The second higher-order dimension of Full Range Leadership requiring consideration is transactional leadership. The foundations of transactional leadership lie in expectancy theory (Vroom, 1964) and can be allocated to the Old Leadership paradigm (Furtner & Baldegger, 2013, p. 136). Transactional leadership builds on the fact that individuals are likely to engage in activities that capitalize on their expected return for performance. Using reward systems, transactional leadership seeks to explain the effort-reward relationship (Pearce & Sims, 2002, p. 174). Whereas transformational leadership places the focus on developing followers, transactional leadership is characterized by exchange between leaders and followers (Avolio, 2011). Transactional leaders emphasize a rational exchange process which is typically characterized by setting clear objectives and monitoring for achievement.
The transactional leadership dimension includes three first-order factors: (1) contingent reward, (2) active management-by-exception (MBEa), and (3) passive management-by-exception (MBEp) (Bass & Avolio, 1995). Contingent reward leadership is based on an exchange process between leader and followers. It is considered an effective and efficient leadership behavior (Judge & Piccolo, 2004). Targets are set with followers which in turn are promised rewards if goals are met. Contingent rewards can be either transactional or transformational in nature. A reward might be categorized as transactional when it is materialistic. Psychological rewards, such as praise, make a contingent reward transformational (Antonakis et al., 2003).
Active management-by-exception describes a facet of transformational leadership that is characterized by monitoring and control by the supervisor. If required, the leader may take immediate corrective actions to prevent bigger mistakes. For this reason, active MBE is considered effective in many situations.
Passive management-by-exception is less effective than active MBE as it strives to place responsibility in the hands of the follower. Followers are required to make decisions on their own and have to deal with the consequences. The leader assumes a passive role and only interferes if mistakes have already been made (Furtner & Baldegger, 2013, pp. 159-161).
Transactional leadership is considered to be more effective in stable environments when there is no immediate need for change (Daft & Lengel, 1998). Transactional leaders encourage followers by emphasizing rewards in return for work performance (Kahai & Avolio, 2008). Transactional leadership has often been linked to successful performance. Leaders that exhibit strong contingent reward leadership traits are perceived as effective communicators (Neufeld et al., 2010). Contingent reward leadership was further found to positively influence performance (Bass & Avolio, 1990). A recent study found transactional rather than transformational leadership to be associated with subordinates’ satisfaction (Mihalcea, 2014). The author claims that immediate reward and liberty are of utmost importance. Contradictory findings outline that the relationship between leadership behavior and performance is more difficult than assumed, as group quantitative performance was found to be better under transactional leadership, whereas group qualitative work was enhanced under transformational leadership (Hoyt & Blascovich, 2003). This could be due to the intellectual stimulation associated with transformational leadership (Jung & Avolio, 2000). Whereas transactional leadership encourages followers to meet the negotiated standard for performance, transformational leadership promotes performance beyond the negotiated level (Bass, 1985). Howell and Avolio (1993) account for this difference in terms of the commitment expressed by followers towards leaders.