Abstract
Leadership is an important factor for the organizational success, increased productivity of employees, job satisfaction, and customer satisfaction. Leaders are the very beacon of light that direct their subordinates in the right path towards achievement and success. Two leadership styles that are mainly the topic of discussion in the literature include transactional and transformational leadership. The studies available in the literature show mixed results as regards the effectiveness of these two leaderships. Both the leaderships are associated with increased job satisfaction and performance of employees. However, transactional leadership is more suited for competition intensive industry, whereas transformational leadership is suitable for professions like schools and law enforcement. There are, however, no generalized rules for the efficacy of leadership style, and therefore, both transactional and transformational leaders should incorporate the strategies of one another to be more effective.
Introduction
It is undeniably true that an employee can only perform better if he is satisfied with his job. An unhappy employee will be unable to commit himself wholeheartedly to his job assignments, giving poor performance. If the culture of the workplace is authoritarian and suffocating, with the employees having no power to make decisions independently on work related matters and career goals, then they will lose interest in work after a certain point of time. The work culture of an organization, therefore, largely depends on the leadership of that organization. According to Stuart Levine and Michael Crom (1993), leadership is all about "listening to people, supporting and encouraging them and involving them in the decision-making and problem-solving processing. It is about building teams and developing their ability to make skillful decisions.” A leader bears the responsibility to guide his subordinates into the right directions. A leader plays the central role in group interactions, and influences the behavior of other group members.
Leadership is one of the crucial elements in improving organizational performance. Effective leadership gives a company competitive advantage over others (Riaz and Haider, 2010). Bearing the responsibility for the development and execution of strategic managerial decisions, leaders need to obtain, develop, and deploy the resources in an optimal way to bring out the best services and products in the industry. A leader needs to provide the subordinates with the thing required to keep them motivated, productive, and satisfied. Satisfaction is an extremely important factor for employee retention. Satisfied employees are not only productive; they are also a contributing factor to the satisfaction of customers (Fareed et al., 2013). This paper would present a literature review on how leadership impacts the satisfaction of both the customers and employees and motivates the latter to give good performance, and on the basis of the review, an analysis and recommendations will be made.
Literature Review
According to Smircich and Morgan (1982), leadership is dialectical by nature and socially constructed for enabling the interactions between leaders and followers. Clemmer and McNeil (1990) believe that leadership refers to the ability to initiate an action and propel others into the direction of shared goals. They also believe that leadership is the very foundation upon which the organizational performance management system and technology rest. Gannon (1979) believes that an organization cannot function effectively without effective leadership. An effective leadership depends on the leadership style a leader chooses to follow. However, it should be noted that the correlation between job satisfaction and employee performance has been the subject of numerous studies, and the results are always mixed.
Corrigan and Garman (1999), and Glisson and Durick (1988) in their studies on the human service industry have found that a positive organizational climate fostered by positive leadership not only enhances the performance and job satisfaction of employees, but also leads to a higher degree of customer satisfaction. They believe that satisfied and committed employees can give better service to the customers, leading to an increased satisfaction level for the consumers. According to Morris (1995), employee job satisfaction is the crucial factor that affects customer satisfaction, because a demotivated and unsatisfied employee cannot put in best effort to satisfy the customers. Vilares and Cohelo (2000), in their study, have found that perceived employee satisfaction, perceived employee loyalty, and perceived employee commitment had a profound impact on the perceived product quality and on the perceived service quality, resulting in customer satisfaction (Bulgarella, 2005)
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In order to know how leadership influences the performance of employees and the satisfaction of customers and employees, one needs to take a look at the leadership theories that are available in the literature. The two main leadership theories, which are mostly discussed by scholars, include transactional theory and transformational theory. Transactional leaders bargain performance for rewards. They expect their subordinates to achieve the negotiated performance targets without encouraging them to assume greater responsibilities for self-enhancement or leading others. They make no attempt to change the followers' values, attitude, growth and development (Chan, 2005). They give praises, promotions, and monetary rewards for keeping employees motivated. The weakness of this theory is, however, that the employees lose interest in achieving higher productivity if the rewards become unavailable.
Transformational leadership, the concept of which was first proposed by James McGregor Burns in 1978 and expanded further by Bernard M. Bass in 1987, refers to the leadership style that can bring about positive changes in the followers, with the leaders being more involved in the whole process of leadership making endeavors to help every member of the group achieve success (Bogler, 2001). P.G. Northouse, a professor at the Western Michigan University, defines transformational leadership as a leadership that makes the followers desire for change, improvement and being led (Balyer, 2012). P. Hallinger, another educationist, opines that a transformational leader is an organizational entity who involves the whole of an organization in the execution of a task rather than depending on the task of a single individual entity (Hallinger, 2003). According to Bass, transformational leadership termed by him as 'superior leadership performance' occurs "when leaders broaden and elevate the interests of their employees, when they generate awareness and acceptance of the purposes and mission of the group, and when they stir their employees to look beyond their own self-interest for the good of the group" (Bass, 1987, p. 21). Bass shares the idea that a leader is followed when he is able to generate trust and honesty among his followers through his qualities. He also believes that a leader projects himself as a role model to his followers. The four components of transformational leadership identified by Bass include Charisma, Individualized Consideration, Intellectual Stimulation, and Idealized Influence.
The findings of various research studies as regards the effectiveness of transactional and transformational leadership in terms of job satisfaction and performance of employees show mixed result. According to Wu (2009), and Epitropaki and Martin (2005), transactional leaders through the method of giving rewards provides higher job satisfaction and motivation for the employees to improve their performance as compared to transformational leadership. They also opine that transactional leaders have substantial influence on the followers. In contrast, Boerner et al. (2007) in their study have found out that transformational leaders have a larger influence on their subordinates' performance and innovation than transactional leaders. They also opined that transformational leaders increase the effectiveness of teamwork and team cohesiveness. According to Berson and Avolio (2004), transformational leaders help their employees with the achievement of strategic goals of the organization and try to protect their subordinates from work-related problems, which ultimately lead to increased job satisfaction among employees.
Riaz and Haider (2010) in their study of the organizations in the capital city of Pakistan noted that transactional leadership, which is based on the reward and punishment behavior, is highly effective in achieving career satisfaction, skill development, professional goals, and job success. They also found that transformational leadership by giving employees a sense of belonging to the organization and allowing them to take decision independently make them highly satisfied with their career and motivated for giving the best performance. However, according to them, besides the influence of leadership, there are other variables, such as cooperation from colleagues, employees' education and experience, work-related stress, organizational politics, and external economic conditions, which also account for the increased productivity and job satisfaction.
Analysis
Performance is defined as the accomplishment or execution of work, feats, and acts. Satisfaction is defined as the fulfillment of one's desire, ambition, dreams, or need. Job satisfaction has been defined as the extent to which an employee likes or dislikes his job (Fareed et al, 2013). Taking into consideration the literature reviews, it appears that the traditional factors that boost up the performance and the job satisfaction of employees include job conditions, colleagues, pay structure, leadership and supervision, the nature of work and the benefits. It also appears that job satisfaction and performance are interrelated, and similarly, employee job satisfaction and performance are correlated with customer satisfaction. The two leadership models that have been the subject of literary discussion are transactional and transformational leadership.
Transactional leadership motivates employees through reward and punishment behavior by praising and rewarding employees on the accomplishment of a target and criticizing and rebuking them for the failure of achieving targets. Transactional leadership style works for most of the industries if transactional leaders use the strategy of rewards and recognition effectively.
Rewards are benefits that are awarded to employees in exchange for their work. In many organizations across different industries, transactional leaders use the system of giving rewards effectively to keep employees committed to the organization and motivated to give great performance. In both the public and private sectors, there is apparently a great connection between rewards and employee job satisfaction and increased performance. Achieving rewards for the accomplishment of an organizational goal makes employees satisfied with their job. Rewards make employees feel valued by their employers and also make them feel that the company is serious about their career development (Fareed et al, 2013). As a result, the satisfaction level of employees increases and so does their performance. Transactional leaders by awarding employees for good performance do just that.
Transactional leaders motivate employees by giving two types of rewards - extrinsic and intrinsic reward. Extrinsic rewards are the financial or cash related rewards such as formal recognition, incentive payments, promotion, bonus gifts, commission, and fringe benefits. Intrinsic rewards are non-financial or non-cash rewards such as recognition, achievement, appreciation, and growth. Employees seek both types of rewards, financial and non-financial rewards depending on their needs. Some employees cash rewards over non-cash rewards to fulfill their financial and material needs (Fareed et al, 2013). It has been observed that the public sector employees prefer financial rewards more than non-financial rewards. In order to know how transactional leaders keep employees motivated to work through rewards, we need to take a look at the findings of some real life case studies to see how rewards are connected to employee jobs satisfaction and performance.
Ali and Ahmed (2009), in their study of the relation between rewards and employee’s performance in the cement industry of Pakistan, found that there is a direct correlation between reward system and employee performance. Jehanzeb et al. (2012), in their study on job satisfaction of the employees in the banking sector of Saudi Arabia, found that the employees prefer financial rewards and economic rewards more in the form of acknowledgement of their good performance. Another study conducted on the commercial banking sector of Sri Lanka, it was found that the rewards give employees motivation to perform and that rewards promotes happiness and job satisfaction (Fareed et al, 2013). Taking into account the above examples, it seems that the system of giving rewards, the main strategy a transactional leader employs, works in keeping employees motivated and satisfied in their job, even if they do not remain engaged in the work and career goals of their employees as much as the transformational leaders.
Transformational leaders, on the other hand, are the role models of a company who with their charismatic persona motivate employees to perform better. Even if the remuneration and rewards for employees of an organization are low, still transformational leaders can keep employees motivated and satisfied. Transformational leaders project themselves as a role model to their subordinates. They with charismatic persona, integrity and honesty motivate their employees to perform better, even in situations that do not offer the chance of receiving formal recognition. Transformational leadership is likely to be more effective for public sector jobs like the law enforcement and school jobs (Fareed et al, 2013). Transformational leaders with their behaviors try to bring change in their attitudes, belief and values of their subordinates. Such behaviors, for example, are important to those higher in authority in law enforcement because these leaders can directly influence the rank and file officers to perform ethically and valuably for the betterment of the society (Waqas, 2012). It is important in professions like law enforcement and schools to have leaders who can appeal to the higher values and ideals of the subordinates by moving their focus away from the self-interest, which is encouraged by transactional leadership. Transformational leader influences their followers to look beyond the profit. However, transformational leadership in itself might not be suitable in a highly competitive industry where every employee is trying to outshine the others. In private sectors, for example, transformational leadership is effective only during the time when the company is going through an organizational change, or when the company is being led by one leader for a long period of time (Waqas, 2012).
However, taking into account the findings of Riaz and Haider, it seems that besides leadership, there are other important factors such as stress, cooperation from colleagues, external economic conditions, employees’ education and experience, and organizational politics that are equally correlated with employees’ job satisfaction and performance. In other words, whether or not a particular leadership style will be effective for an organization depends on the environment the employees are working in. Therefore, Riaz and Haider (2010) believe that a transformational leader can take the help of rewards to bring out career satisfaction and job success, and similarly, transactional leaders may also apply the style of transformational leaders to make employees emotionally attached to the organization and develop a feeling of job success and career satisfaction.
Conclusion
The organizational performance and the job satisfaction of employees depend on the leadership they follow. An employee's job satisfaction depends on the culture of the workplace, which in turn depends on the leadership of an organization. Leadership influences the customer satisfaction as well. Two main leadership styles are transactional leadership style and transformational leadership style. Transaction leadership increases employee satisfaction and productivity by creating a reward mechanism looking at the needs of the employees and the industry standards. Transformational leaders, on the other hand, motivate employees to perform better through their charismatic character and convincing power. They become the role model for the employees. There is no single solution to all types of situations. In fact, the style of leadership varies greatly across industries. For example, in public concerns, transformational leadership style works better than transactional leadership style, whereas in private and competitive industry sector, transactional style of leadership is more effective.
Recommendation
As it is seen above, there are mainly two leadership styles used by the industry leaders to address employee and customer satisfaction issues. Employee satisfaction is important to keep the attrition rate low and turnover cost low. Satisfied employees not only improve productivity, but can generate a band of satisfied and loyal customers for the company. That is why leadership is extremely important for an organization.
Transactional leadership is suited for competition intensive industries that have a well-developed management structure. In such industries, unsatisfied employees can easily switch companies as there are other lucrative options available. Transformational leaders may work effectively in such industry for a short period of time, but eventually employees leave the organization for better remuneration, reward based work environment. Transactional leaders should look at the competition and the best practices in the market and create a rewards and remuneration system equal to or better than the competition. Also, it is important for the leaders to identify which employees give value to financial remuneration and who feel motivated by non-cash remunerations like public recognition, and then design the rewards system accordingly. Transactional leaders can create a work environment that identifies and rewards good performance so that the employees feel motivated.
Transformational leaders, on the other hand, are effective in a work environment where the future is uncertain or the company is going through major changes. For example, if a company is transitioning from its current model to a new model of business and going through a period of financial stress, then transactional model is not effective as the leaders may not have the flexibility to provide rewards and remunerations according to industry standards. Transformational leaders are more effective in such cases as they with their charisma and charm can convince the employees that the company is only going through a short term transition phase and that things will change in the near future.
Caledonian is a medium sized construction firm in Scotland. Caledonian may not be treating their employees well, which probably accounts for its high attrition rate. Furthermore, it seems that the management is not much involved with the employees. It is important that the MD of Caledonian follows a transactional leadership style of management in the company. This will help improve the employee satisfaction through better pay and recognition system for better performance. This will also improve the credibility of Caledonian management in the eyes of the employees.
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