Transactional vs. Transformational (Part 1): Leadership styles in comparison

Timo Gerhardt, Monday 11 July 2022 | Reading time: 4 min.

Over time, different styles of team leadership have emerged.  A few years ago, transactional leadership was the unchallenged standard in almost all companies. Now, a transformational style seems to be catching up and winning followers. However, this does not necessarily mean that this type of leadership is categorically superior. Find out what defines both styles, how they differ, and which one is right for you in the following article. 

When you think of impressive leaders, US-American CEOs like Elon Musk come to mind first. He is considered a prime example of a transformational leader. If we look at Germany, specifically at the DAX companies, we see a different picture: CEOs tend to favor a transactional leadership style. For example, Oliver Zipse, CEO of BMW AG, is less memorable than Musk because of his more rational style. In the following, we will show you the specific aspects in which the aforementioned leadership styles differ.

The transactional style: The rational approach

The transactional approach is a very results-oriented approach. Its primary goal is to teams to complete their tasks and projects as effectively and efficiently as possible.  A rational and economic mindset is a prerequisite for this style. Team members receive support and resources in exchange for their own efforts and performance. This is equal to a results-oriented compensation. Thus, employees are motivated primarily by extrinsic factors. Ultimately, the focus is on a clear plan, structures and order. Emotions and interpersonal relationships are secondary. 

The transformational style: leading through enthusiasm

The transformational approach focuses much more on employees as people than on their tasks. Leaders engage with the team not only in the context of task accomplishment. They also try to influence the employee as a person toward the company's goals. Four aspects characterize the transformational leadership style:

  1. Individual consideration
  2. Intellectual stimulation
  3. Inspirational motivation
  4. Idealizing influence

Individual consideration means that the leader responds to each team member as a person. Strengths are pushed individually, and personal goals are aligned with the goals of the team and the company. This conveys a sense of appreciation and generates intrinsic motivation. 

In addition, transformational leaders use intellectual stimulation in order to get employees to question routine processes, to think differently and to develop their own innovative spirit and desire for knowledge. In this way, a breath of fresh air can enter the team and processes are adapted to a constantly changing environment. 

If managers stand for certain values and represent them authentically, it has an inspiring effect, and they can develop a strong vision for the team and the company. Employees become enthusiastic about what they are doing as a result of this vision which in turn energizes the whole team. A leader's idealizing influence is fed by the ethical and moral beliefs held. Altruistic motivation can additionally unite employees and bind them to the company. 

In the second part, you will learn in which practical situations a transactional or a transformational leadership style is more suitable.

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