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Transactional or Transformational – Which Leadership Style is Best?

February 4, 2015
Borderless Leadership

In a report by SIMAD University, researchers identified two different leadership styles – transformational and transactional. According to the report, transformational leadership is ‘the ability to motivate and to encourage intellectual stimulation through inspiration.’ Transformational leaders aim to lead by example, encouraging employees to follow a set of values rather than a rulebook.

Transactional leadership, on the other hand, is ‘an exchange-based relationship where self-interest is dominant.’ Transactional leaders adhere to set rules and regulations, motivating employees with specific task-based rewards. Although both methods are valid, they have radically different effects on employee job satisfaction and loyalty.

Transformational leaders aim to lead by example, encouraging employees to follow a set of values rather than a rulebook.

Rewards and Retention

Transactional leaders tend to offer financial reward in return for high performance. However, this is problematic for several reasons. A one-off bonus is always appreciated in the moment, but will soon be forgotten. Indeed, by reducing a job to a financial transaction, all it takes is a higher offer for an employee to jump ship. This practice can also lead to friction between employees – particularly if the bonuses are awarded publicly.

Transformational leadership focuses instead on building a values-led work culture. Employees work hard not because they seek reward, but because they believe it’s the right thing to do. They respect the company values, and find meaning beyond their monthly pay check. This ultimately builds employee loyalty, in turn improving retention rates and cultivating a healthy workplace culture.

Of course, financial recognition is appreciated by employees, but transformational leaders rarely relate this directly to performance. For example, birthday presents and Christmas bonuses can make workers feel valued – without creating further problems.

Forward Thinking

The SIMAD report found that transactional leaders tend to do the following:

  • Fail to act on problems until they become serious
  • Wait for things to go wrong before acting
  • Spend a lot of time dealing with other people’s mistakes

On the whole, transactional leaders are impulsive bosses, valuing the present moment over the future. Rather than wasting time on extra training, they prefer to jump straight in and get quick results. This initially seems impressive, but soon backfires when things go wrong – as a lot of time is spent fixing problems which could have been avoided with some forethought and instruction.

Transformational leaders tend to ‘spend time teaching and coaching’, and place a heavy emphasis on employee training and development. Although an employee may take longer to start achieving measureable results, their future work will be of a higher quality. Indeed, the benefits of staff training are well documented. Some 90% of executives feel that training impoves employee productivity, and 85% believe that it can also boost customer satisfaction.

Transformational leadership focuses instead on building a values-led work culture. Employees work hard not because they seek reward, but because they believe it’s the right thing to do.

Disciplinary Methods

Transactional and transformational leaders also differ in the way they handle discipline. As transactional leaders relate performance to reward, they are more likely to actively sanction workers when they make a mistake or fail to meet targets. If handled poorly, sanctions can make employees feel belittled and undervalued. This, in turn, can sour company culture and reduce retention rates.

Transformational leaders are more likely to take a holistic approach to mistakes and wrongdoings. This doesn’t translate to a lack of discipline – managers are ultimately responsible for steering the company to success, and transformational leaders understand this. However, rather than imposing heavy sanctions, a transformational leader will discuss the issue with the employee. They will establish why the misdemeanour occurred, provide additional training and support if necessary, and treat the employee with dignity throughout.

Employee Satisfaction

In some environments, transactional leadership can be beneficial. Commission-based sales teams often benefit from this style of management, as pay is directly linked to performance. However, in the majority of workplaces, transformational leadership will have a more positive effect overall.

The SIMAD University report found both ‘a strong relationship between transformational leadership style and job satisfaction’, and a ‘weak relationship between job satisfaction and transactional leadership.’

True transformational leaders – such as Richard Branson and Bill Gates – are a rare breed. However, with a little effort, managers can bring many transformational tactics into the workplace.

  • Show your employees you trust them, by giving them the authority to make decisions. You will also need to equip them with the ability to make good decisions, by providing thorough and ongoing training.
  • Don’t micro-manage your employees. Avoid performance-based rewards, and adopt a holistic approach to discipline. Your workers are intelligent adults – treat them as such.
  • Give your employees the bigger picture. Rather than presenting them with a series of small targets, show them where the company is heading as a whole. Demonstrate how their work is contributing to the business’ success.

By Simon Markland

Source: Switch & Shift

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