Transactional Leadership vs. Transformational Leadership: Understanding Their Differences and Similarities
Transactional and transformational leadership are two styles of leadership for companies.Wondering which approach is best for your business? Neither leadership style is superior to the other. Either style of leadership may be appropriate in your situation, and you might use both approaches together. We’ll examine both types of leadership in detail below.
Key Takeaways:
- Transactional leadership focuses on setting goals and expectations for employees by providing reinforcements, rewards, and penalties
- Transformational leadership focuses on promoting innovation and change
Understanding Transactional Leadership
Definition and Key Characteristics
Transactional leadership is a strategy that involves providing reinforcements to employees, thereby encouraging them to meet certain standards.
In practice, this usually means that leaders reward employees for achieving defined goals. However, some transactional leadership styles involve imposing penalties, and any incentive-based system might qualify as a transaction-based leadership model.
Advantages of Transactional Leadership
Transactional leadership is useful for a few reasons. First, it is highly efficient. By establishing clear goals, you can ensure that employees understand exactly what is expected of them.
Second, transactional leadership sets out defined roles for employees in situations where there is little room for variation. This makes transactional leadership highly useful for businesses with strict corporate structures and routine day-to-day operations.
Limitations of Transactional Leadership
Transactional leadership has its limitations. Because it focuses on maintaining structure, this leadership style can discourage innovation, and it may demotivate employees over time. For dynamic work environments, transactional leadership might be considered too inflexible.
In short, this leadership style is not appropriate for environments where innovation and change are needed. Transactional leadership aims to maintain the status quo.
Examples of Transactional Leadership
Several well-known leaders have made use of transactional leadership, including:
- Bill Gates, former Microsoft CEO — known for heading Microsoft with a strict and authoritative style to gain a monopoly on the PC operating system market.
- Vince Lombardi, American Football coach — known for training the Green Bay Packers with the same plays repeatedly to perfection; the team won five NFL Championships in seven years under Lombardi’s leadership.
- Tim Parker, British businessman — known for his results-focused approach to business. He rescued the British motoring company AA in 2004 by addressing specific operational problems and aggressively restructuring the company.
- Sir Alan Sugar, British business magnate — known for leading the electronics company Amstrad, and also for hosting the UK version of The Apprentice, which presents contests with strict tasks incentivized by rewards and penalties.
Understanding Transformational Leadership
Definition and Key Characteristics
Transformational leadership is a style that focuses on motivation and inspiration rather than adherence to a set of rules or rewards and punishments.
Transformational leadership is ideal for companies where circumstances constantly change — especially when new ideas are highly sought after.
Advantages of Transformational Leadership
Transformational leadership is ideal when you need to foster innovation and creativity.
This leadership style encourages employees to develop and adapt to the latest trends and developments. It can also motivate employees and encourage professional development, helping your company grow beyond its strictly defined goals.
Limitations of Transformational Leadership
Transformational leadership comes with limits. If it is not combined with transactional leadership, you may end up neglecting key operational details.
Due to the flexible nature of transformational leadership, there are also challenges in measuring and implementing this leadership style in a consistent and even way.
Transformational leaders ideally inspire their employees to innovate. However, if a transformational leader is especially influential or important, employees may become dependent on the leader’s vision, leaving the company unable to succeed without them.
Examples of Transformational Leadership
Several famous leaders are known for their transformational leadership style, including:
- Steve Jobs, former Apple CEO — known for setting challenging goals for employees while also promoting innovation at a time when the company was struggling, eventually transforming the company and producing revolutionary products like the iPhone.
- Jeff Bezos, Amazon executive chairman — known for creating a competitive, customer-driven workplace, Bezos split Amazon employees into teams, assigned those teams to tasks and problems, and improved communication across the company.
- Richard Branson, Virgin founder and business magnate, known for taking risks in a multitude of business ventures and encouraging employees to act creatively.
Comparing Transactional and Transformational Leadership
Transactional leadership and transformational leadership styles have differences and similarities. We’ll compare each leadership style in detail in this section.
Situational Effectiveness
Each type of leadership is most effective in particular situations.
Transactional leadership typically works best in environments in which operations are highly structured and goals can be clearly defined — such as manufacturing and sales.
Transformational leadership is more appropriate in industries where creativity is important and success can come from unexpected places. This leadership style is particularly useful in areas such as technology, advertising, and marketing.
Integration of Leadership Styles
It’s entirely possible to combine both styles of leadership. In fact, it may even be necessary to do so. Most businesses will not succeed without adapting to changes, nor will they survive unless they maintain a structure that allows for consistent and reliable operations.
The dual nature of these leadership styles can be seen in the real world.
Steve Jobs, though he is known as a transformational leader, would likely not have succeeded in revolutionizing Apple without setting clear goals for himself and his employees.
On the other hand, Bill Gates, who is known as a transactional leader, may not have succeeded at Microsoft unless he intuitively understood how to focus his employee’s efforts.
Conclusion
Transformational and transactional leadership styles have key differences. Transactional leadership is focused on setting goals and expectations for employees. This involves rewarding and penalizing employees as they meet or fail to meet those goals.
Transformational leadership, meanwhile, is focused on encouraging innovation and change, usually with less of a focus on incentives for employees.
Despite those differences, both leadership styles have one key similarity: either approach can help your company succeed under the right circumstances.
It’s important to determine which leadership style is best for your business — or to use both leadership styles together when it’s necessary to do so.
Read More
For more on leadership styles, read our blog The 6 Most Common Leadership Styles and How to Find Yours.
Frequently asked questions
What is a multi-currency account/virtual IBAN?
A Payset multi-currency account allows you to receive money in 34 different currencies and send money in up to 38 currencies, all within the same account.
You can deposit and withdraw funds, convert currencies at competitive exchange rates, and hold your chosen currencies to capitalize on market movements.
A Payset multi-currency account allows startups and business owners to receive payments from clients virtually anywhere in the world and pay suppliers, staff, and contractors quickly and affordably in their chosen currency.
- Funds can be deposited and withdrawn from the account for a small fee.
- Account holders can send and receive money with other Payset users for free.
- Depending on your region, you can use various payment networks from your Payset account, including SWIFT, SEPA, ACH, Fedwire, Faster Payments, BACS, and CHAPS.
- Once you register an account, you will be provided with a Virtual IBAN (International Bank Account Number), which makes all of these transfers easy.
- We provide you with local payments and collections. For example, transactions in USD, EUR, CAD, and GBP are processed through the local payment networks, which is far cheaper and takes minutes as opposed to days
Are there limits on the amount of money I can send and receive?
No, there are no transaction limits on Payset multi-currency accounts.
However, higher-volume transactions may require additional anti-fraud verification. If you plan to make a large transaction, contact us in advance to avoid verification delays.
How is Payset regulated?
Payset is regulated as an authorized Electronic Money Institution by the UK Financial Conduct Authority. Our activities are also regulated by the Payment Services Regulation 2017 and the Electronic Money Regulation 2011 (SI 2011/99).
How do I add money to my account?
How do I send money from my account?
Once you have opened your verified IBAN account and added money to a balance, transferring funds is simple.
Simply log in into your account and add a beneficiary, then simply “make a transfer” in your preferred currency to that beneficiary.
Information contained in this publication is provided for general education and information purposes only and should not be construed as legal, tax, investment or other professional advice or recommendation, or an offer of, or solicitation for, any transactions or any other actions (or refraining therefrom); This material has been prepared without taking into account any particular recipient’s financial objectives or situation. We make no warranty, guarantee or representation, whether express or implied, as to the completeness or accuracy of the information contained herein or fitness thereof for a particular purpose; Use of images and symbols is made for illustrative purposes only and does not constitute a recommendation or advice to take or refraining from any action; Use of brand logos does not necessarily imply a contractual relationship between us and the entities owning the logos, nor does it represent an endorsement of any such entity by Pay Set Limited, or vice versa; Market information is made available to you only as a service, and we do not endorse or approve it; Any reference to past performance, predicted returns, or likelihood performance scenarios may not reflect actual future performance and certainly do not guarantee future outcomes.
