1. Transactional Theory and its Relevance
to Business
First proposed by Max Weber in 1947, Transactional Theory is the essence of management today. While
most businesses try to adapt Transformational Leadership, the ultimate result is a carrot and stick system,
or rather, Transactional Leadership.
Transactional Theory
How it Works
According to transactional theory, the workplace is nothing but a system of punishments and rewards. A
leader is to use a combination of both to achieve what is needed. If a worker deviates, punishment is
incurred. If they do a good job, the converse is true, usually in the form of money. This how transactional
theory derives its name –leaders make transaction with employees to get what they want.

2. Transactional theory works on the assumption that people are motivated by rewards and the prospect of
punishment. In many cases, a transactional leader will set extremely specific guidelines to be followed.
This is to ensure little deviation.
When to Use It?
1) Keeping the Status Quo
Transactional leaders thrive on stability and normalcy. In contrast with a transformational leader, a
transactional leader aims to keep things unchanging, instead of growing an employee’s skill set and
abilities. This is good for workplaces where routine is desired and deadlines have to be consistently met.
By setting clear expectations and constantly using rewards and punishments, leaders can ensure
conformity.
2) When Employees Desire Direct Incentives
Some workers prefer a direct incentive for the work they do. In this case, a more transactional kind of
approach may be better at motivating them. This is especially true when it comes to mechanical tasks.
Mechanical tasks require little thought and are often based on repeated actions. Here, indirect incentives
such as autonomy, emotional connections and purpose have little effect. Instead, hard incentives such as
cash and bonuses tend to encourage more work. Transactional leaders are ideal at providing these
incentives given their work ethic.
Why it isn't Reliable Anymore?
1) Most Businesses Operate Badly on Transactions

3. Most businesses these days require workers to think outside the box. As Dan Pink, author of the book
“Drive”, said, "mere carrots and sticks aren’t going to encourage the creativity that is desperately
needed. A mix of pressure and unwillingness to act unless pushed detracts from the creative process". In
this regard, transactional leaders are losing relevance as their tactics are ineffective. They simply do not
have the tools to promote productivity in a modern and non-mechanical workplace.
2) It Creates Unreliable Employees
Other forms of leadership edge out mostly because they use other means of incentivizing performance.
Transformational leaders seek to motivate you from within; democratic (or participative) leaders motivate
you by involving you; while autocratic leaders scare the living daylights out of you. Transactional leaders
lose out as they have to constantly rely on money to get things done. Ignoring arguments about cost-
effectiveness, this also creates employees that will only act under the incentive of money, or lack thereof.
It subtly creates a culture of subscribing to the highest bidder which may be counter-productive to the aim
of most businesses today, which is to have high employee loyalty.
The Bottom Line
As with other leadership styles, transactional theory should be applied on a situation-by-situation basis.
Sadly, modern businesses rarely have situations that call upon transactional leaders. It has its uses, but it
is unlikely to do much good compared to other styles.