Which Leadership Style Works Better: Transactional or Transformational?
Updated February 2025.
Leadership style is a critical factor in the success of any organization. How the leadership operates will affect employee morale, productivity, innovation, and decision-making, so getting it right is imperative. In recent decades, the mechanics of leadership have been analyzed in academic and business circles, styles have been labeled and defined, and debates have raged over which are most effective. In this piece, we look at two leadership styles that are most often used—transactional leadership and transformational leadership—and analyze their differences, including their strengths and weaknesses.
What is Transactional Leadership?
Transactional leadership is one of the more traditional leadership styles and was first described academically by German sociologist Max Weber in 1947. In this model, leaders apply a “carrot and stick” philosophy based on exchanges between the leader and follower. The leader provides rewards and punishments to followers based on their performance, such as bonuses, salary increases, or disciplinary procedures.
To use this method effectively, the leader must recognize progress and achievements quickly and take action. Subordinates in this situation are not expected to behave innovatively or move outside the boundaries of their defined roles. The risk with this approach is that ineffective transactional leaders either do not respond quickly enough or fail to monitor employee performance adequately, leading to poor morale and decreased productivity. On the positive side, subordinates know precisely where they stand; their roles are clearly defined, and they are fully aware of the criteria they must meet to advance.
What is Transformational Leadership?
The concept of transformational leadership was first introduced by James MacGregor Burns in 1978 and describes a leadership approach centered around inspiring subordinates with charisma or a strong vision. Leadership extends outside of traditional concepts of exchanges and rewards. Examples of this method include Steve Jobs and Oprah Winfrey, who both built successful organizations by creating a clear vision of what that organization could do to transform the world and people’s lives.
This type of leadership works best with subordinates who share the leader’s vision and have the capability to regulate their own work to some degree. Unfortunately, transformational leaders tend not to monitor the performance of their employees and subordinates closely, which can lead to problems with performance going unnoticed. The best transformational leaders avoid this by selecting subordinates who closely align with their vision and working consistently to inspire them.
But Which Works Better?
Both of these leadership styles have their advantages and disadvantages, which depend on the leader’s personality and the type of organization they are running. For example, large businesses with clearly defined goals, such as financial or manufacturing companies, work very well with a transactional model; after all, it is not easy to inspire a machine operator with a vision for your business, but it is easy to motivate them with productivity bonuses. A transactional approach also works well in team sports, rewarding the best team members and benching those who don’t perform—although you could argue that the best coaches are transformational, too, inspiring their athletes to perform with their vision of becoming the best team.
Transformational leadership works well in areas where subordinates are not necessarily motivated by their own gain. This can include politics, where unpaid interns motivated by ideology are common, or education, where the best teachers want to improve the lives of their students. Tech startups are also a common place to find transformational leaders, inspiring their subordinates to create the next world-changing product.
The Best of Both Worlds
Although both transactional and transformational leadership have environments in which they work best, there is usually some overlap, as we indicated earlier in the case of sports teams. The best leaders will find a blend of the two that works best for their organization, inspiring subordinates when necessary and using rewards and punishments when required.
More info to help decide which leadership style is better for your organization (Transactional vs. Transformational)
Are you being held back by one of these leadership styles?
Here’s some more information to help you decide which is better in your industry, organization, and personal style.
How do transactional and transformational leadership styles influence organizational innovation?
Your leadership approach directly shapes the level of innovation within your organization. Transactional leadership prioritizes efficiency, consistency, and structured processes, which can improve short-term execution but may limit experimentation. In contrast, transformational leadership fosters creativity, encourages unconventional thinking, and motivates employees to challenge existing norms.
A transactional leader enforces rules, sets performance metrics, and expects employees to follow predetermined guidelines. This structure ensures stability but discourages risk-taking. Employees may hesitate to propose new ideas if failure carries penalties. This leadership style is effective in industries that require strict adherence to regulations, such as finance and manufacturing.
Transformational leaders inspire employees to seek continuous improvement. They create a work environment where questioning the status quo is encouraged. Leaders in this category promote open communication, reward creative problem-solving, and provide autonomy, which can accelerate innovation. Companies in tech, marketing, and research-driven industries benefit from this approach.
Balancing both styles may yield the best results. An organization that integrates structured oversight with room for creative thinking allows employees to innovate within well-defined parameters. A study published on MDPI suggests that transformational leadership leads to higher levels of innovation when combined with strategic discipline.
What are the measurable impacts of transactional and transformational leadership on employee satisfaction and performance?
Your leadership style directly influences how engaged and productive your employees are. Transactional leadership, with its structured environment and performance-based rewards, leads to predictable results. Employees know what is expected, and high performers are often rewarded with financial incentives or promotions. However, this approach may leave little room for personal development, which can result in lower job satisfaction over time.
Transformational leadership, on the other hand, fosters intrinsic motivation. Employees feel valued when their ideas contribute to the organization’s growth. Employees who work under transformational leaders report higher engagement, which leads to increased productivity, lower turnover rates, and improved job satisfaction.
Measuring these impacts requires looking at key performance indicators (KPIs) such as retention rates, employee surveys, productivity metrics, and profitability. Companies that invest in leadership development programs focused on transformational skills often see a positive shift in both employee morale and overall business performance.
How do cultural differences affect the implementation and effectiveness of transactional versus transformational leadership?
Your leadership effectiveness depends on how well you adapt to cultural expectations. Transactional leadership works well in cultures that value hierarchy, structure, and clearly defined roles. Countries with high power distance, such as Japan and Germany, often embrace this leadership style because it aligns with their cultural norms. Employees expect direct supervision, formal decision-making processes, and structured reward systems.
Transformational leadership thrives in cultures that emphasize collaboration, innovation, and individual empowerment. Scandinavian countries, for example, often favor transformational approaches because their work environments encourage open dialogue and collective decision-making. Employees in these cultures respond well to leaders who inspire rather than dictate.
Global organizations need to consider cultural differences when implementing leadership strategies. An approach that works well in one region may fail in another. Cross-cultural training, localized leadership development programs, and employee feedback systems help companies navigate these differences successfully. Checkout these deeper insights into cultural dimensions that affect leadership effectiveness.
What are the potential drawbacks or limitations of exclusively adopting either transactional or transformational leadership?
Over-relying on one leadership style can create problems within an organization. A strict transactional approach may lead to stagnation. Employees focus solely on meeting predefined goals, which discourages creativity and personal investment in long-term success. Organizations that operate this way may struggle to adapt to market changes, as rigid structures slow down decision-making and limit innovation.
A purely transformational approach also has risks. Constantly pushing for change without maintaining operational consistency can overwhelm employees. If goals are too ambitious or lack clear execution plans, productivity may decline. Employees may also experience burnout if they feel pressured to constantly think outside the box without clear expectations.
A balanced leadership approach mitigates these risks. Structuring processes while fostering a culture of innovation allows organizations to maintain stability while evolving strategically. It is extremely important to have adaptability in leadership, particularly in fast-changing industries.
How can organizations assess which leadership style aligns best with their current goals and challenges?
Determining the right leadership style requires assessing your organization’s priorities, industry demands, and workforce dynamics. Companies that require consistency, compliance, and efficiency benefit from transactional leadership. Industries such as finance, healthcare, and logistics often operate best under clear structures and well-defined performance expectations.
Organizations focused on growth, creativity, and change management should lean toward transformational leadership. Startups, marketing agencies, and tech companies thrive under leaders who inspire employees to challenge conventional thinking.
Employee feedback surveys, performance data, and industry benchmarks provide insight into which leadership approach is most effective. Leadership assessments help organizations evaluate leadership impact and identify areas for improvement.
Combining both leadership styles allows for flexibility. Establishing a structured foundation while encouraging innovation ensures long-term success. Organizations that periodically reassess their leadership strategies remain agile and competitive in evolving markets.
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About the Author:
Pat Bosworth
Founder and CEO Patrick effectively coaches leaders at all levels and across a number of industries with a pragmatic, consultative approach. Previously, he was vice president with Right Management and held other senior OD and development positions in manufacturing and the professional services Industries.
He holds an M.S. in Industrial/Organizational Psychology from Lamar University.
