Reward as well as reprimand serve as the fundamental motivators of human behavior. These perceptions are shown clearly within Maslows hierarchy of needs. Human social organizations run most successfully once a clear leadership chain of command is defined. One characteristic of employment that people have to consent and anticipate is that they have to defer to the power of the chief to whom they report. The main job of a subordinate is to deliver to the expectations of his or her chief.

The leader of the transaction works on creating clear structures, consequently making it clear to employees unerringly what is essential, as well as the rewards commensurate with meeting those requirements. Penalty is usually obliquely declared, but usually understood, with recognized discipline procedures existing.

The early stage of Transactional Leadership is in negotiating the contract whereby the subordinate is given a salary and other benefits, and the company (and by implication the subordinate's manager) gets authority over the subordinate.

Employees will be punished for their failure if things do not go correctly, just as they would be rewarded for their successes. When a job is given to an employee by the Transactional Leader, the employee is fully accountable for its completion. This accountability applies whether or not the employee has the means or ability to finish the project.

The transactional leader often uses management by exception, working on the principle that if something is operating to defined (and hence expected) performance then it does not need attention. Exceptions to expectation require praise and reward for exceeding expectation, whilst some kind of corrective action is applied for performance below expectation.

There are several differences between Transformational and Transactional Leadership. Transformational leadership denotes positive change, and persuading others to participate in achieving this positive change. A good transformational leader will impart the same enthusiasm for achieving the team's goals that the leader himself has. A transactional leader, on the other hand, is concerned with a hierarchical approach -- one of stating what he expects from his subordinates and what they may expect from him. There is no sense of "team" and the subordinates may or may not become personally enthusiastic about completing the task. They may receive praise if the leader deems their work acceptable -- or they may be penalized for poor work.

Despite much research that highlights its limitations, Transactional Leadership is still a popular approach with many managers. Indeed, in the Leadership vs. Management spectrum, it is very much towards the management end of the scale.

To have an effective model of human behavior, we can't assume that people are mainly motivated by reward and are very predictable. This fallacy is supported by the psychological theory of behaviorism, which was made famous by Pavlov's classical conditioning and Skinner's operant conditioning experiments. Unfortunately, these experiments are often performed in controlled lab conditions using animals as subjects, negating the complexity of the human mind and motive.

When applied to real life there is a lot of actuality in Behaviorism to sustain Transactional approaches. If you look at Maslow's Hierarchy of Needs along with the effects of the supply and demand of employment you can see the correlation. Transactional Leadership isn't enough when demand for a certain skill erodes the supply.