Transactional vs Transformational Leadership

Transactional vs Transformational Leadership

When we look back at some of our past managers we can look back and smile, for others, we can aggressively roll our eyes and sigh. 

In the situation where your manager kept a close eye on every KPI and motivated you “with a stick and a carrot” (penalties and rewards), this would be called Transactional Leadership. 

The other time where you felt inspired, wanting to exceed all expectations and make a meaningful impact on the company, that would be considered Transformational Leadership.

Which type of leadership style is better? Let’s dive in together.

Transformational leadership vs transactional leadership which one promotes growth and creativity?

Transformational leadership offers more growth and creativity because leadership focuses on inspiring the hearts and minds of employees to get them personally invested in the business goals. Whereas transactional leaders focus on completing tasks and tracking KPIs to achieve short-term results rather than reinventing the wheel with innovation in the long run.

A good example is to look at Netflix or Amazon.

When Netflix first launched they were simply mailing out DVDs to customers.

If they had a transactional leadership model, they would have focused on
a) getting more customers
b) faster delivery times

c) better DVD selection
However, with transformational leadership, they were able to focus on long-term goals and completely innovate their offering to create the widely successful digital-first experience we now know and love.

Advantages & setbacks to transactional leadership:

  1. Pro: Creates a sense of fairness

We’ve all been in situations where we feel we’re producing the same output as a colleague but they’re being treated differently. Office favoritism isn’t an uncommon concern and it’s an easy way to demotivate your team. 

With transactional leadership, the entire team is rewarded and measured in the same way. This leaves little room for personal interpretation. It’s simple. Over-achieving your KPI leads to a promotion and underperforming leads to performance improvement plans.

  1. Setback: Employee retention could suffer

Being laser-focused as a transactional leader means you simply reward or punish your team based on their trackable achievements. 

This approach doesn’t focus on more complex or hard-to-measure areas like relationship building.

With remote work and Zoom relationships becoming more common, it’s easier to be a transactional employee - working just enough to simply not be punished or rewarded. Just enough to receive the next paycheck. 

If your only purpose for being in a company is the next paycheck then you have little loyalty to the business and a slightly better opportunity will whisk you away. 

  1. Pro: Efficiency, efficiency, efficiency

Giving your team crystal clear goals, and rigid routines mean they can focus clearly on achieving their goals. When you have a certain number to hit at the end of the month it’s easy to tell how close you are to that goal. Each day can feel like progress is being made because the KPIs show your effort directly.

  1. Setback: Kills creativity and limits growth

One of Google's 9 key pillars to innovation is to “not make failure a bad word”. Google acknowledges that not every innovative idea will work, so instead, the company cultivates an appetite for failure, to encourage persistent innovation.

Innovation and creativity require the freedom to be able to make mistakes and learn from them. 

In a transactional environment, the leadership team punishes their staff for not meeting goals and therefore leave little room for creativity.

In this environment, leadership sets rigid processes and expects their team to follow them or face punishment.

Advantages & setbacks to transformational leadership:

As a transformational leader, you’re inspiring the hearts and minds of each employee. Motivating them to go beyond simple exchanges and rewards to help tap into intrinsic motivation.

  1. Pro: Shared vision, employee loyalty & reduced churn

Transformational leaders possess a unique ability to share a vision, gather support from their teams and create a “do what it takes” mentality.

By sharing this unique vision and engaging each team member, transformational leaders are able to create a strong sense of loyalty between them and their team.

And when it comes to recruitment fees and time to retrain, this loyalty saves companies huge costs.

  1. Cons: Being too big picture-focused can be harmful

Unlike transactional leaders, transformational leadership focuses on the bigger picture. This can be its biggest success and flaw at the same time. 

Being too long-term focused means it’s tough for specific team members to focus on the short-term goals they need to be guided with.

Your team might be swept up in the grand vision but forget to make substantial progress week to week or month to month which can easily lead to a slowing of growth.

Why does Transformational leadership require a continuous feedback loop?

This leadership style feeds off of huge commitment and large bits of motivation coming from each individual on the team. It requires enthusiastic employees to collaborate and create innovative ideas.

The second a team member begins to feel out of the loop and disengaged, they risk losing commitment to the big picture.

In situations like these, it’s important for leadership to keep an ear to the ground and understand suggestions and challenges the team is facing. 

In a remote-first world, it’s not always easy to pick up on challenges early. 

We recommend integrating anonymous feedback channels into your team's Slack or main communication channel to make it easy for them to share feedback with leadership.

Which leadership style comes out on top?

Over at Incognito, we’re all about giving the “real feedback” without sugar-coating it. Although we’re leaning towards transformational leadership, the reality is that your type of leadership style should depend on your environment.

If you’re working in a factory or another workplace that requires you to hit short-term goals, with strict guidelines then transactional leadership may be the right fit for you.

If you’re looking to be an innovative company that inspires your team and focuses on the long-term vision and goal for the business, then perhaps transformational leadership could be for you.

However, there’s no rule that says you can’t use the best traits from each leadership style to form your own. When looking back at the world's best innovators, Steve Jobs and Elon Musk both possess traits from transactional to transformational leadership.

On a few occasions, Elon Musk referred to himself as a “nano-manager” whilst also mentioning that “a failure is an option. If things are not failing, you are not innovating enough”.

Perhaps the best option is a concoction of both leadership styles.

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