Transactional vs. Transformational Leadership: What’s the Difference?

Last Updated November 22, 2021

Transactional vs. transformational leadership is not a question of a good vs. bad, right vs. wrong approach to leadership. While they are in fact opposite approaches to leadership, both offer advantages and are important styles of leadership to understand and apply in certain types of situations.  

A leader may naturally gravitate towards either the transactional or transformational side in their style and methods. However, the best leaders understand that both can be utilized and integrated into their overall leadership toolkit. Those who aspire to leadership in the business world should develop an understanding of the differences between the two and recognize how they can apply the appropriate style based on the situation.

What Is a Transactional Leadership Style?

A transactional leadership style follows a managerial philosophy of reinforcement and exchanges, managing employees by establishing specific goals and then offering a reward for achieving them. That’s the “transaction” in transactional leadership. Effective transactional leaders recognize and reward a follower’s accomplishments in a timely way.

A study in Psychiatric Services found transactional leadership “more practical in nature because of its emphasis on meeting specific targets or objectives.”

Transactional leaders are often found in manufacturing, where line workers are expected to hit a set production quota per shift. Another area where a transactional mindset is beneficial is sales, as the team and individual members are driving to hit specific sales goals. Transactional leadership can also be most effective in situations where teams are working under strict time constraints to deliver on a project and/or where financial resources are limited.

Transactional leadership often goes hand-in-hand with maintaining a status quo of actions and processes that have proven successful. It tends to work best with self-motivated employees who do not seek or need inspiration from their managers or company executives, making it a leadership approach more often used at established companies.

What Is a Transformational Leadership Style?

The transformational leadership style is grounded in four components, commonly referred to as the four “I’s” of transformational leadership:

• Intellectual Stimulation: encouraging new experiences and ways of thinking for themselves and employees
• Individual Consideration: mentoring employees and supporting their professional development
• Inspirational Motivation: imparting a vision for an organization that employees internalize and make their own
• Idealized Influence: serving as role models for how they expect employees to conduct themselves

As the four I’s detail, transformational leaders focus on nurturing and positively motivating their employees. Rather than micromanage, transformational leaders foster an independent workplace that promotes creativity, desires innovative thinking and empowers employees to make their own decisions in their work.

Transformational leaders emphasize personal and professional growth and encourage all employees to think creatively in developing solutions to longstanding challenges, but they can be most impactful in leading younger employers, helping to integrate them into the company culture and giving them a sense that their work is a part of something special.

The leadership style works well in organizations or teams where the goals include developing the talent of the employees, and not just meeting an immediate production quota or sales goal.

Transformational leadership can also be the preferred approach in an environment where a product or service is new, or in an industry where innovation is key to survival. Many of the constraints and quotas may still be in play—limited financial resources, strict deadlines, specified quotas—but with a new product or start-up company, “the rules” and processes are not yet established, and open and innovative thinking on how to produce, grow, survive and thrive may be needed and even expected.

Transactional vs. Transformational Leadership: Which is Better?

It all depends. Neither approach is “better” than the other, and, despite the clear differences, the two are not mutually exclusive. A blended approach often works best because both leadership styles work, but they work best in in different situations, depending on the desired outcomes and on the leader.

Leadership Effectiveness

Both transactional and transformational leadership are effective in achieving intended results.

Transactional leaders focus on organizational performance and employee supervision. These leaders are not looking much toward innovating for the future, but rather maximizing productivity in the present. They focus on making the day-to-day business of an organization flow smoothly.

Transformational leaders focus on organizational change and employee development. These leaders devote more time to developing a strategy for the future of their team or organization, then motivating and inspiring employees to buy into that vision. This leadership is most effective in organizations or teams that need a leader to guide them towards positive change.

The most effective leaders recognize when and how to apply the elements of both. For example, sales may be transactional at its core, with the sales team driving towards specific and continuous sales targets, whether that be monthly, quarterly or annual sales goals. But sales is also about people, with developing and managing customer relationships at its heart.

Sales team leaders need to understand what motivates and inspires people (both their employees and customers) and look beyond the sales transaction to be innovative in seeking out new customer relationships, emphasize the strategic thinking behind key account management and may even need to lead the team in transforming their sales approach in response to market factors.

Promoting Growth, Innovation and Creativity

The transformational leadership style has clear advantages when it comes to promoting growth, innovation and creativity within individuals, teams and an organization as a whole.

A study in Frontiers in Psychology found that transactional leadership led employees “to perceive the culture as more goal, than innovation, oriented,” whereas transformational leadership led employees to see the organizational culture as more innovative. Employees feel they are encouraged to develop as professionals, growing their base of skills and knowledge.

A key part of the overall strategy of a transformational leader is to encourage innovation and creativity in the workplace. The focus on employee development is important to cultivating the future leaders an organization needs, as employees grow into the shoes of their leaders and emulate their style.

Transactional vs. Transformational Leadership: How They Complement Each Other

In developing, adapting and applying these two styles of leadership, it’s important to consider both the advantages and disadvantages of each, along with the current work situation your team and organization may be functioning in.

Transactional Leadership: While it’s the best approach for maximizing operational efficiency, transactional leadership can fall short in the areas of innovation, long-term strategy creation and employee development.

Transformational Leadership: While best for creating strategy and fostering organizational change, transformational leadership sometimes lacks the attention to detail, as these leaders are less concerned about daily workflow and processes. It also relies on having the type of leader who can sustain both a great deal of motivation and passion for a long period of time.

If there is anything that the year 2020 taught organizational leaders, it is that change is happening faster than ever, and those efficient processes and set goals can be upended in an instant.

You can help motivate your team during turbulent times and successfully lead them through transformation, confidently driving your organization toward positive change with transformational and visionary leadership. How do you become this leader?

Enhance your leadership capabilities with MSU’s Strategic Leadership & Management Certificates.