Exchange Theory – Leadership Theories Series

Use exchange theory if you wish to (potentially) develop a close working relationship with every member of your team and ensure their loyalty to you and you alone.

Dansereau, Graen and Haga’s theory is unusual in that it both describes what leaders do and suggests a strategy for how they should act. The¬†exchange theory suggests that the leader should try to establish a close working relationship with each follower individually.

To achieve this leaders follow a three-stage process:

Stage 1 – the stranger phase: At this stage the relationship is one of manager/employee. The relationship is defined by the person working to their job description and the leader watching for signs of potential.

Stage 2 – the acquaintance phase: If potential is identified the leader invites the person to take on additional work and responsibilities. During this phase the leader assesses if the worker has what it takes to become a full member of the in-group.

Stage 3 – the mature partnership phase: If the leader is satisfied with the person’s performance they are invited to join the in-group. In return for taking on additional responsibilities and showing loyalty to the leader they gain greater access to the leader, more interesting work and opportunities for training and advancement.

Those not in the in-group are in the out-group.

The strength of the exchange theory is that it allows a leader to build a strong and loyal follower base. The followers’ commitment and loyalty improves productivity and team cohesion and targets and objectives are achieved more quickly and with less hassle.

How to use exchange theory

Decide if you wish to use the exchange theory. Many people feel that it is an unethical form of leadership. However, provided all staff are given the same opportunity to join the in-group LMX(leader member exchange theory) isn’t inherently unfair.

Identify what you can offer staff in return for working harder and showing greater commitment and loyalty to you. It might be access, a reputation for having the ear of the leader or greater opportunities to discuss their views and ideas.

Do not announce that you are going to adopt a form of LMX leadership or advertise the benefits of being in the in-group. Instead demonstrate through your actions with individual members of staff the benefits that are on offer. Other staff will quickly realize what is going on.

Almost certainly, you will be able identify some staff who are already working above what is expected of them. Start with them. Then work outwards.

As staff begin to recognize the benefits of in-group membership many will want to join. Ensure that everyone gets the same chance to join but only recruit those who have demonstrated by their attitude to work that they are willing to enter into a closer working relationship.

You are not being unfair if you refuse membership to someone who lacks commitment to their work but it is unfair to exclude someone just because you don’t like them.

Questions to ask

  1. Can I be confident that my in-group will not just be made up of friends?
  2. How am I going to deal with the members of my out-group?
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