KeywordsVenture Capital Transformational Leadership Transactional Leadership Virtual Leadership Opposing Theory
The concept of transactional leadership would appear to have been derived from juxtaposition with its opposite, transformational leadership. One could define the term “transactional leadership” by saying it is leadership that involves managing necessary transactions with and between employees, while keeping organizational arrangements the same.
Transactional leadership was really quite popular in the 1960s through the 1980s and reflected an increased interest in the human relations model, closed-systems thinking, as well as including the viewpoints of the workers. It has now become surprisingly relevant due to the evolution of our workplace in the direction of virtual leadership.
Blake and Mouton’s managerial grid theory, which relates interest in people with interest in production.
Hersey and Blanchard’s situational leadership, which suggests four different approaches to leadership dependent upon the specific situation.
Path-goal theory, which sets up an employee path to the attainment of organizational goals.
Leader-member exchange theory, which looks at several different ways of analyzing the relationship between the leader and the follower (Van Wart 2012, pp. 58–69).
James MacGregor Burns, in his 1978 book on leadership, discussed transformational leadership which is an approach that leads to positive change in an organization and is often accompanied by charismatic leadership. But he also discussed transactional leadership.
Peter Northouse further distinguished transactional from transformational leadership by suggesting that the transaction between the leader and the follower just involves a mere interaction, using either a contingent reward (where the management provides a reward for something the employee does) and management by exception (which involves management taking action if something out of the ordinary occurs) (Northouse 2016, p. 171).
There is a difference between a transaction where a leader gives the employee something in exchange for their work effort and a situation where the leader provides a transformative direction for the employee. A good example of this would be the difference between a North American Treaty Alliance that is based solely upon which nations pay in order to receive military aid from the United States (transactional relationship); and a vision in which the United States provides regional leadership by ensuring that an attack upon one country constitutes an attack upon all with the United States as a power guaranteeing nuclear superiority (which is a transformational vision).
Bernard Bass did perhaps one of the best descriptions of the theory of transactional leadership using data that he collected: He found 44 behaviors that he characterized as helpful management behaviors; and identified two factors that are characteristic of modern management – accomplishing the work and taking care to appreciate the work that the employees perform (Bass 1990, p. 20). Bass does not paint a positive picture of transactional management, especially if it suggests that the manager only gets involved when standard practices are not being implemented. If and when the leader has control of performance incentives, then they can use these to ensure that the employee is rewarded for following procedures or penalized financially when they do not (Bass 1990, p. 210).
However, as Bass indicates, transformational leadership has always seemed to be the more interesting of the two concepts. It seems to be the province of leaders who are able to dream about the future and provide a picture of an environment one would want in an ideal world. Clearly one would like to be the Nelson Mandela, the Martin Luther King Jr., or the Mother Theresa of their generation. However, the nature of our changing economy is modifying the relationship between transformational and transactional leadership.
We all should know that leadership for this type of society is not the same as management. Leadership sets directions, works on cultural change, and provides mentoring and guidance to employees. Management works on the implementation of goals and objectives. It takes the direction that has been set and makes it become real. So that almost leads one to think that “transactional leadership” is more like “transactional management.” What type of transactions might a leader engage in, given this distinction? It could be a form of leadership where all of the necessary actions required of a manager to make an organization function are reinforced.
One of the issues identified by Van Wart is that transactional theory counts upon an environment characterized by stability (Van Wart 2012, pp. 58–69). One of the problems, however, is that we are now going through a period of immense social change as identified by the urban theorist Richard Florida. As he has noted, we are going through what he calls “the Great Reset.” Our society is changing from a service and corporate society to one based upon mega-cities, which attract skilled and highly productive people. Since the 1908s, we have had 30 million new jobs created (artists, entrepreneurs, scientists, and tech people). According to Richard Florida, these jobs constitute 50 % of the wages, with 1/3 of the workforce producing ¾ of the discretionary income; and an economic engine producing three trillion dollars. Twenty cities now produce 50 % of the new jobs in the United States. And capital formation is located in only a few cities. San Francisco, for example, produces 45 % of all venture capital start-ups (Florida 2016).
This change is reflected in differences among generations in our society. Bruce Tolgan has done considerable research on generational shifts with special emphasis upon how retention may be accomplished among millennials. As part of his research, he finds that the workforce is changing because of the pressure of doing more with less and that leaders from the baby-boomer generation want the work to be done without a lot of explanation. He also notes that millennial employees have many “hard skills” or computer and technical skills, but they are deficient in having “soft skills” or people skills (Tolgan 2016).
Organizations these days have to be quite flexible and adaptive. Leaders of these organizations have purposefully set up the organizations in this way in order to compete in a globalized economy. Regional and international trade agreements have resulted in lower wages and required that jobs become very flexible in order that corporate entities might compete.
Instead of job security, organizations now offer jobs to independent contractors; hence the concept of the “gig economy.” Perhaps 30 % of the corporate employees in the United States are compensated in this way, and the forecasts are that much higher percentages will be in the offing (Small Business Labs 2014).
Employees work on a particular project, for a set period of time, and they receive payment for that – oftentimes with no benefits. It is not just in the corporate sector that we find this type of “gig” employment. For instance, in academia today, a large percentage of teaching faculties are often hired for a single course, paid a set amount, and have no benefits (AAUP undated).
This approach by management to the hiring of employees is spreading, and it is dramatically changing the way in which employees deal with their management, even in governmental and nonprofit agencies. These employees have short-term objectives, have their work measured using metrics, and see their work as transactional (Tolgan 2016).
Tolgan suggests some approaches that highlight the kind of transactional leadership that is needed to manage this new generation of Millennials: (1) teach them the basics of leadership and management, (2) spend time with them, (3) teach them how to follow, (4) since they are used to structure, one can show them how they can set themselves up for successes, (5) spell out expectations, (6) tell them how to puzzle through a problem and figure out where they fit, and (7) lay out the expectations and keep score (Tolgan 2016).
The nature of the new “virtual workplace” makes these transactional leadership skills even more important. (MBA/UNC undated). Because of the way in which activities are increasingly linear, virtual, and very highly detailed, it is important that managers and employees have the kinds of relationships in their organizations that are transactional in nature. Certainly at the very highest levels of management “transformational leadership” is important, but for most managers and employees, “transactional leadership” is surprisingly necessary in our new economic and technological environment.
Transactional leadership began as the opposing theory to the more exciting transformational leadership model. It was seen as the kind of mundane relationship that one experiences in working with their supervisor; e.g., “if one completes this task, one’s employer may reward one with another task to complete, and if many of these tasks are completed, one will be paid for them.” As our society has changed to an increasingly digital society, and toward a “gig economy,” transformational leadership is reserved for the very few upper middle and upper class leaders and professors who are paid handsome salaries and receive benefits for their work in contrast to the employees and adjuncts that do their work. By contrast, transactional leadership has become more and more important – because that is the way that a large and increasing number of lower and middle income people make their living.
- AAUP (undated) Background facts on contingent faculty. https://www.aaup.org/issues/contingency/background-facts
- Bass B (1990) From transactional to transformational leadership: learning to share the vision. http://discoverthought.com/Leadership/References_files/Bass%20leadership%201990.pdf
- Florida R (2016) Keynote address. Government Finance Officers Association, TorontoGoogle Scholar
- MBA/UNC (undated) The characteristics of effective virtual teams. https://onlinemba.unc.edu/research-and-insights/developing-real-skills-for-virtual-teams/the-characteristics-of-effective-virtual-teams/
- Northouse P (2016) Leadership: theory and practice, 7th edn. Sage, Los AngelesGoogle Scholar
- Small Business Labs (2014) Small businesses hiring more independent workers. http://www.smallbizlabs.com/2014/11/small-businesses-hiring-more-independent-workers.html
- Tolgan B (2016) Generational shift: how to manage millennials and bridge the soft skills gap in the workplace. Government Finance Officers Association, TorontoGoogle Scholar
- Van Wart M (2012) Leadership in public organizations: an introduction. M.E. Sharpe Inc, ArmonkGoogle Scholar