What Is The Leader-member Exchange Theory? The Leader-member Exchange Theory In A Nutshell

The leader-member exchange theory was first proposed in a seminal paper by Fred Dansereau, George Graen, and William Haga in 1975. In the paper, entitled A Vertical Dyad Linkage Approach to Leadership within Formal Organizations, the authors proposed a new, dyadic leadership approach. Here, “dyadic” can best be described as the interaction between two individuals. The leader-member exchange (LMX) theory is a dyadic, relationship-based leadership theory.

Concept OverviewLeader-Member Exchange (LMX) Theory is a leadership theory that focuses on the quality of the relationships between leaders and their followers within an organization. It suggests that leaders do not interact with all their subordinates in the same way; instead, they form unique exchange relationships with individual followers. LMX Theory proposes that there are two main types of relationships: the in-group, characterized by high levels of trust, mutual respect, and collaboration, and the out-group, marked by more formal, transactional interactions. Understanding these leader-follower dynamics can shed light on leadership effectiveness and employee outcomes.
Key PrinciplesLMX Theory is guided by several key principles:
1. Differential Treatment: Leaders form distinct relationships with each follower based on individual characteristics and interactions.
2. In-Group and Out-Group: LMX theory identifies the existence of two types of relationships – in-group and out-group – each with different levels of trust, communication, and mutual support.
3. Quality of Exchange: The quality of the leader-follower exchange impacts follower outcomes, job satisfaction, and performance.
4. Impact on Leadership: LMX relationships influence leadership behaviors and decision-making.
5. Dynamic Nature: LMX relationships can change over time based on interactions and performance.
6. Leadership Implications: LMX theory highlights the importance of leaders recognizing and managing these relationships to maximize organizational effectiveness.
In-Group and Out-GroupIn-Group: In-group members have high-quality, mutually beneficial relationships with their leader. They often enjoy greater trust, autonomy, and access to resources. Leaders have a higher degree of confidence in in-group members and may grant them more opportunities for growth and responsibility.
Out-Group: Out-group members have more formal, task-oriented relationships with their leader. They may have limited access to resources and less trust. Their interactions are often transactional, focused primarily on job-related tasks.
Impact on EmployeesThe quality of LMX relationships can significantly impact employees:
1. In-Group Members: In-group members tend to experience higher job satisfaction, performance, and commitment to the organization. They often feel more valued and supported.
2. Out-Group Members: Out-group members may feel excluded or less valued, potentially leading to lower job satisfaction and engagement. They may be less likely to go beyond their basic job responsibilities.
Leadership BehaviorsLMX relationships can influence leadership behaviors:
1. In-Group Leadership: Leaders tend to display more transformational leadership behaviors with in-group members, including mentoring, empowerment, and consideration.
2. Out-Group Leadership: With out-group members, leaders may adopt a more transactional leadership style, emphasizing task completion and less emphasis on relationship building.
ApplicationsLMX Theory has practical applications in leadership development, team building, and organizational effectiveness. By recognizing the importance of leader-follower relationships, organizations can:
1. Foster Positive Relationships: Encourage leaders to build high-quality relationships with all team members.
2. Develop Leadership Skills: Train leaders to exhibit transformational leadership behaviors that benefit all team members.
3. Improve Employee Engagement: Recognize and address disparities in leader-follower relationships to enhance overall employee engagement.
Challenges and RisksChallenges in applying LMX Theory include the potential for perceived favoritism or bias in leader-follower relationships, which can lead to resentment or morale issues among team members. Additionally, there is a risk that leaders may invest too much time in in-group members, neglecting the development of out-group members.

Understanding the leader-member exchange theory

The leader-member exchange theory revolves around the notion that leaders sometimes interact differently depending on the subordinate. With some subordinates, the relationship may be characterized by trust, personal involvement, and investment. Conversely, other relationships involve less investment and trust with more formal, quid pro quo transactions.

Both these relationships comprise the theoretical basis of the similar social exchange theory (SET), which argues social behavior is the result of an exchange process designed to maximize benefits and minimize costs.

The three stages of the leader-member exchange theory

Further research into the LMX theory in 1987 suggested leader-member exchange could be explained in three stages:

1 – Role-taking  

When a new employee first joins a team, the leader observes them in an attempt to identify their talents, motivations, and general attitude toward the work itself. This stage may last for hours or days, depending on the circumstances.

2 – Role-making 

During the second stage, the new employee performs various project tasks and assumes some responsibility. The leader may pay particular attention to the way a new employee handles difficult, stressful, or problematic situations. 

In so doing, the leader consciously or subconsciously begins categorizing the subordinate into one of two groups:

  1. In-group – the members of the in-group are those the leader trusts the most. With proven skill or competence, they are rewarded with promotions, learning opportunities, favorable work schedules, and meaningful growth opportunities. They also receive more one-on-one time with the leader.
  2. Out-group – conversely, the members of the out-group are considered incompetent or otherwise untrustworthy. They are not afforded the same incentives, resources, or access to management.

3 – Role routinization

In the final stage, the leader and their subordinates establish routine and habitual ways of operating based on the categories mentioned above. 

This is good news for the in-group, who continue to enjoy a strong working relationship with their superiors. 

The implications for out-group members are more significant because initial impressions are difficult to change. With no access to leadership or incentives designed to motivate performance, these employees act in ways that reinforce a self-fulfilling prophecy.

Ultimately, the leader-member exchange theory encourages leaders to check their biases. The theory also suggests it is incumbent on the leader to initiate and develop better relationships with those in the out-group. 

These actions increase the likelihood a subordinate will reciprocate the goodwill shown, forming a relationship more conducive to personal and organizational success.

Leader-member exchange theory example

Now, let’s take a look at a hypothetical leader-member exchange theory example.

Hotel valet manager

Valet manager Mitchell is 25 years of age and has 13 valet attendants working under him at a well-known hotel in New York City. 

Mitchell has been working at the hotel since he left school and, out of the 13 individuals he leads, has developed a close working relationship with eight of them.

The remaining five have been employed on a casual basis to cater to recent increased demand. 

Since this cohort of eight individuals is closer to Michell’s age, they regularly enjoy drinks with him after work and also participate in other activities.

The five casual valets are much older and, despite being competent workers, do not tend to participate in such activities.

Applying leader-member exchange theory

It is observed that Mitchell’s co-workers of a similar age receive preferential treatment.

He often allows them to choose when they would like to work, but this courtesy does not extend to the older valet attendants who are assigned the less desirable shifts.

The eight employees who choose their hours and enjoy a relationship with Mitchell that extends beyond the workplace comprise the in-group.

The older valets, whose relationship with their superior does not extend beyond the workplace, are part of the out-group.

When the hotel analyzes the employees who have been hired in the past seven years, it is clear that younger recruits readily form a relationship with Mitchell and join the in-group.

These employees tend to perform better and are more committed to the company and its customer-centric values. 

Developing a relationship with the out-group

Mitchell then meets with his manager who informs him that it would be beneficial for all concerned if he worked to establish a better relationship with members of the out-group. 

At the most simplistic level, Mitchell could hold after-work drinks at a location or venue that is more attractive to the older valets.

He could also promote a mentorship culture within his department where younger and older valets are encouraged to share their skills and perspectives with each other.

While not every member of his staff will want to become part of the in-group, Mitchell understands that older valets must be offered more desirable working hours to improve their commitment, motivation, and sense of belonging.

He also does the following to build better relationships with this group:

  • Self-reflection – Mitchell takes the time to analyze his strengths and weaknesses when interacting with others. He finds that his active listening skills need work and his lack of emotional intelligence is also holding him back.
  • Scheduling and accessibility  – Mitchell also notes that time must be scheduled to develop relationships with the older valets otherwise it is unlikely to happen. In addition to more extra-curricular staff events, he leaves the first 15 minutes of a shift open to discuss any issues and avoids hiding in his office during the day.
  • Asking for assistance – the most successful relationships are built on give and take – even those in the workplace. Mitchell decides to ask his older staff for advice more often and delegate important tasks to them to better manage his workload. By acknowledging their unique skills and expertise, it is hoped that the older staff will feel more valued and included in the hotel’s day-to-day operations.

Key takeaways:

  • The leader-member exchange (LMX) theory is a dyadic, relationship-based leadership theory developed by Fred Dansereau, George Graen, and William Haga in 1975.
  • The leader-member exchange theory argues leaders have different relationships with different subordinates. These can be categorized into two groups: the in-group and the out-group.
  • The leader-member exchange theory encourages leaders to use initiative and develop positive relationships with out-group members. This enables them to identify their own biases and increase productivity.

Key Highlights

  • Definition and Origin: The Leader-Member Exchange (LMX) theory was introduced by Fred Dansereau, George Graen, and William Haga in 1975. It focuses on the dynamic and personalized relationships between leaders and their individual followers within a dyadic framework.
  • Dyadic Nature: LMX theory revolves around interactions between two individuals—the leader and each individual follower. It suggests that leaders can have different relationships with different subordinates based on trust, investment, and personal involvement.
  • In-Group and Out-Group: The theory proposes two categories of relationships:
    • In-Group: These are the followers who share a strong and trusting relationship with the leader. They receive more attention, resources, and opportunities.
    • Out-Group: These followers have a more formal, transactional relationship with the leader. They may receive fewer benefits and less personal attention.
  • Similarity to Social Exchange Theory: LMX theory shares similarities with the Social Exchange Theory (SET), which argues that social behavior is based on a process of maximizing benefits and minimizing costs in interpersonal relationships.
  • Three Stages of LMX Theory:
    • Role-Taking: The leader observes the new member’s talents, attitudes, and motivations. This stage helps categorize the member into the in-group or out-group.
    • Role-Making: The follower takes on tasks and responsibilities. The leader assesses how the follower handles challenges and categorizes them further based on their performance.
    • Role Routinization: A routine is established based on the categorized relationships. In-group members receive more support and opportunities, while out-group members continue to experience a lack of attention and incentives.
  • Application and Example:
    • Hotel Valet Manager Example: Mitchell, a valet manager, favors younger employees, forming an in-group, while older employees become part of the out-group due to a lack of personal connection.
    • Developing Out-Group Relationships: Mitchell’s manager advises him to build better relationships with the out-group. Mitchell takes actions such as improving his listening skills, making time for interactions, seeking assistance from older staff, and acknowledging their expertise.
  • Key Takeaways:
    • LMX theory emphasizes the personalized relationships between leaders and individual followers within a dyadic framework.
    • It categorizes relationships into in-group and out-group, based on trust, investment, and personal attention.
    • The theory encourages leaders to be aware of their biases, take initiative, and develop positive relationships with out-group members.
    • Developing these relationships can lead to increased motivation, commitment, and productivity among followers.

Connected Leadership Concepts And Frameworks

Leadership Styles

Leadership styles encompass the behavioral qualities of a leader. These qualities are commonly used to direct, motivate, or manage groups of people. Some of the most recognized leadership styles include Autocratic, Democratic, or Laissez-Faire leadership styles.

Agile Leadership

Agile leadership is the embodiment of agile manifesto principles by a manager or management team. Agile leadership impacts two important levels of a business. The structural level defines the roles, responsibilities, and key performance indicators. The behavioral level describes the actions leaders exhibit to others based on agile principles. 

Adaptive Leadership

Adaptive leadership is a model used by leaders to help individuals adapt to complex or rapidly changing environments. Adaptive leadership is defined by three core components (precious or expendable, experimentation and smart risks, disciplined assessment). Growth occurs when an organization discards ineffective ways of operating. Then, active leaders implement new initiatives and monitor their impact.

Blue Ocean Leadership

Authors and strategy experts Chan Kim and Renée Mauborgne developed the idea of blue ocean leadership. In the same way that Kim and Mauborgne’s blue ocean strategy enables companies to create uncontested market space, blue ocean leadership allows companies to benefit from unrealized employee talent and potential.

Delegative Leadership

Developed by business consultants Kenneth Blanchard and Paul Hersey in the 1960s, delegative leadership is a leadership style where authority figures empower subordinates to exercise autonomy. For this reason, it is also called laissez-faire leadership. In some cases, this type of leadership can lead to increases in work quality and decision-making. In a few other cases, this type of leadership needs to be balanced out to prevent a lack of direction and cohesiveness of the team.

Distributed Leadership

Distributed leadership is based on the premise that leadership responsibilities and accountability are shared by those with the relevant skills or expertise so that the shared responsibility and accountability of multiple individuals within a workplace, bulds up as a fluid and emergent property (not controlled or held by one individual). Distributed leadership is based on eight hallmarks, or principles: shared responsibility, shared power, synergy, leadership capacity, organizational learning, equitable and ethical climate, democratic and investigative culture, and macro-community engagement.

Ethical Leadership

Ethical leaders adhere to certain values and beliefs irrespective of whether they are in the home or office. In essence, ethical leaders are motivated and guided by the inherent dignity and rights of other people.

Transformational Leadership

Transformational leadership is a style of leadership that motivates, encourages, and inspires employees to contribute to company growth. Leadership expert James McGregor Burns first described the concept of transformational leadership in a 1978 book entitled Leadership. Although Burns’ research was focused on political leaders, the term is also applicable for businesses and organizational psychology.

Leading by Example

Those who lead by example let their actions (and not their words) exemplify acceptable forms of behavior or conduct. In a manager-subordinate context, the intention of leading by example is for employees to emulate this behavior or conduct themselves.

Leader vs. Boss

A leader is someone within an organization who possesses the ability to influence and lead others by example. Leaders inspire, support, and encourage those beneath them and work continuously to achieve objectives. A boss is someone within an organization who gives direct orders to subordinates, tends to be autocratic, and prefers to be in control at all times.

Situational Leadership

Situational leadership is based on situational leadership theory. Developed by authors Paul Hersey and Kenneth Blanchard in the late 1960s, the theory’s fundamental belief is that there is no single leadership style that is best for every situation. Situational leadership is based on the belief that no single leadership style is best. In other words, the best style depends on the situation at hand.

Succession Planning

Succession planning is a process that involves the identification and development of future leaders across all levels within a company. In essence, succession planning is a way for businesses to prepare for the future. The process ensures that when a key employee decides to leave, the company has someone else in the pipeline to fill their position.

Fiedler’s Contingency Model

Fielder’s contingency model argues no style of leadership is superior to the rest evaluated against three measures of situational control, including leader-member relations, task structure, and leader power level. In Fiedler’s contingency model, task-oriented leaders perform best in highly favorable and unfavorable circumstances. Relationship-oriented leaders perform best in situations that are moderately favorable but can improve their position by using superior interpersonal skills.

Management vs. Leadership


Cultural Models

In the context of an organization, cultural models are frameworks that define, shape, and influence corporate culture. Cultural models also provide some structure to a corporate culture that tends to be fluid and vulnerable to change. Once upon a time, most businesses utilized a hierarchical culture where various levels of management oversaw subordinates below them. Today, however, there exists a greater diversity in models as leaders realize the top-down approach is outdated in many industries and that success can be found elsewhere.

Action-Centered Leadership

Action-centered leadership defines leadership in the context of three interlocking areas of responsibility and concern. This framework is used by leaders in the management of teams, groups, and organizations. Developed in the 1960s and first published in 1973, action-centered leadership was revolutionary for its time because it believed leaders could learn the skills they needed to manage others effectively. Adair believed that effective leadership was exemplified by three overlapping circles (responsibilities): achieve the task, build and maintain the team, and develop the individual.

High-Performance Coaching

High-performance coaches work with individuals in personal and professional contexts to enable them to reach their full potential. While these sorts of coaches are commonly associated with sports, it should be noted that the act of coaching is a specific type of behavior that is also useful in business and leadership

Forms of Power

When most people are asked to define power, they think about the power a leader possesses as a function of their responsibility for subordinates. Others may think that power comes from the title or position this individual holds. 

Tipping Point Leadership

Tipping Point Leadership is a low-cost means of achieving a strategic shift in an organization by focusing on extremes. Here, the extremes may refer to small groups of people, acts, and activities that exert a disproportionate influence over business performance.

Vroom-Yetton Decision Model

The Vroom-Yetton decision model is a decision-making process based on situational leadership. According to this model, there are five decision-making styles guides group-based decision-making according to the situation at hand and the level of involvement of subordinates: Autocratic Type 1 (AI), Autocratic Type 2 (AII), Consultative Type 1 (CI), Consultative Type 2 (CII), Group-based Type 2 (GII).

Likert’s Management Systems

Likert’s management systems were developed by American social psychologist Rensis Likert. Likert’s management systems are a series of leadership theories based on the study of various organizational dynamics and characteristics. Likert proposed four systems of management, which can also be thought of as leadership styles: Exploitative authoritative, Benevolent authoritative, Consultative, Participative.

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