what they want. 

In this article, we focus on how transactional leadership works. In addition, you will see some characteristics that such leaders possess along with some examples of this leadership style. Let’s begin by defining the term.

What is Transactional Leadership?

Transactional leadership is based on a system of supervision, control, and group performance. A transactional leader believes in the system of rewards and punishments to improve their employees’ performance. There are a few assumptions of transactional leadership:

  • Employees perform their best under a clear chain of command
  • Incentives and punishments motivate employees into giving the best results.
  • In order to keep an eye on employee performance, leaders need to continuously monitor them.

A transactional leader helps their employees in making and meeting short-term goals for the organization. They make sure that everyone is on the same page in maintaining stability at their organization and that everyone’s duties are clear to them. They expect their employees to fulfill these responsibilities and then either reward or punish them depending on the outcome. 

For example, a CEO as a leader doesn’t actively participate in day to day functions of their organizations but closely monitors what outcomes they return. For every great performance, they give employees an incentive and to underperforming employees, a performance improvement plan is handed. 

Transactional leadership is generally split into the following three dimensions:

Contingent Rewarding

Transactional leaders use incentives for employees showing incredible performance at work.

Active Management By Exception

In active management by exception, the leader actively participates in day-to-day functions at the organization. They help their employees by monitoring their progress regularly. 

Passive Management By Exception

Passive management by exception is a characteristic of transactional leadership in which the leader only intervenes if the employees don’t meet the standards or expectations. 


One possible characteristic of this leadership style is Laissez-faire. In this, the leader creates an environment where the employees get to make their decisions without help from the leader. The leader themself doesn’t participate in helping them with making these decisions and therefore employees lack a sense of direction in this style.

Transactional Leadership Characteristics

A transactional leader follows the following practices:

Extrinsic Motivation

A transactional leader is good at extrinsically motivating their employees in a balanced way. Sometimes extrinsic rewards like praise, money, or bonus do not motivate employees. In this case, they know what to do and when to completely rely on this method. 


One characteristic of transactional leaders is they are rigid in their way of dealing with things. Unlike transformational leadership, this style of leadership is more about control and rigidity rather than flexibility.

Critical Mindset

A transactional leader thinks critically and logically rather than creatively. They’re more left-brainers than right-brainers. One of their traits is that they follow an inside the box thinking. With a very linear thinking approach, they sometimes find it hard to find flexible solutions to employees’ problems.

They Follow Rules

Transactional leaders are bound to follow a straight path and make their employees do the same. They are fairly opposed to change and completely follow orders. With this type of leadership, creativity and out-of-the-box thinking are hard to practice. 

They’re Practical

Transactional leaders are practical. They consider all hurdles and challenges before deciding on something.

Strong Personality

They are able to make decisions, set goals for their employees, monitor them, and take necessary action based on whatever the outcome is. 

Directive and Structured 

They follow a very directive and structured approach. There is very little room for testing new things and enhancing creativity under transactional leadership. Transactional leadership is more effective for employees who find it easy to follow a fixed pattern, follow instructions, and deliver results as is expected of them.


One good characteristic or advantage of transactional leadership is that it is good for reaching short-term goals. This is because employees know they’re being monitored for their performance. When they know they will be rewarded or punished for their outcomes, they work fast and deliver timely results.

Setting Expectations Beforehand

Another characteristic of transactional leaders is that they set their expectations beforehand. They must be specific about what goals lie ahead of their team and what will be the result if they fail to meet those expectations. To make sure the team is on the same page, a good transactional leader conducts one-on-ones with the employees and monitors their progress.

Transactional vs Transformational Leadership

Both styles of leadership have the following differences:


Transactional leadership is a strict form of management based on controls and processes. On the other hand, transformational leadership is more about inspiring others to follow the correct path. It focuses on collaboration and cooperation rather than constant supervision and control.


Transactional leaders focus heavily on their relationships with their followers while transformational leaders emphasize on needs, values, and ideals of their followers. 

Level of Control

Transactional leadership talks about making employees do certain things in certain predetermined ways. While transformational leadership is leading others through motivation and inspiration.

Transactional leadership is about making employees fulfill their responsibilities and meet goals in exchange for an incentive. This is agreed upon beforehand. Transformational leadership, however, focuses on transforming employees through awareness and enthusiasm.

Rewards and Punishment 

A transactional leader gives their employees rewards for good performance and punishment for subpar performance. A transformational leader however focuses on inspiring others, motivating them, and making them enthusiastic to work and reach goals. 


The transactional leadership style focuses on goals and expectations. While the transformational leadership style focuses on vision. In transformational leadership, leaders like to take things smoothly and in an intrinsically positive way. In transactional leadership, the concept of rewards, punishments, and control exists.

Way of Bringing Change

Transactional leaders focus on changing the organization through group performance and control. Transformational leaders focus more on bringing change within the organization. 


Both leadership styles are effective depending on the situation. Transactional leadership is better effective for small and medium-sized organizations with entry and mid-level employees. On the other hand, in larger organizations, CEOs and managers prefer the transformational leadership style more. 

Led By

Transactional leadership style is usually led by a single leader while in transformational leadership, more than one leader performs this duty.

Transactional Leadership Examples

Consider the following examples:

  • Your organization just recently launched a new product. You, as a transactional leader, tell your employees whichever department will help in bringing the most users will get an additional bonus. In this way, you control the environment and fix a reward for reaching the goal.
  • The big board meeting is coming up this week. You tell your employees to represent the company in an impressive way and whoever succeeds in closing the most deals will be rewarded with a compensation raise. As a transactional leader, you instruct your employees and make them follow a directed path. You only help them when a problem occurs. This is another example of this leadership style.

Some real-life transactional leadership examples are as follows:

Bill Gates

Bill Gates as a transactional leader would ask his team difficult questions until he made sure each of them fully understands the goal. According to him “The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency.”

Vince Lombardi

Transactional leadership is common in athletics. One such example is Vince Lombardi who was a coach for the Green Bay Packers. What he did was he made the Packers run through the same plays in practice over and over again. He made sure his team never lost.

When is Transactional Leadership Effective?

So which type of organizations prefer a transactional leadership style? 

For Small-Medium Enterprises 

A transactional leadership style is more effective in small and medium-sized businesses. Under the transactional leadership theory, completion of the assigned tasks results in a reward from the employer. This reward or incentive can either be in a form of recognition, a job promotion, a bonus, or a raise in compensation. On the other hand, if an employee fails to comply with the given tasks, they are punished in the terms of either a loss of benefits or deduction in salary or sometimes even a disciplinary action against the employee. 

Most organizations prefer having a mixture of both these leadership styles. A transactional leadership style is however more preferred in organizations that are already well established and require a little change in the ongoing processes. Organizations that require huge changes in the company system should rarely opt for this leadership style. 

For Large Organizations

In large organizations, the transformational leadership style is more effective than transactional leadership. For example with senior management, a leadership that focuses more on collaboration, cooperation, and motivation makes more sense than giving them a reward or taking negative action against them. Similarly, CEOs and other senior leaders prefer working as transformational leaders because of the flexibility it comes with.

Limitations of Transactional Leadership

Lacks One Size Fits All Approach

A transactional leadership style lacks a one size fits all approach. It means that if it is effective for a particular department at the organization, it may not necessarily mean that it will benefit every other department as well. Secondly, especially the Laissez-faire leadership characteristic where the leader doesn’t provide their employee help in making decisions. therefore the employees often feel left out and puzzled about what to do. 

Doesn’t Focus on Building Relationships

Another drawback to this leadership style is that it doesn’t focus on building relationships with others. Rather it focuses on controlling and rewarding the employee for good performance or punishing for poor performance. It doesn’t focus on the actual reason an employee didn’t perform well or why they performed extra good on one task. 

Hard to Motivate Every Employee

The third limitation is that it isn’t always easy to find rewards for motivating employees. If an employee is motivated by getting a raise, another employee may not be motivated by some extra money. For some employees, a tangible reward doesn’t mean anything at all and they are more motivated by providing value in the lives of customers. A motivational reward doesn’t always suit every situation. Sometimes health insurance would mean more to an employee compared to a bonus. Therefore, it’s hard to keep employees happy with incentives every time. 

Lack of Flexibility

A transactional leadership style focuses more on control and creating a strict management style where the leaders reward or punish the employee for their performance. This leadership style focuses more on rigidity than flexibility. In the 21st-century workplace, employees like working in an environment where employers provide or offer them more opportunities, collaboration, and cooperation.

No Creativity

This style of leadership doesn’t promote creativity because all the goals are preset. In this way, a waste of skills and potential is seen with many talented employees. 

The Takeaway

Transactional leadership has many benefits for your organization when applied in the right way. Although it has its benefits and so does transformational leadership, most organizations prefer a blend of both these leadership styles. It is however best if you take into account your employees, their needs, and what they want to learn before they learn through any type of leadership.