Transformational leadership includes those leaders who are inclined towards the change of the organization or team and accordingly inspire their followers to achieve the needful (McShane & Glinow, 2009). They further state that transformational leadership is all about creating a strategic vision and communicating the same to the followers as well as developing a model for the vision which is hence followed by building commitments to fulfil the same. This kind of leadership involves leading the organization's strategic and cultural transformation for a better fitment with the surrounding environment. There are four characteristics of transformational leadership which includes charisma, inspiration, intellectual stimulation and individualized consideration. Charisma is all about providing vision as well as gaining respect and trust where as inspiration includes sharing important purposes in simple manner and thus communicating high expectations. Intellectual stimulation helps to develop intelligence, problem solving capabilities and individual consideration is concerned about guiding employees individually and giving personal attention (Bass).
On the other hand transactional leadership has been defined as 'a transaction or exchange of process between leaders and followers' (Daft, 2002, P. 147).Achieving organization's current objectives and goals and focussing on the performance improvement of the employees as well as their job satisfaction through leader's behaviours are the main perspectives of this kind of leadership (McShane & Glinow, 2009). Contingent Rewards and management-by-exceptions are the characteristics of transactional leadership (Deluga, 1988). He stated that contingent rewards is all about notifying employees about their task and objectives in order to earn rewards where as management-by-exception includes primary reaction of managers when employees make errors. Actions are taken only when employees fail to complete their objective. Hence transactional leadership is more concerned about managing people in relation to the current scenario of an organization. As a result of this it differs from transformational leadership because transformational leaders are keener about forward looking of organization's objectives (McShane & Glinow, 2009).
Transformational and transactional leadership theories help to understand the efficiency of leaders on cultivation of knowledge (House & Aditya, 1997). One of the advantages or characteristics of transformational leadership is that it develops creativity within an individual. Transformational leaders play an important role in motivating workers on a daily basis and encourage them to share their ideas with the organization (Bryant, 2003). On the contradictory, transactional leaders reduces creativity within an individual as the characteristics of this kind of leadership give more importance to specified goals and policies (Conger & Kanungo, 1998). Bryant (2003) also discussed about the contribution of transformational leadership at group level. It plays an important role in facilitating interactions and exchange of knowledge among groups which in turn encourages group workers to be innovative and come up with problem solving skills (Bass, 1985). Like individual level, focus on reward structure, sticking to basic rules and procedures make transactional leaders ineffective in developing innovations at group level. But knowledge exploitation is much more fruitful in transactional leadership from an organization level point of view compared to transformational one. As transformational leaders are more inclined towards inspiring individuals, providing vision to them and other characteristics they tend to be a weaker in proving their efficiency in organizational systems, structures and implementation. Hence Bryant (2003) stated that effectiveness of transformational leadership is more than transactional one as far as individual and group level are concerned, but at organizational level transactional leadership had been proved to be more effective.
Influential relationship between managers and employers can be explained or understood though different perspectives of transformational and transactional leadership theories. According to Deluga (2002), the relationship between leaders and followers in transactional leadership is more of a bargaining nature. The transformational leadership differs from that of transactional one in this context as the transformational leaders are more or less concerned with the effective employee involvement in a joint mission. Unlike transactional leadership, the relationship between managers and employees is also mutual stimulating in this kind of leadership. Deluga (2002), further states an important difference between these two kinds of leaderships. Transactional leaders set the goals of the employees in an organization based in their basic or lower-level needs. On the contradictory, leaders following transformational leadership look after the high-level needs of their followers which in turn act as a motivation factor for the employees to improve performance.
Since transformational leadership involves inspiring employees and hence stimulating them to think differently , transformational leaders do make a difference . According to McShane and Glinow (2009), employees have greater satisfaction under transformational leaders which leads to improved organizational commitment. It also helps the followers as far as job performance, engagement with organizational citizenship behaviour and making innovative decision are concerned. But there are certain limitations as well in this kind of leadership. Positiveness of transformational leaders are recognized only when they bring about change successfully in organizations (McShane & Glinow, 2009). They further suggested that effectiveness of this kind of leadership is situational because ' transformational leadership is probably more appropriate when organizations need to adapt than when environmental conditions are stable' (McShane & Glinow, 2009, P. 241). Hence Klegg, Kornberger and Pitsis (2008) described one of the weaknesses of transformational leadership to be short-lived because of the fact that organizations are not always involved in constant change. On the other hand , one of the main limitations of transactional leadership is that employees get largely motivated by simple awards which leads to the fact that transactional leadership has been ineffective in providing skilled employees to organizations. According to Deluga (2002), transactional leadership is a failure in improving job satisfaction among employees, increasing their effort towards goal and providing effectiveness towards employee contribution to organizational goals. This kind of leadership focuses more on management of rewards and punishments.
Leadership patterns differ in transformational and transactional perspective and these two kinds of leaders also have their own way to view themselves and their followers (Kuhnert & Lewis, 1987). Because of its characteristics, transformational leaders lead to positive results in the field of organizational leadership which involves employee commitment, satisfaction and trust (Barling, Slater & Kelloway, 2000). But according to Clegg, Kornberger and Pitsis (2008), both transformational and transactional components of leadership can make an ideal leader. Hence both transformational and transactional leadership are important from an organizations point of view (McShane & Glinow, 2009). On one side effectiveness of transformational leadership styles helps organizations to implement better course action and on the other side it is because of transactional leadership styles that organizational efficiency can be improved. But McShane & Glinow (2009), further concluded that daily involvement of managerial activities makes a leader transactional in nature rather than transformational which results in organization's stagnancy and misalignment with its environment.