University of Twente
Faculty of
Behavioral Sciences
Bachelor Thesis Work- and Organizational Psychology
Uncovering individual potential:
An integrative approach to LMX and transformational leadership
Ontdek individuele vaardigheden - Een integratieve kijk op LMX en transformational leadership
Name:Britta Rüschoff
Studentnr.0111171
Study:Psychology
Course:Bachelor Thesis Work- and Organizational Psychology
Date:June 2008
Supervisors:M. Moorkamp, MSc
Prof. Dr. K. Sanders
1
I. Summary
The objective of this study was to clarify the role of transformational leadership and leader-member exchange relationships aspossible antecedents of beneficial organizational human resource management-outcomes, focusing on the assumption that leader-member exchange relationships might emerge through transformational leadership behaviors and thereby mediate the relationship between transformational leadership and HRM-outcomes.
Cross-sectional survey research on the relationship these leadership approaches and their impact onorganizational HRM-outcomes has been conducted on threeorganizations operating in the technical sector, incorporating 151 respondents evenly spread over the participating organizations. In line with the hypotheses,transformational leadership emerged to be positively related to the HRM-outcomes under study, that is,innovative behavior, affective organizational commitment, and employees’ Hr-satisfaction. Contrary to the hypotheses, LMX proved not mediate thisrelationship. Findings suggest that both leadership approaches operate mainly independent of one another and that both contribute to an organization’s HRM-outcomes. However, the interrelation between transformational leadership and LMX stays unclear and remains to be a worthwhile issue of further study.
II. Samenvatting
Het doel van dit onderzoek was de verduidelijking van de rol van transformationele leiderschap en leiderschap gebaseerd op leader-member exchange relaties (LMX) in de verklaring van interorganisationele HRM-uitkomsten. Het wordt ervan uitgegaan dat leader-member exchange relaties ontstaan door de toepassing van transformationele leiderschap en de hieran gekoppelde gedragingen, hetgeen verondersteld dat LMX een mediator is voor de relatie tussen transformationele leiderschap en HRM-uitkomsten.
Cross-sectioneel survey onderzoek naar de relatie tussen deze benaderingen van leiderschap was uitgevoerd op 151 medewerkers in drie technische toepassingsgerichte organisaties. Zoals verwacht bleek transformationele leiderschap positief gerelateerd te zijn aan de onderzochte HRM-uitkomsten, dat zijn innovatief gedrag, affectieve betrokkenheid en tevredenheid met Hr-praktijken. In tegenstelling tot de verwachtingen bleek LMX geen mediator te zijn voor dezerelaties. Het mag dus geconcludeerd worden dat zowel transformationele leiderschap als LMX gerelateerd zijn aan HRM-uitkomsten, maar dat de relatie tussen deze twee benaderingen van leiderschap onuidelijk blijft.
III. Contents
1. Introduction
1.1. Theoretical Background
2.Method
2.1. Procedure
2.2. Respondents
2.3. Instruments
2.4. Statistical Adjustments
3. Results
3.1. Descriptives
3.2. Analysis
4. Discussion
5. References
Appendix A- Example of a report to the organizations
Appendix B- Characteristics of the respondents
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1. Introduction
The topic of leadership effectiveness has been up for debate for a long time (see e.g., Boxall & Purcell, 2000).Within this debate, the issues of transformational leadership and leadership approaches based on leader-member exchange relationships have received exceptional attention (for a discussion see e.g., Basu & Green, 1997; Hollander, 1995; Gerstner & Day, 1997).Building on the current discussion of leadership efficiency, this study aspires to analyze the relation between transformational leadership and leadership approaches based on leader-member exchange theory (LMX), as well as their connection among each other and their impact on innovative behavior at work, affective organizational commitment, and employees’ satisfaction with human resource (HR)-practices. Since a transformational leaderis characterized by communicating a higher vision to his or her subordinates and by changing their attitudes to serve a higher goal, it is feasible that leaders and subordinates being situated in such a closely related transformational leadership setting will ultimately establish personal relations based on mutual support, as it is also characterized by high-quality leader-member exchange relationships. Due to this assumption, LMX is expected to function as a mediating variable between transformational leadership and HRM-outcomes.
Nowadays, the source of an organization’s sustainable competitive advantage is its employees rather than its material assets as it has been some decades ago (Gupta & Singhal, 1993). To remain competitive, organizations must build on employees’ knowledge and intellectual capital (Ulrich, 1998). Due to this fact, this study will investigate the impact of leadership on HRM-outcomes rather than financial outcomes and profitability. HRM-outcomes are being distinguished from regular organizational outcomes such as mere financial profitability and embrace the 4 Cs commitment, competence, congruence, and cost effectiveness (Paauwe, 2004). They are assumed to result from the application of various HRM activities. According to Paauwe (2004), HRM-outcomes are expected to affect organizational long-term consequences such as employees’ individual and societal well-being and organizational effectiveness, thereby influencing the overall performance of the organization. The first outcome to be analyzed here is an organization’s ability to innovate, respectively its employees’ innovative behavior. Regarding the fact that nowadays innovations have become one of organization’s primary tools ensuring their continuity (Looise & van Riemsdijk, 2004), employees’ ability and willingness to innovate has become an organization’s key to sustainable competitive advantage, which makes an effective human resource strategy focused on the attraction and retention of highly qualified and creative employees indispensable (Gupta & Singhal, 1993; Ulrich, 1998). This lays the link to the second HRM-outcome to be investigated, employees’ affective commitment to the organization. Since employees’ affective commitment has proven to be negatively related to employee turnover (Meyer, Stanley, Herscovitch, & Topolnytsky, 2002), establishing affective organizational commitment should be a primary goal in itself to retain highly skilled employees.The third outcome to be investigated is employees’ satisfaction with HR-practices (Hr-satisfaction). Although in literature Hr-satisfaction is mainly treated as an antecedent of HRM-outcomes such as affective commitment (Kinnie, Hutchinson, Purcell, Rayton, & Swart, 2005), it can also be regarded as an HRM-outcome in itself, since it is a direct result of the implemented Hr-strategy aimed at benefiting the organization by increasing employees’ willingness to perform andinvest in the organization. Assuming that organizations who aim at the retention of highly creative and skilled employees are interested in their employees’ well-being to avoid dissatisfaction and disconcertments at work, employees’ Hr-satisfaction is a worthwhile topic to investigate. In the context of this study, Hr-satisfaction is based on the Harvard-Model of human resource management (Beer, 1984), which differentiates among four dimensions of human resource management, that are thereward system, the work flow, the work system, and employees’ right to participate in decision-making processes. One has to differentiate between an organization’s intended and implemented Hr-policy and keep in mind that employees react to the implemented Hr-policy as it is exerted by their direct superior ratherthan to the intended Hr-policy as it is planned by the organization (Khilji and Wang, 2006). A good Hr-policy will fail if it is implemented inappropriately. In the same way, a rather a poor Hr-policy can result in high Hr-satisfaction if its flawed design is cancelled out by proper implementation. Due to this fact and regarding that it is the line managers who implement an organization’s Hr-policy (Stoker De Korte, 2000), the relation between implemented Hr-practices and employees’ Hr-satisfaction will be investigated. The importance of employees’ Hr-satisfaction originates in its positive relation to discretionary behavior and organizational citizenship behavior (Kinnie et al., 2005), assuming that employees who are satisfied will contribute more to the organization than they are formally required to.
In sum, the issue to be analyzed within this study can be stated as follows:
What is the relation between transformational leadership and innovative behavior at work, affective organizational commitment, and employees’ satisfaction with Hr-practices,and is this relation mediated by LMX?
Results of this study may clarify the ongoing discussion about the connection between transformational leadership and leadership based on dyadic relationships between leader and subordinate (e.g., Basu & Green, 1997; Hollander, 1995; Gerstner & Day, 1997). The assumption thatLMX is the result of charismatic transformational leadership behaviors and actually mediates the relation between transformational leadership and beneficial organizational HRM-outcomes is tested. Identifying the relation between these different leadership approaches and HRM-outcomes may provide valuable information to organizations who wish to understand the impact and relevance of a proper implementation of effective Hr-practices on their employees. By understanding these distinctive effects, organizations may create sustainable competitive advantage through the retention of affectively committed high-potential employees (Meyer et al., 2002), increased innovativeness (Looise & van Riemsdijk, 2004), and may create a pleasant and satisfying work environment for their main competitive advantage: their employees.
1.1. Theoretical Background
Transformational leadership. According to Basu and Green (1997) transformational leadership, sometimes denoted by charismatic leadership, is aimed at replacing subordinates’ values and redirect them to represent higher morality. A transformational leadership approach is characterized by transforming current ways of accomplishing tasks to initiate required changes. This transformation takes place by enhancing the value of outcomes subordinates receive, thereby initiating self-interested behavior (Bass, 1985). Due to this focus on the exchange of valuable outcomes, transformational leadership is often defined as an extension of transactional leadership such as leader-member exchange theory (LMX), which rests on the mere exchange process between leader and subordinate(Hollander, 1995),but lacks the communication of a certain higher morality. Transformational leadership is supposed to enhance the effect of transactional leadership in that more meaning is given to work and in that subordinates are stimulated to engage in actions that go beyond formal requirements (Hoogh & Koopman, 2004). Bass (1985) distinguishes four components of transformational leadership: Idealized influence, inspirational motivation, intellectual stimulation, and individualized consideration. Inspirational motivation and idealized influence build the core concepts of transformational leadership and can be summed up as “charisma”, whereas intellectual stimulation and individualized consideration are more focused on the empowerment of employees (Hoogh & Koopman, 2004). Finally, transformational leadership has proven to be positively related tosubordinates’ level of innovation(Bass, 1985).
Innovative behavior.Innovations and innovative behavior are of high importance to organizations’ effectiveness and survival in an ever changing organizational environment (Basu & Green, 1997). Innovation is defined as the application and implementation of ideas, processes, and products that are substantially new to the organization and aim at benefiting it (Shipton, West, Dawson, Birdi & Patterson, 2006). It denotes the process by which knowledge is turned into economic activity, ultimately leading to improved life standards (Tang, 2006). Innovation is assumed to proceed in two stages: During the exploration stage new and creative ideas are developed, which will be implemented in the exploitation stage (West, 2002). Innovative behavior in turn can be defined as “the intentional creation, introduction and application of new ideas within a work role, group or organization, in order to benefit role performance, the group, or the organization” (Janssen, 2000, p. 288). Here, innovative behavior is denoted as a discontinuous process of moving back and forth between the stages of idea generation, idea promotion, and idea generalization. It can be categorized as an instance of discretionary behavior voluntarily exerted by employees in return for employers’ fair handling of social exchanges. It is conceivable that the stimulating andinspiring focus of transformational leaders as well as their emphasis on initiating self-interested behavior and their engagement in employees contribute to the relation between transformational leadership and innovative behavior found by Bass (1985). This argumentation results in the first hypothesis:
H1Transformational leadership is positively related to employees’ innovative behavior.
Commitment.Furthermore, transformational leadership is assumed to be related to employees’ affective organizational commitment.Commitment denotes an employee’s feelings and beliefs towards the employing organization (organizational commitment) or towards the occupation as a whole (occupational commitment) and can be regarded as the amount of attachment an employee experiences towards his or her occupation or to the employing organization (Spector, 2006). The concept of affective organizational commitment originates in Meyer and Allen’s Three-Component Model of Commitment (Meyer & Allen, 1993) which distinguishes affective, continuance, and normative commitment. Normative commitment refers to employees feeling obliged to stay with the organization due to investments the organization has made in them, while continuance commitment refers to remaining with the organization due to substantially high personal costs associated with leaving. Affective commitment refers to emotional attachment to and identification with the employing organization.In general, affective commitment has been shown to be most strongly related to organization-relevant and employee-relevant behaviors (Meyer et al, 2002), which is the reason why only this component will be investigated in the study at hand. Considered antecedents of organizational commitment include among others group-leader relations, which comprisetask interdependence, leader communication, and participatory leadership (Mathieu & Zajac, 1990). Affectively committed employees are considered to be highly valuable to an organization in that they have been found to exhibit lower withdrawal cognitions, assuming a lower turnover rate among affectively committed employees (Meyer et al., 2002). Regarding that transformational leadership is focused on altering employees’attitudes and wishes to initiate self-interested engagement and dedication to the organization (Bass, 1985), it is feasible that subordinates who work under a transformational leader will be affectively committed to the organization since the organization’s goals have become their own goals. This leads to the second hypothesis:
H2Transformational leadership is positively related to employees’ affective
commitment to the organization.
Hr-satisfaction.Moreover, a relation between transformational leadership and employees’ satisfaction with Hr-practices, also denoted by Hr-satisfaction, is feasible. According to Khilji and Wang (2007), employees’ Hr-satisfaction builds the fundamental link between an organization’s human resource practices and organizational performance. It can be defined as an attitudinal assessment of the implementation of HR-practices within an organization (Khilji and Wang, 2007). Regarding that HR-satisfaction is concerned with employees’ individual experiences of HR-practices it is important not to confuse intended with implemented HR-practices. Intended practices are the ones planned by management, whereas implemented practices are those finally reaching an organization’s employees. One has to be cautious to assume that this difference is negligible, as intended practices are not always enacted according to their planning (Kinnie et al., 2005; Khilji and Wang, 2006). Regarding that HR-satisfaction is an indicator of employees’ individual experience of HR-practices it is concerned with implemented rather than intended practices. The importance of employees’ Hr-satisfaction lies, beside its positive impact on employees’ well-being, in its positive relation to organizational performance and its negative relation to turnover. The Harvard-Model of human resource management proposed by Beer (Beer, 1984) states that effective HR-practices should primarily be concerned with balancing employees’ and leaders’ influences on decision-making processes, the work system, the reward system and the human resource flow. By balancing employees’ expectations with the implemented HR-practices, organizational commitment can be enhanced. Based on this model, the current study will focus on employees’ perception these Hr-practices. Due to the charismatic behaviors exerted by a transformational leader and the high interest and involvement he or she exerts, it is conceivable that employees perceive their leader as fair and highly dedicated to his or her subordinates, assuming that employees will be satisfied with how they are treated. Regarding that it is leaders who implement an organization’s Hr-policy and thereby represent this policy to an organization’s employees (Stoker & De Korte, 2000), it is expected that employees’ satisfaction with their leader will also be reflected in high satisfaction with the organizations’ Hr-policy. This results in the third hypothesis:
H3Transformational leadership is positively related to employees’ satisfaction with Hr-practices.
Leader-member exchange theory.The second leadership approach to be investigated in this study is leader-member exchange theory (LMX), which is an instance of a transactional leadership approach,proposing that leaders develop different kinds of exchange relationships with their subordinates (Dansereau, Graen, & Haga, 1975) wherein exchanges concerning contribution, loyalty, professional respect, and affect are made (Liden & Maslyn, 1998). The dyadic relationships proposed by LMX differ in terms of their quality and are defined as either high quality or low quality relationships. Subordinate-members of these relationships are referred to as either in-group or out-group members in high- or low quality relationships, respectively (Dansereau et al., 1975). High quality dyads are characterized by frequent exchange of valued resources and engagement in activities beyond formal requirement, whereas low quality dyads rely more on the formal employment relationship (Liden & Maslyn, 1998). The specific kind of exchange relationship influences the amount of work-related resources available to the subordinate (Graen & Scandura, 1987) and determines leaders’ behavior towards subordinates insofar as subordinates defined as in-group members are granted higher autonomy and influence in decision-making processes than out out-group members (Dansereau et al., 1975). In return, in-group members reciprocate with higher levels of performance, less inclination to leave, and taking on additional responsibilities (Keller & Dansereau, 2001). Furthermore, leaders enjoy in-group members’ loyalty and gain potentially more influence and higher status (Basu & Green, 1997). Over time, these high-quality exchange relationships turn into social relations (Basu & Green, 1997). A meta-analysis conducted by Gerstner and Day (1997) indicated a positive relationship between LMX and job performance, satisfaction with supervision, overall satisfaction, and commitment, whereas a significant negative relation was observed between LMX and turnover intentions but not actual turnover.
Recent research indicated that LMX functions as a mediator between transformational leadership and organizational citizenship behavior as well as task performance,as the outcomes of transformational leadership behavior are a result of dyadic relationships between leaders and subordinates that actually origin in the social orientation of transformational leadership behaviors (Wang, Law, Hackett, Wang, & Chen, 2005). Aiming to refine these findings, this study extends the relationship found by Wang et al. (2005), investigating a possible mediating effect of LMX in the relation between transformational leadership and organizational HRM-outcomes. This integration of transformational leadership and LMX has also been called for by other researchers (e.g., Graen & Uhl-Bien, 1995). Wang et al. (2005) argue that it “is the quality of the leader-follower relationship through which transformational leadership behaviors influence follower performance” (Wang et al., 2005, p. 420). Stated differently, the dyadic exchange relationships of LMX are supposed to emerge through charismatic behaviors exerted by transformational leaders, assuming that LMX is the result of transformational leadership behaviors. Due to the high involvement transformational leaders show for their subordinates and also due to their charismatic behaviors, it has been suggested that on the long run social relationships establish between leaders and subordinates(Wang et al., 2005), thereby blurring the distinction between transformational leadership and LMX.According to Bass (1985), transformational leaders initiate self-interested behaviors in employees by enhancing the values subordinates receive, which further obliterates the distinction between transformational and transactional leadership approaches.Findings indicating a strong positive correlation between transformational leadership and LMX support this notion (Gerstner & Day, 1997). Although it has often been argued that transformational leadership might be an extension of transactional leadership behaviors including LMX (Hollander, 1995), this assumption might not be correct and the two concepts might indeed be related in the manner assumed by Wang et al. (2005).Regarding the relatively small number of studies integrating transformational leadership and LMX (e.g., Basu & Green, 1997; Wang et al., 2005), not much research has been conducted on the theory of LMX as a mediator between transformational leadership and beneficial organizational and HRM-outcomes.