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Understanding the difference between transactional vs transformational leadership helps you define your own leadership or management style.

All leaders would like to improve their leadership skills. They hire business coaches, take online courses, ask for feedback and more.

There are lots of leadership styles that leaders can use to transform their organizations. But the two primary ones are transactional or transformative.

While every leader is unique, they often naturally gravitate toward transformational vs. transactional leadership.

Contrary to the popular notion, leadership skills can be learned and developed throughout life. That’s why the best leaders understand the benefits and drawbacks of both types of leadership and learn to leverage the more appropriate one based on the situation.

Keep reading to explore each style of leadership in more detail, get insights from Coach Sean Smith (creator of neuro-transformational coaching) on how to put them into practice, and learn how to adopt each one to help you in your day-to-day managerial duties.

What is a transformational leadership style?

Transformational leadership, as the name implies, is about changing the people who work with you. Transformational leaders focus on the personal and professional growth of their employees. Such leaders nurture their employees and motivate them to go beyond what they thought was possible.

As a result, a transformational leadership encourages independence in the workplace, promotes creativity and inspires innovation. They help everyone involved understand the “why” behind their actions, as Simon Sinek would say.

Transformational leaders have the most impact with younger employees, who are just developing their talents, as well as environments where there are fewer deadlines or quotas, and work processes are not as established. So start-ups, creative agencies and companies with huge ambitions are a good fit for transformational leaders.

The four I’s of transformational leadership

Transformational leadership is commonly characterized by four I’s:

  1. Idealized influence
  2. Inspirational motivation
  3. Intellectual stimulation
  4. Individualized consideration

These principles were first described by a leadership scholar Bernard Bass (once the most cited leadership scholar in the world) and inspired by the work of another leadership authority James MacGregor Burns. Bass, among other things, described transformational leadership as “the leader’s impact on the target audience.”

The presence of the four I’s tends to have a substantial impact on the efficacy of transformational leadership for both the leader and the organization involved.

A venn diagram showing the four components making up transformational leadership

The four I’s are often described as follows.

1. Idealized influence

Leaders should themselves serve as role models for the change they wish to see, demonstrate their core values and be guides for their employees. In short, you want to become an ideal model of influence to gain respect and trust.

Coach Sean Smith, creator of neuro-transformational coaching, says transformational leadership is an energy, not an action or a set of rules. Leaders cannot take their followers where they won’t go themselves. They cannot advocate for what they have not experienced personally. This is leadership from the front, not leadership from behind.

The leader knows their vulnerability and imperfections are their most powerful teaching tools so their followers can see themselves in the leader and show up with their authentic selves, free from the need to protect and hide their “weaknesses.”

2. Inspirational motivation

Leaders should craft a vision that conveys a sense of purpose and that could be shared and internalized by their employees, inspiring them to take action. The leaders inspires with vision and creates high standards to chase that vision, so the group is driven by purpose and meaning.

As Coach Sean Smith points out, we all crave meaning. And most people don’t feel connected to a deep purpose for their work.  A compelling vision that is co-created within a partnership or group provides ownership within the group.  People are much more committed to something they’ve created than something they’ve been given.  The vision is fluid, it can change constantly and rapidly.  The group holds itself collectively and each other individually accountable with positive reinforcement rather than shame, blame & punishment.

This allows people to tap into the most powerful form of human fuel — intrinsic creative inspiration, which is the desire to create something meaningful for the sake of creating something meaningful as opposed to external reward or recognition.

3. Intellectual stimulation

Leaders should provide opportunities for creativity, encourage innovative thinking, and promote personal growth and experimentation. This has to come from a place of authenticity — the leader should stimulate intellectual challenges and genuinely want to hear what the followers have to say.

According to Coach Sean Smith, great leaders see conflicting opinions and experiences as opportunity to strengthen and unify, rather than weaken and divide. Each dissenting view is equally valid to be explored, rather than immediately judged. The leader is not threatened by the brilliance of the followers because the leader has internal esteem and stability.

From this place, questions & challenges become launchpads for innovation and expansion.  Followers are more likely to ask their own questions, thereby increasing the collective question bank and opportunities for expansion.

4. Individualized consideration

Leaders should support their employees in terms of professional development, act as mentors, and find an individual approach to everyone’s needs. This means the leader not only tends to each individual’s concerns and needs, but also celebrates their individual contributions.

For Coach Sean Smith, this is the core belief of transformational leadership — that every individual person has inherent value. If this is true, then the leader values that value and seeks to build upon it with collaboration rather than competition. There’s no reason for the followers to peacock or position themselves against each other because each puzzle piece is uniquely valuable. The leader knows that time spent with each person provides exponential returns.

This makes the individuals believe they are important, which will inspire intrinsic motivation thereby removing the need for external rewards & punishments. Those are still good to use, but won’t be the main fuel for performance. Everyone feels safe in this environment.

Related: Mentoring vs Coaching vs Training: What’s the Difference?

What are examples of transformational leadership?

The type of leaders who want to transform the people around them often think long term and are ready to sacrifice short-term profits, for example, for future gains.

Among contemporary business leaders, Elon Musk stands out as someone who practices the transformative leadership approach. From colonizing Mars to slowing down climate change, he knows how to present challenges that would rally partners and employees behind him.

Steve Jobs, through his work at Apple, transformed the way we think about the possibilities and the industrial design of personal electronics.

Nelson Mandela and Martin Luther King Jr., both Nobel Peace Prize recipients, transformed their respective societies through activism around civil rights.

Oprah Winfrey has been recognized as a transformational leader for changing the media landscape with her talk shows, which received every TV award out there.

According to Coach Sean Smith though? It’s difficult to identify a transformational leader unless you have had direct experience working with them…

From my personal experience: Jack Canfield and Diane Luby Lane are transformational leaders. [But] I’m a snob with this stuff, so if I don’t have personal experience or haven’t seen somebody vetted through these filters, I’m not willing to call them transformational leaders just from the outside looking in.

You can see that transformational leadership works when a leader manages to instil change in and inspire anyone they interact with.

What are the top characteristics of transformational leaders?

While every leader will be unique in their own way, there are a few key attributes that many transformational leaders tend to share:

  • Intrinsically inspired
  • Self trust
  • High self esteem
  • Embraces ignorance & conflict as opportunities to create something currently unknown 
  • Values each individual opinion as valid
  • Seeks to understand vs. be understood 
  • Makes bold decisions
  • Willing to change decisions with new information 
  • Honors each individual’s contribution 
  • Willing to be wrong, transparent, authentic, vulnerable 
  • Normal person, not seeking perfection

What is a transactional leadership style?

Unlike transformational leaders who act based on their vision, transactional leaders seek to establish a culture of continuous exchanges of value between the parties involved.

For example, transactional leaders set specific goals for their team members and then reward them for reaching those goals. That’s the core of the “transaction.”

Even though transactional leadership seems easy and straightforward, it’s anything but. Transactional leaders focus on the delicate balance of challenges and rewards. While rewards need to be valuable enough to motivate employees, they also need to correspond to various levels of performance.

Choosing effective incentives for everyone in your organization is extremely important, since proper incentives tend to have a linear relationship with expected results.

In general, transactional leadership is a practical approach to managing others, since it’s based on an accessible system of rewards and punishment that everyone can understand.

What are examples of transactional leadership?

Transactional leadership is more widespread than successful transformational leadership, but there are few well-known examples of transactional leaders.

Why? Because transactional leadership, by design, is not meant to stand out and be recognized. It’s more about delivering precise results on time and on budget. People only notice transactional leadership when it fails to achieve its goal and the work process breaks down.

However, you can find successful transactional leadership in any work environment that requires structure or easily predictable results.

Manufacturing, with quotas for work shifts, is a good example, and sales departments as well. Anywhere strict hierarchy is present, such as military and team sports. Companies that need to deliver projects with time or financial constraints and that reward employees with quarterly bonuses. Even schools and universities that assign good grades for effective performance work within the transactional leadership model.

Fil J. Arenas, a professor of leadership, in his book A Casebook of Transformational and Transactional Leadership states that “organizations need excellent transactional leaders who leverage contingent rewards and management by exception to meet their performance goals.”

But chances are, you’ve encountered lots of examples of transactional leadership throughout your life without really paying attention to it.

Transactional vs. transformational leadership: Which is more effective?

You can see that transactional and transformational leadership styles have lots in common but also differ in some other aspects.

It should be noted that it’s not to say that one of them is right or wrong, or better than the other. They both have their advantages and disadvantages, which can be leveraged or avoided depending on the situation.

Transactional leadership works best at maximizing operational efficiency as well as building out processes and management structure. It’s not that great at innovation, professional development or long-term strategy.

Transformational leadership can inspire changes throughout the company and motivate employees to work toward a unified vision. However, there are often challenges that accompany this style too. This type of leadership often lacks attention to detail and requires a lot of coordination, which might not work in an organization without a built-in management structure.

Besides, transformational leaders have to sustain their drive for a long time to continue to motivate others.

So transactional leadership gets things done, whereas transformational leadership knows how to inspire people to do something new. The good news is the two types of leadership are not mutually exclusive.

The same leader can be role modeling both styles, depending on the situation. For example, sales teams can run on transactional principles. They have monthly quotas to hit and are rewarded with a bonus, which incentivizes them to close as many deals as possible.

At the same time, the strategy department might work on realizing the greater vision and trying to come up with new concepts and products that fully encapsulate it. To succeed, they need space to experiment and “transform” their thinking. Hence, transformational leadership might work better here.

To sum up: If you’re a leader (either of a whole company or a single department or team) with a singular goal, you can pick whether to use transformational vs. transactional leadership accordingly. But if your ambitions span across multiple directions, it’s likely that you’d need to learn to combine both types of leadership to get the best results. This concept is also is also supported by research.

How to teach as a leader online

Both transactional and transformational leaders today, but especially the latter, are involved in a lot of teaching, whether it’s giving presentations or creating online courses for their team.

You can see how the process of teaching itself can be transactional (giving facts to memorizing and testing through quizzes) or more transformational (inspiring students to come up with their own solutions).

Regardless of your teaching method, you need a powerful online teaching solution to get started, such as Thinkific.

Thinkific is an intuitive web-based teaching platform that you can use to create an online course (public or private) of any complexity in just a few hours. You can make it free or sell it for passive income. Additionally, you can also add memberships, community, and more.

Building courses with Thinkific is easy and doesn’t require you to know any coding whatsoever. Just use a drag-and-drop editor and any of the dozens of professionally designed templates to craft exactly what you want.

Get started with Thinkific and create your first course for free today.