Leadership Styles – Transactionalism

After we dealt with the classic three leadership styles according to Kurt Lewin in the first part of our series on leadership styles, today we are going a few years further into the future and are dealing with the transactional leadership style.


Lewin was, of course, not the only one to deal with leadership styles. About 30 years (1973) after him, the American sociologist James Downton described the transactional leadership style 1, which was further developed into a model by James MacGregor Burns in 1978 2.

This is essentially based on a barter between manager and employee – the transaction. IN this mutual transaction, the employee gives his labor and receives a corresponding reward in return, or a penalty in the event of non-compliance.This is mainly about persuading or motivating the employee to complete a task by pointing out advantages and disadvantages (e.g. salary increase, promotion, sanctions).

A manager sets the goals and defines deadlines, degree of achievement and other success criteria.

Thanks to the clear definitions, the employee knows exactly what needs to be done. This provides security. A classic example would be the work on the assembly line, where an employee knows exactly which number of pieces he has to achieve at the end of the day. The goal is clearly defined and transparent for everyone involved. In addition, dimensions for over- or under-achievement are agreed upon (bonus or penalties).

Example:One employee has to paint 180 Easter eggs in one and a half hours of a day shift of 8 hours. That’s the agreement with his boss. If he creates more than the agreed number, he receives an additional payment of 3 euros for each additional Easter egg. However, if he manages less, 1 euro will be deducted from his wages for each unpainted egg.

So, if the employee really puts in the work, he can increase his salary, which is motivating. In addition, he also knows that if he works too slowly, he will lose salary. This motivates as well.

Through the principle of “reward for performance”, if the employee behaves as desired by the manager, he is rewarded, otherwise he is punished. The relationship between the manager and the employee is thus based on reward for the performance of a job, or precisely on a corresponding sanction for non-performance. Here, the manager has the opportunity to motivate employees to perform better by offering rewards.

The great advantage of this method lies in the clear definition of target achievement and consequences. Thus, the employee can calculate before starting work how high an agreed bonus will be, or whether it is achievable.

Another advantage is that the manager can intervene quickly if a deviation from the targets is detected or becomes apparent. He can take immediate action, such as assigning additional employees to the issue. Employees can also identify potential deviations themselves (the target is clearly defined) and report them to their supervisor.

In addition, delegating to subordinate managers is easier. Clear guidelines can reduce misunderstandings when targets are delegated across hierarchies.

Furthermore, transactional leadership is a very simple leadership style. Meaning, (at the risk of sounding mean), you don’t need the very best leaders. It can also work conditionally in environments where there are more potential employees than jobs, for example in crises. Here, sanctioning is then used more: “If you don’t get your work done, I’ll find someone else real quick.

This sets natural incentives, although I would like to make it quite clear at this point that I consider such an approach to be more than questionable. First, it takes its toll at the latest when the market changes and the employee “quickly finds another employer.  And secondly, in modern management, people and not resources should play a decisive role.

Please don’t overdo it

Now we come to the crux of transactional leadership: motivation is extrinsic. The system of reward and punishment is therefore based on stimuli that are set from the outside. And as with all external stimuli, over a longer period of time, stimulus blunting occurs. If you are lured with a bonus over a longer period of time, you become less and less motivated by it.

Let’s take a project manager who has completed a 5-month project particularly quickly and thoroughly. For this performance of duty he receives – as previously agreed – a bonus of, let’s say, 1000 euros. The employee is happy, the boss is happy. Everyone is happy.

Now another bonus is agreed for the next task. In joyful anticipation, the employee is again highly motivated to perform and delivers the result once again to complete satisfaction – Katsching, another 1000 euros more in the account. The new couch set and the matching 70-inch TV are secured.

Now we continue the game of “reward for doing one’s duty” and keep giving bonuses. The boss will be satisfied, the employee will continue to deliver to complete satisfaction. But over time, something will change in the employee. If the employee receives a bonus for a completed task, he will expect a reward the next time as well – assuming consistent performance. He will no longer see the bonus as a reward for his performance, but will start to see it as part of his salary – the reward effect will stop. Even worse, if the employee does not receive a bonus one day, he will not perceive this circumstance as normal (“OK, this time I was not quite as good”), but as a sanction (“I am being punished for not achieving 120% this time”). Due to stimulus overload, we have set a different tolerance threshold in the employee – reducing or missing the reward will then lead to frustration.

The negative effects of extrinsic motivators have also been demonstrated by experiments conducted by psychology professor Edward Deci. He designed an experiment 3 in 1971 in which he asked subjects in two different groups to solve soma cubes. Both groups had three rounds of one hour each to solve the puzzles. In the first round, both groups were equally motivated to puzzle and interested in the cubes. In the second round, participants were rewarded with a few dollars for each puzzle solved.

In the third round, the rewards failed to materialize. Several minutes before the hour was up, Deci left the room on a pretext. While the group that didn’t get paid once continued to puzzle away at the solutions with motivation, the subjects in the other group tended to read the newspaper or occupy themselves with other things. Deci concluded that the subjects who had been offered money no longer felt this intrinsic motivation.

Transactional methods may in principle still work for a certain time in areas where quantifiable assembly line work has to be done (Easter egg example). However, the longer the time periods become in which a task is completed and the more difficult it is to quantify the result, the more complicated bonus-based motivation becomes.

If the employee and supervisor can’t quantify exactly what performance they are being rewarded for, the bonus (and later the lack thereof) becomes arbitrary. This creates uncertainty and frustration. If different goals are then assigned to different employees, this can lead to envy and resentment, which in the long term can lead to conflicts, demotivation and resignations.

And it can get even worse. Because we often see employees being given a one-off bonus for “particularly good performance in the last 6 months” after the fact, without a target agreement having been reached beforehand. Sounds great at first, doesn’t it? Someone has made a real effort and is getting the appropriate recognition. But what if the employee continues to work just as before and doesn’t get a bonus in the next round? A sour feeling spreads. Have I done a worse job now? Has my performance decreased? It doesn’t help to point out that the bonus was a one-off.

And goodbye …

The problem of stimulus deadening affects not only positive but also negative stimuli. Long-term resistance can even be built up to threats and punishments, so that they can no longer have any effect.

And entirely, sanctions fail in areas where employees have no major problems finding a new employer. After all, motivation through punishment only works if the employee is “motivated” by fear – of losing his or her job, for example. Apart from the fact that this is a morally very questionable practice, it only works if the external circumstances can generate fear in the first place. In economic environments where it is easy to find a new employer, sanctions fizzle out very quickly if the employee simply packs his bags and leaves.

And even with society’s shift in thinking toward greater appreciation of employees’ own free time, transactional leadership is reaching its limits. This is because it only works if the value in return that the company has to offer also creates an incentive for the employee. As a rule, companies offer non-cash or financial benefits. With a shift in thinking toward a greater appreciation of one’s own time and work-life balance, monetary incentives suddenly fizzle out. Because the company and the employee are now competing for the same precious resource: the employee’s lifetime. Those who do not take this into account and think they can buy their lifetime with money will run a higher risk of losing their employees to other employers who offer better incentives.

In addition, the transactional leadership style often leads to a classic “stopping of thinking along”. The employee, who tries as far as possible to fulfill the specifications of the superior so that he gets the reward, will not think outside the box or contribute his own ideas. Just this aspect endangers in the fast moving time of the successes of enterprises and prevents their flexibility, lies the “correctness” of goals only in the hand of few decision makers.  And even if the employee does not resign, in the long run one can say goodbye to his creativity, commitment and passion.

In the end

So let’s summarize once again: Transactional leadership is based on the principle of “motivation through reward and punishment”. The stimuli are set from the outside, i.e. extrinsically. These stimuli (for example, salary increases) are intended to motivate the employee.

Transactional leadership is a simple leadership style based on clear quantifiable goal agreements between employee and manager. This avoids misunderstandings and also allows the manager to intervene quickly if, for example, he or she notices a deviation from the target agreement.

The disadvantage of transactional leadership is stimulus overload, which can weaken or cancel out the effect of both rewards and sanctions. Also, bonuses and salary increases cannot be increased ad infinitum, which limits or even cancels out the effect in the long term.  In addition, the principle of “lifetime versus money” no longer works in societies or economies where employees develop a higher appreciation for their own lifetime, or where the employee – for example due to a shortage of employees – is no longer strongly dependent on a specific employer.

In fact, transactional leadership is a rather outdated model, based more on concepts from the age of industrialization. It’s shocking that it’s still used across the board, often leading to employee frustration and resignations.

But does it still have any justification at all in modern companies? Yes, if it is used very selectively. For example, if you agree with an employee on a 1-year project on a special payment at a certain fulfillment. Then you can achieve a targeted motivation boost.

  1. Rebel Leadership: Commitment and Charisma in the Revolutionary Process. Free Press, New York 1973, ISBN 0-02-907560-2.
  2. Burns, J. MacGregor (1978): Leadership. New York: Harper & Row.
  3. https://www.apa.org/members/content/intrinsic-motivation

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