THE EFFECT OF TRANSACTIONAL LEADERSHIP ON EMPLOYEES PERFORMANCE – CASE STUDY OF 5 ALGERIAN BANKING INSTITUTIONS Ali Bousbia Brahim *, Ognjen Riđić **, Tomislav Jukić ***
The objective of this study was to determine what managers thought about the organizational results performed by utilizing different leadership styles in a part of the banking sector in Algeria. A quantitative survey instrument was designed to analyze their opinions. Quantitative survey instrument design was adopted as the most cost efficient for this research. Convenience sampling method was utilized. As far as the research time frame was concerned, it was performed in a cross-sectional manner, in the summer of 2014. Out of 174 sent out surveys, the responses were collected from 132 surveyed individuals. The survey was the main instrument for data collection and it was designed in a “5 - point Likert’s scale”, in addition to descriptive statistics questions. The collected data were analyzed with descriptive statistics. The analysis of variance (ANOVA) was utilized as the tool of inferential statistics in order to determine differences in leadership between multiple groups of respondents, by age groups and employment within the organization. The research was conducted to see how efficiently and effectively managers used available human and other material and financial resources to satisfy customers and achieve organizational goals. The paper investigated the impact of transactional leadership style on employees’ performance in Algerian banks. The objectives of the study were to determine the relationship between transactional leadership style and employees performance, The recommendation was made that managers adopt leadership style(s), such as transformational and Level 5 leadership that will enable them to successfully integrate and maximize available resources within the internal and external environment for attainment of organizational goals.
Keywords: Leadership, Transactional Leadership, Organizations, Performance.
The concept and definition of leadership and style may differ from one person, or situation, to the other. The word “leadership” has been used in various aspects of human endeavor, such as: politics, businesses, academia, social works, etc. Previous views about leadership show it as one example of the personal ability. Leadership style in an organization is one of the factors that play a significant role in enhancing or retarding the interest and commitment of the individuals in the organization. An individual will support an organization if he/she believes that through it his/her personal objectives and goals could be met; if not, the person’s interest will decline.
2 LITERATURE REVIEW
2.1 Definitions of leadership
Leadership can be defined in different ways; thus, it is difficult to come up with a single working definition. In spite of all the research and theorizing, the concept of leadership is problematic. As Meindl & Ehrlich (1987) commented: “It has become apparent that
after years of trying, we have been unable to generate an understanding of leadership that is both intellectually compelling and emotionally satisfying. The concept of leadership remains elusive and enigmatic. Leadership is a process in which leader is indulged in various activities to achieve any goal”. It may be for one's own goals or for the goals of others and these goals may or may not be congruent with organizational goals (Hersey, Blanchard & Dewey 2008). Other definitions (out of many) include:
Daft (2014): Leadership is ‘the process ofinfluencing people to enable theachievement of relevant goals’;
Goleman (2000): ‘A leader’s singular job isto get results’;
House & Aditya (1997): ‘Leadership is theability to motivate, influence and enableindividuals to contribute to the objectivesof organizations of which they aremembers’;
Bass (1990): ‘Leadership is an influencingprocess aimed at goal achievement’;
Armstrong (2009): Leadership is no morethan exercising such an influence on othersthat they tend to act in concert towards theachievement of a goal that they might nothave achieved so readily had they been leftto their own devices’.
2.2 Theories of Leadership
Various perspectives have developed over time and leadership theories have developed within these perspectives. The following discussion contains a number of popular and recent theories pertaining to the concept of leadership. “The Trait Approach” that endured up to the late 1940s claimed that leadership ability is inborn. In the late 1940s to the late 1960s,“the Behavioral Approach” became dominant; advocating that effectiveness in leadership has to do with how the leader behaves. In the late 1960s to the early 1980s,“the Contingency Approach” became popular suggesting that effective leadership is dependent upon the situation(Jones George 2009). Recent approaches to leadership focus on vision and charisma, as such of Max Weber, John Kennedy, Marin Luther King Jr. and Steve Jobs, the co-founder of Apple Inc (Robbins Judge 2012). Later, a stream of research has focused on differentiating transformational from transactional leaders such as the Ohio State studies, Fiedler's model and path-goal.
2.2.1 Trait Theories of Leadership
The Trait Approach arose from the “Great Man” theory as a way of identifying the key characteristics of successful leaders. Also, this approach includes the models that attempt to explain leadership effectiveness by articulation of physical, psychological and social characteristics (McKee 2012).
This approach was performed focusing on isolating leader's traits, by providing characteristics, intelligence, charisma, decidedness, enthusiasm, strength, bravery, integrity and self-confidence.
The belief that leaders are born rather than made dominated much of the late 19th century and the early 20th century. Also, it tried to define any distinguishing physical or psychological characteristics of the individual that explains the behavior of leaders (Nahavandi 2009).
However, after several years of such research, some shortcomings of this approach were identified. Firstly, it is not clarified which of the traits are most important and which are not. Secondly, some traits overlap. For example, tact, judgment, and common sense are listed as separate traits but the last one covers the preceding ones. Thirdly, trait studies do not distinguish between traits helping to become a leader and those enabling it to be maintained. Fourthly, most trait studies are descriptive. There is an assumption that the leader’s traits existed prior to leadership and most of them have
failed to approach the study of personality as an organized whole (Derel 2003).
2.2.2 Behavioral theories of leadership
The trait approach did not yield the expected results. As the need for identifying and training leaders came to the forefront during the World War II, the previous results led researches turn to behaviors, rather than traits as a resource of leadership effectiveness (Nahavandi 2009).
188.8.131.52 The Iowa studies
The University of Iowa studies conducted in the United States, explored three leadership styles to find which was most effective and to determine their effect on the attitudes and productivity of the subordinates (Derel, 2003). They identified the Authoritarian, Democratic and Laissez Faire Leadership styles. These leadership styles exist on a continuum from autocratic to laissez-faire.
Authoritarian style is characterized by a leader who makes all the decisions and passes the directives to subordinates who are expected to carry these out under very close supervision. It is assumed that the leader knows everything and knows what is best for the organization and that the leader has unlimited authority (Derel 2003).
Democratic style is characterized by a structured but cooperative approach to decision making. It focuses on group relationships and sensitivity to the people in the organization. This style fosters to improve professional competence and lead them to work as team. It is well suited to the environments where people have a very high level of expertise such as software engineers, lawyers, doctors, mature teachers, etc. The democratic leadership style promotes greater job satisfaction and improved morale (Marturano & Gosling 2008).
184.108.40.206 Laissez-faire style
This is quite the opposite of the Authoritarian style. There is the absence of any real leadership and everyone is free to do as they please. Usually, with no targets or direction, there is a state of confusion. As the result of it, productivity is usually very low (Marturano & Gosling 2008).
As the leadership studies that were aimed at identifying the appropriate traits did not yield any conclusive results, a group of people from the Ohio State University developed in the 1940s and the 1950s a list of 150 statements from their generated responses that included 1,800 statements. The list was designed to measure nine different behavioral leadership dimensions. The resulting questionnaire is now well-known as the LBDQ or the Leaders Behavior Description Questionnaire. As part of the study, the LBDQ was administered to various groups of individuals ranging from college students and their administrators, private companies including military personnel.
Those researches and studies in Ohio identify two basic kinds of leader behaviors that may be engaged to influence their subordinates, namely Consideration and Initiating structure.
Consideration. Leaders engage in consideration when they show their subordinates the trust, openness, and concern for employees' well being. Learders who emphasize consideration would likely create trusting, supportive, and as a result, more productive work environment (Jones George, 2009) .
Initiating Structure. Leaders engage in initiating structure when they take steps to make sure that work gets done. It includes behaviors related to task and goal orientation, such as giving clear directions, monitoring employees' performance, and planning and setting work schedules and deadlines. Leaders who emphasize structure are likely to
emphasize efficiency and effectiveness to support employees by identifying what needs to be done in order for them to succeed at the job or task (Mckee 2012).
220.127.116.11 University of Michigan studies
Around the same time the Ohio University studies were under way, researchers at Michigan University began studying the behavior of effective leaders. The Michigan University researchers came up with two dimensions behavior. The first one was employee-oriented, which emphasized interpersonal relationships by taking a personal interest in the needs of employees and focusing on engaging them through setting and assisting in the attainment of high-performance targets. The second was the production-oriented behavior, which emphasized technical or job tasks such as efficiency, costs adhering and so on. Those dimensions are closely related to the ones identified by the Ohio State University dimensions.
18.104.22.168 Managerial grid
The Managerial Grid (Figure 1) was developed by Blake and Mouton, who focus on task (production) and employee (people) orientations of managers (Bolden et. al 2003). In 1964, they developed two dimensional views of leadership style based on the concern for people and concern for production which could be plotted along horizontal and vertical axes (Mckee 2012).
As we can see in this model, there are five leadership styles that might fall under: Impoverished Management (1, 1), Task Management (9, 1), Middle of the Road Management (5, 5), Country Club Management (1, 9), and Team Management (9, 9).
As a result, Mouton and Blake concluded that the Impoverished Management (1,1) is not the most effective, while Team Management (9,9) is the best style because it improves performances, lowers employee turnover and absenteeism and grants employee satisfaction. However, the Team Management style would not work in a crisis, because sometimes there is no time to be sensitive to moral issues. In addition, this model encourages managers to devote more time to managing human resources, because they usually spend more time managing easier resources (Bolden et al 2003).
2.3 The main types of leaders
Leaders have been classified into a number of different types as described below:
2.3.1 Transactional leaders
As originally described by Burns (1978), the transactional leaders identify the expectations of their followers and respond to them by establishing a close link between effort and reward. Power is given to the leader to evaluate, correct and train subordinates when performance needs to be improved and to reward effectiveness when the required outcomes are achieved (Couto 2007).
2.3.2 Transformational leaders
As defined by Bass (1990), the purpose of transformational leaders is to empower their followers and encourage them to ‘do more than they are originally expected to do’. Transformational leaders motivate followers to perform at higher levels, to exert greater effort, and to show more commitment. Bass identified three principal leadership processes for achieving various outcomes, such as: (1) heightening followers’ awareness about the importance and value of designated goals and the means to achieve them; (2) inducing followers to transcend their self-interests for the good of the group and its goals; and (3) meeting followers’ higher-order needs. Transformational leaders provide encouragement and support to followers; assist their development by promoting growth opportunities, and show trust and respect for them as individuals. They build self-confidence and heighten personal development.
2.3.3 Charismatic leaders
They have compelling personalities and the ability to rouse people to follow them through the sheer force of the impression they make. As originally described by Weber (1947), charismatic leaders are achievement orientated, calculated risk-takers and good communicators. They achieve motivational outcomes through four mechanisms: (1) changing follower perceptions of the nature of work itself; (2) offering an appealing future vision; (3) developing a deep collective identity among followers and (4) heightening both individual and collective self-efficacy (e.g. people’s belief in themselves and what they can do) (Couto 2007).
2.4 Steps to measure organizational performance
The steps to measure organizational performance will assist directorates in selecting and designing appropriate
performance indicators to strengthen current program and strategy management. Those steps will outline a method for identifying outcomes and relevant outputs, developing appropriate performance indicators and strengthening performance reporting – leading to more effective and efficient programs and strategies. Those steps are structured as six steps (shown in Figure 3).
Plan: Good planning does not guarantee good performance, but it can assist in developing more robust performance measurement systems and finding a clearer course of action. A useful tool in planning is program logic, which involves aligning top level company outcomes, company priorities, directorate services and costs;
2. Select performance indicators: This section provides more information on selecting appropriate and measureable performance indicators. The performance of programs or strategies should be measured at each level of the logic model;
3. Conduct program: The project is delivered
to effect change and should be
implemented in line with the program
4. Collect data and monitor performance:
Program planning, design and selection of
indicators are key components of a
performance measurement system.
However, these steps are essentially
meaningless if data is not collected
against each of the indicators. Measuring
performance requires the timely and
relevant collation and analysis of data.
Data must be gathered by set timeframes
and must be accurate, comprehensive and
5. Analyze and report: The utility of
performance information is limited if it is
not communicated effectively and
integrated back into the planning cycle;
6. Evaluate and modify: Once the data for
the performance indicators are collected,
analyzed and communicated, consider
evaluating both the performance
indicators selected and the program or
strategy being measured. Evaluating the
program or strategy can inform leaders’
decisions about planning, capability and
resource allocation (O.P. Measurement,
2.5 Link between transactional leadership
Since transactional leadership is based on a
system of rewards and penalties, it does not
offer much in terms of inspiration, to motivate
people to go beyond the basics. Given this fact,
the followers of transactional leaders might
get complacent and develop a tendency to
achieve minimal expectations only that would
help them avoid penalties (Bass 1990). Thus,
the leader and the follower are in an
agreement on what the follower would
receive upon achieving the negotiated level of
performance. The success of such leadership
depends on the level of satisfaction the leader
and followers have in following this system of
performance based appraisals. Thus, the
expected causal chain where leadership style
positively affects employee motivation, which
translates into improved employee and
organizational performance, does not seem to
be applicable to transactional leadership.
(Bass 1990) (see Figure 2.3.).
As a matter of fact, a study conducted by
Howell & Avolio (1993) confirms that
contingent reward leadership has a negative
impact on the followers' performance.
Contingent reward is viewed as "an active and
positive exchange between leaders and
followers whereby followers are awarded for
accomplishing agreed upon objective". If
managers do not effectively follow-up on the
contingent reward promises, thereby
displaying behavioral inconsistency, they are
viewed as ineffective leaders. Furthermore,
Howell & Avolio (1993) suggest that the level
of contingent reward leadership is dependent on organizational context and settings. For example, an organization undergoing change might suffer from a transactional leadership style. The penalties, awarded in such a system of managing by exception, have a negative impact on performance and satisfaction. This stems from the fact the leader passively awaits problems before taking any action. By following this strategy, the leader ensures that corrective action is taken when required and in doing so he reinforces the roles and expectations for the followers. Hence, this behavior represents an important aspect of transactional leadership (Bass 1990).
Jayasingam, Ansari & Jantan (2009) discussed that the coercive power has been linked with ineffective leadership. Transactional leaders make use of reward and coercive power. Coercive power is based on "the target's perception that the agent has the ability to inflict various organizational punishments" and it appears that transactional leaders are more likely to adopt coercive power. Working in fear of losing one's job, or fear or demotion, only makes an employee ineffective and unproductive because the employee spends most of his/her time worrying about the consequences if the expectations of the leaders are not met.
As it can be observed, a transactional leader relies heavily on power and authority to lead his members. Power play and the use of a "reward and penalty" system thus play an integral role in such a leadership style. As discussed through various researches, transactional leadership measures are not so effective and in most cases can de-motivate employees. There are suggestions that effects of leadership styles on employee performance are dependent on the organizational context and settings. If, as Howell & Avolio (1993) argued, an organization undergoing change might suffer from a transactional leadership style, could the opposite be true? Specifically, if an organization has a long history and operates under a more or less unchanged business model over a long period of time, could transactional leadership actually improve the organization’s performance? More to the point, is it possible that Algerian banks’ managers transactional leadership style (of course, if they indeed practice such style of leadership) have tangible effects on employee motivation?
2.6 The categories to measure performance
Firstly, we need to solve this question, why do we measure performance? We may say, to evaluate how well (i.e., how effectively, efficiently, and profitability) organizations are doing in achieving their goals in their mission statements.
Secondly, by which techniques or approaches can we measure performance? Many researchers argue that the characteristics for performance measurement would be different, depending on the different purposes of measuring performance.
2.6.1 Accounting measures
Accounting measures represent the most common and readily available means of measuring organizational performance; the validity of their use is found in the extensive evidence showing that accounting and economic returns are related. A summary of accounting measures is shown as follows:
Cash flow from operations;
Earnings before interest and taxes (EBIT);
Earnings before interest, taxes, depreciation, and amortization (EBITDA);
Net operating profits (also known as earnings);
Net operating profit after tax [NOPAT];
Return on assets (ROA);
Return on book-valued assets;
Return on capital employed (ROCE);
Return on equity (ROE);
Return on investment (ROI);
Return on invested capital (ROIC);
Variance in accounting profitability;
Sales and Sales growth. (Carton & Hoffer 2006).
2.6.2 Financial market measures
A summary of financial market measures is shown as follows:
Market value (or market capitalization) (numbers of shares x price per share);
Price-to-earnings ratio (P/E ratio);
Return on market-valued assets;
Total shareholders return (TSR) and Tracking stocks.
2.6.3 Mixed accounting / financial market measure.
An advantage of those measures is that they are better able to balance risk (largely ignored by accounting measures) against operational performance issues that are sometimes lost in market measures. According to Carton & Hoffer (2006) more recent studies have produced equivocal results, with accounting measures retaining incremental explanatory power. A summary of those measures is shown as follows:
Balanced scorecard, Cash flow per share;
Cash flow return on investment (CFROI), Cash value added (CVA);
Discounted cash flows (DCF), Economic value added (EVA);
Internal rate of return (IRR), Market-to-book value;
Market value added (MVA), Net present value (NPV);
Shareholder value analysis (SVA), Tobin’s q,
Total business return (TBR), Warranted equity value (WEV);
Weighted average cost of capital (WACC) and Z-score (Pierre et al 2009).
Survival is a common dependent variable in management research, particularly in organizational sociology and entrepreneurship where increasing attention is given to ecological explanations of firm performance (DTI, n.d.) (Pierre et al 2009).
Profitability is the primary goal of all business ventures. Without profitability the business will not survive in the long run. In addition, profitability is measured with income and expenses and it can be defined as either accounting profits or economic profits (Hofstrand 2009). The reasons for computing profitability are: firstly, to check the state of organization; secondly, increasing profitability is one of the most important tasks of the business managers, so mangers constantly look for ways to change the business to improve profits (DTI, n.d.).
We can calculate productivity as outputs divided by inputs, which can be quoted as:
Expected productivity = [(expected output) / (resources expected to be consumed)] or
Actual productivity = [(actual output) / (resources actually consumed)] (DTI, n.d.), (Pierre et al 2009).
Efficiency is the measure of how well or how productively resources are used to achieve a goal. Efficiency can also be quoted as: Efficiency = [(Resource actually used x100%) / (Resources planned to be used)] (DTI, n.d.) (Jones & George 2009).
Effectiveness is the measure of appropriateness of the goals that managers have selected for the organization to pursue and of the degree to which the organization achieves those goals Effectiveness can also be quoted as: Effectiveness = [(actual output x 100%) /( Expected output )] (DTI, n.d.), (Jones & George 2009), (Pierre et al 2009).
3.1 General approach
The data for the study were gathered from 132 surveyed employed in five banking institutions in Algeria. The study was carried out in the summer of 2014, in a cross-sectional time-line manner.
The survey instrument was then pre-tested. It was sent to ten national employees (irrespective of their organizational position) who were not subjects of the study. Based on their inputs, the questionnaire was slightly revised.
The survey was conducted over 67 days (from 28-07-2014 to 03-10-2014) by fielding a questionnaire on hard copies. The researcher checked for logic and consistency at the time of data entry and coding.
In order to increase the response rate, a reminder visit or telephone call was placed to all the participants, one week after the survey administration.
The researcher wrote an introductory note for the participants to explain the intent and purpose of the research and to solicit cooperation. They were advised that their participation in the research project was completely voluntary and they were under no obligation to participate; that all information would be used only for the purpose of the study; and that they could obtain findings upon request. It was made clear that this research was for the purposes of the dissertation project and was in no way ordered or sponsored by their organizations or a third-party. The participants were advised to contact the researcher with any questions about the research and their participation in it.
Selecting a sample is a fundamental element of a positivistic study. The researcher employed purposive sampling to select participants that are representative of the population. To do this, the researcher considered factors that might influence the population: general demographic characteristics (gender, age, and education), job description (manager/non-manager), and experience with organization (length of employment with organization), etc. Then the researcher purposefully selected a sample that adequately represented the target population on these variables.
This study lies with five institutions banking in Algeria; Bank of Agriculture and Rural Development, Loan Algerian People, Algerian´s Exterior Bank, Albaraka Bank and Gulf Bank Algerian.
4.1 Data analysis
In total, 21 (95.5%) of the manager respondents were male and one (4.5%) was female.
In terms of age, the majority of respondent managers (14, or 63.6% of the total) were 41-50 years of age. A small group of five respondents (22.7% of the total) were 31-40 years of age, (two or 9.1 percent of the total were 51-60 years of age, while only one (4.5% of the total) manager belonged to the 18-30 years age group.
The managers were asked the following questions, represented in a 5-point Likert’s scale where each number was explained, as listed, below:
[(1) Strongly Disagree, (2) Disagree, (3) Neutral, (4) Agree, (5) Strongly Agree)].
In general, all these answers when considered as a whole reveal deeply dichotomous leadership traits of responding managers. On the one hand, they seem to prefer transactional leadership style, while on the other hand, it appears that they are not vested with a true decision-making powers (which is suggested by the answers provided to the related questions).
To explore relationships between demographic variables and the leadership style of the responding managers, the researcher constructed two index variables: transactional and democratic leadership style indices. No significant differences were observed between gender groups while conducting t-test (see table, below):
On transactional style, t=-0.943, p=0.357 > 0.05.
On democratic style, t=-0.211, p=0.835 > 0.05.
So, the researcher proceeded with testing, to establish whether there are underlying “true” differences in leadership style (as measured by composite index variable “Leadership style”- a composite of Authoritarian Leadership Style Index and Democratic Leadership Style Index).
The newly created variable is normally distributed, as confirmed by the normality tests (see table below). Kolmogorov-Smirnov results (t=0.163, p=0.132>0.05), confirm that the variable does not significantly depart from normality.
This is also confirmed by visual inspection of normality plots (left), where observed vs. expected value plots are very close to normality line (with exception of a single outlier, which was subsequently cleaned).
The Analysis of Variance (ANOVA) was used to determine if there are any differences in leadership between multiple groups of respondents, by age group and length of employment with the organization.
*. The mean difference is significant at the 0.05 level.
The results suggest that the underlying source of variation in observed leadership styles inclination is the length of employment with the organization.
As we can see from the ANOVA output, differences between groups of respondents are not significant at a conventional level (F=3.034, p=0.056>0.05), but taken more liberally (at 10%), these differences become significant.
Post-Hoc Tukey HSD reveals that the group of managers who had been with the bank less than 5 years are much more democratic than those who had been with the bank for 6-10 years.
This is an intriguing notion, especially since no significant differences had been established between junior managers (less than 5 years with the bank) and those with more than 10 years of experience. It appears that the attitudes of managers turn towards transactional leadership at mid-career level, to return to more moderate styles.
The data collected through survey instruments showed that employees working in the banking (private and government) sector perceive supervisors as more inclined towards exercising transactional leadership style as compared to transformational leadership style. They shared an exchange relationship with their employees. Rewards and punishments were the tools that were being utilized to positively and negatively influence the person.
The correlation results from five Algerian banks showed that there was not a significant statistical relationship between transactional leadership style and organizational performance. Another high correlation value between transactional leadership style and performance showed that when employees had a sense of emotional attachment with their organization, it was due to the achievements that they acquired during course of time. On the contrary, the literature review showed transactional leadership style is found to be generally, positively and significantly related to performance, which pertains to the provision of, either, positive rewards, in case of meeting established goals or negative rewards when the performer fails to achieve the desired objectives. This builds a strong relationship with job success.
Differences in leadership between multiple groups of respondents (i.e. stratified by age groups and length of employment with the organization) were analyzed and the results suggested that underlying source of inclination towards a particular leadership style is the length of employment with the organization. Post-hoc testing revealed that the group of Algerian managers who had been less than 5 years with the bank were much more democratic than those who had been with the bank for 6-10 years.
Regression results indicate that transactional leadership, alone, affects Algerian banks employees’ motivation more significantly, than the model tampered by the introduction of democratic leadership traits. This was confirmed by regression coefficients; however, the significance of these relationships did not come close to a statistically significant level.
ANOVA regression results indicate that in this model, transactional leadership alone affects employee motivation more significantly in the model tampered by democratic leadership. This is confirmed by regression coefficients where significance of transactional leadership is stronger than significance of democratic leadership (B=-0.147; t=-1.693, p=0.093>0.05). However, the significance of these relationships (as one would expect based on regression R and r2 values) do not come close to statistically significant levels).
It would be advisable to recommend that further research in highly specific Algerian banking sector be conducted on some other types of leaderships (such as autocratic or transformational).
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