Difference between Transactional and Transformational Leadership to Know

The main difference between transactional and transformational leadership lies in their approaches to motivating and influencing followers. Transactional leaders use rewards and punishments to maintain compliance with established standards. Transformational leaders inspire and empower followers to exceed those standards by appealing to their intrinsic motivations and values.

Transactional and transformational leadership differ in approach and concept. But, both can coexist in an organisation depending on the type of industry, the leader’s personality, the business environment, and other situational factors. 

Today’s blog aims to explain this distinction in a little more detail. 

Comparison of Transactional Leadership and Transformational Leadership

Here is a quick table highlighting the transactional vs. transformational leadership debate. 

Characteristic	Transactional Leadership	Transformational Leadership
Focus	Short-term goals	Long-term goals
Motivation	Rewards	Purpose
Style	Controlling	Empowering
Examples	Setting clear expectations, providing rewards for performance, managing by exception	Inspiring employees, motivating them to achieve their full potential, developing their skills and knowledge
How leaders view it	Efficient, effective for short-term goals, a necessary evil	Effective for long-term success, motivating for employees who are driven by purpose
How followers view it	Controlling, demotivating	Empowering, motivating

Transactional Leadership

Transactional leadership is often seen in structured environments like the military and large corporations. It is primarily based on processes and control. Leaders in this category emphasise clear expectations and reward employees based on their performance. They manage by exception, intervening only when goals are unmet.

Pros and Cons of Transactional Leadership

While transactional leadership can bring about efficiency and clear goal-setting, it might stifle creativity and innovation due to its rigid structure. Let’s explore them in some detail with real examples. 

Pros of Transactional Leadership

Clear Structure and Expectations 

Transactional leadership provides a clear structure and set expectations, which can help maintain order and achieve set goals efficiently.

Companies like McDonald’s have a clear hierarchical structure and well-defined roles. This helps in maintaining consistency and efficiency across their numerous outlets worldwide.

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Performance-Based Rewards 

Employees are motivated through rewards and penalties, which are clearly linked to their performance.

At IBM, employees are often rewarded based on their performance metrics, which includes meeting specific targets or project completion timelines. That fosters a competitive yet goal-oriented environment.

Cons of Transactional Leadership

Lack of Innovation 

This leadership style can sometimes stifle creativity and innovation, as the focus is more on following existing procedures and meeting targets.

Kodak is a company that stuck to its traditional business model for too long. It eventually lost ground to competitors who embraced digital photography innovation. Learn more about this in our blog on marketing myopia. 

Employee Dissatisfaction 

The focus on rewards and penalties can sometimes lead to employee dissatisfaction, as they might feel that their personal growth and well-being are not being prioritised.

Amazon has faced criticism for its demanding work environment, with reports of high employee turnover in certain roles.

Learn about the benefits of employee retention.

Transformational Leadership

Transformational leadership focuses on inspiring and motivating individuals to exceed their normal performance levels. Leaders in this category encourage innovation and personal growth. It is known for fostering a cooperative and communicative environment.

Pros and Cons of Transformational Leadership

While fostering innovation and personal growth, transformational leadership might need a relaxed management structure in environments requiring strict management.

Pros of Transformational Leadership

Fosters Innovation and Creativity 

Transformational leadership encourages employees to think out of the box and come up with innovative solutions.

Google encourages its employees to spend 20% of their time on personal projects. That fostered a culture of innovation and led to the creation of products like Gmail and Google Maps. 

Enhanced Employee Satisfaction 

Employees often report higher levels of job satisfaction as they feel valued and motivated to grow within the organisation.

Salesforce is known for its positive work environment and focus on employee growth, often ranking high in “Best Places to Work” surveys.

Cons of Transformational Leadership

Potential for Lack of Focus 

With a strong emphasis on innovation and big-picture thinking, there can sometimes be a need for more focus on day-to-day operations and achieving short-term goals.

Tesla has faced criticism for missing production targets, with some attributing this to Elon Musk’s transformational but sometimes scattered leadership style.

May Not Suit All Businesses

This leadership style may not be suitable for all businesses, especially those that require a strict hierarchical structure and clear chains of command.

In the healthcare sector, a strict hierarchical structure is often necessary to ensure patient safety and adherence to medical protocols.

Relationship Between Transactional and Transformational Leadership

A leader may use transactional leadership to set expectations clearly and place rewards. Then, use transformational principles to motivate them to their fullest extent. This is an advantageous situation when both can complement each other.

But let’s consider the cons of using these two most important leadership styles. The leader or manager sets high expectations and micromanages as a way of negative reinforcement. Because of their charisma, they can easily mask this toxic managerial aspect for the greater good, leading to a hostile environment. And the consequence is a high employee turnover.  

The way to deal with this at an organisational level is to recognise the difference between transactional and transformational leadership. This clarity helps make important decisions at the right time. The impact of each differs, and both drive the organisation forward when balanced.