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JIMMY A. LOJA JR. PROF. MARLENE AGUIRRE, MPA, MBA   

MBA Student Course Facilitator

MBA 410: EXECUTIVE DEVELOPMENT

ED REPORT 16 – LEADER MEMBER EXCHANGE (LMX) THEORY

INTRODUCTION

Relationships between employees and leaders can often determine how productive an
organization is. The leader-member theory seeks to analyze these interactions and provide
solutions for optimizing them. Leveraging this theory in the workplace can boost morale and
capitalize on everyone's unique skills. 

Informal observation of leadership behavior suggests that leader’s action is not the same
towards all subordinates. The importance of potential differences in this respect is brought into
sharp focus by Graen’s leader-member exchange model, also known as the vertical dyad linkage
theory. The theory views leadership as consisting of a number of dyadic relationships linking the
leader with a follower. The quality of the relationship is reflected by the degree of mutual trust,
loyalty, support, respect, and obligation.

Learning Contents:

 Definition of Leader-Member Exchange Theory

 Leader-Member Exchange Theory Stages
 How to use the Leader-Member Exchange Theory
 Pros of the Leader-Member Exchange Theory
 Cons of the Leader-Member Exchange Theory
 Strengths of Leader-Member Exchange Theory
 Criticisms of Leader-Member Exchange Theory
 IMPLICATIONS

What is the Leader-Member Exchange Theory?

The leader-member exchange theory is a concept that examines the relationship between
management and employees. It evaluates the effectiveness of these relationships and determines
how they directly influence the growth and productivity of each employee. Also known as
Vertical Dyad Linkage Theory or LMX, this theory has been around since the 1970s and is
prevalent in organizations across various industries

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 According to the theory, leaders form different kinds of relationships with various groups
of subordinates. One group, referred to as the in-group, is favored by the leader. Members of in-
group receive considerably more attention from the leader and have more access to the
organizational resources. By contrast, other subordinates fall into the out-group. These
individuals are disfavored by the leader. As such, they receive fewer valued resources from their
leaders.

Leader-Member Exchange Theory Stages

Leaders distinguish between the in-group and out-group members on the basis of the
perceived similarity with respect to personal characteristics, such as age, gender, or personality.
A follower may also be granted an in-group status if the leader believes that person to be
especially competent at performing his or her job. The relationship between leaders and
followers follows three stages:

1. Role Taking

In this stage, an employee first begins at the organization or first starts reporting to their
current manager. If an employee began their career at a company in the marketing department,
transferring later to the customer service department, the leader-member relationship may start
over because they are reporting to a new manager.
However, if the two managers speak to each other about their employees, there is the
potential that the employee is then beginning the relationship at a different part of the three
stages than a completely new hire to the organization would.
During this stage, team members are joining the group for the first time. Managers are
getting to know their new employees and accessing their skills, experience and abilities. A
leader's initial perception of the employee results in the leader forming an image of the team
member, and they are more likely to give their new team member opportunities based on this
image.
2. Role making
In this stage, team members are now a part of the group, working on assigned tasks and
taking part in projects. A manager may observe how everyone interacts and builds a solid idea of
the skills each member brings to the group, expecting that everyone is working hard,
communicating effectively and supporting their team.
They especially assume that new team members give their best as they establish
themselves in the team. Although it often happens subconsciously, leaders usually sort members
into two groups:

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  In-group
If during the role-taking stage and the beginning of the role-making stage the team member
shows the manager they are loyal to the group, a hard worker, deserving of trust and has the
skills to perform their job well, the manager will place them in the in-group.
This group will go on to receive more opportunities, more challenging or exciting work and
more attention from their manager. The manager may also consider them for advancement or
provide them with resources, like access to conferences and training sessions, so they can
improve their skill set and grow in their role.
You may notice that those in the in-group tend to be similar to one another, with related skills
and personalities. Managers and other employees find it easier to form relationships with those
who are like them.
 Out-group
In contrast, managers classify out-group members in this way if an employee somehow
betrays their trust or otherwise makes a manager feel that they aren't as valuable an employee as
their teammate from the in-group.
As a result, the out-group team members work on projects that aren't challenging, don't
require any creativity and are less risky than other projects. A manager may not realize it, but
they don't tend to communicate with these employees as much as others.
A manager may reduce an out-group team member's responsibilities or ability to make work
decisions without manager approval. They may also not have the same access to opportunities or
the resources they need to develop their skill set. Because of this, an out-group team member can
become stagnant in their role and frequently blend into the team rather than stand out to the
manager.
3. Routinization
At this stage, a manager and their team members have established a routine in the
workplace that can differ depending on if the employee is in the in-group or out-group. Once a
manager has assigned someone to either the in-group or out-group, it affects how the manager
relates to them in the future, as transitioning from the out-group to the in-group does not happen
frequently or easily.
In-group team members continue to work hard so they remain in their manager's favor.
They may exhibit the traits, such as patience and empathy for their team, that lead managers to
believe in their work and deem them trustworthy.
Out-group members, feeling like they aren't a core part of the team, may become disengaged
and may even come to dislike their managers and teammates who are part of the in-group.

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How to use the Leader-Member Exchange Theory
Here's how to use the leader-member exchange theory:
1. Know who is in the out-group
Remember that managers are likely subconsciously placing team members into one of the
two groups based on perceptions, whether fair or unfair. The first thing a manager can do to
make the leader-member exchange theory work for them is to write down the names of all the
employees who they would consider to be in the out-group. One by one, determine why these
individuals are not in the in-group.
Managers may want to ask themselves if the employee was uncooperative during a meeting,
has low motivation or did something else that may have caused distrust. The manager can then
analyze further to decide if their reaction to a real or perceived slight is fair or unfair. This can be
a great first step in understanding why someone falls in one group versus the other.
2. Develop relationships
Once a manager has identified who they have placed in the out-group, they should work
on re-establishing a relationship. Doing this is mutually beneficial—not only will the team
member appreciate the effort, but they will also likely improve their work, attitude and
relationship with other members of the team, including those in the in-group. This will serve a
manager well, as they will now have one additional team member who's carrying their weight
and serving the group as a whole.
Although a member of the out-group isn't used to receiving attention from their manager
and may be hesitant to receive it at first, their manager should show a genuine desire to form
rapport. Managers can do this by getting to know their team members and proactively asking
their team members how their day is going or if they can help with anything else.
3. Provide specific opportunities
Once the manager knows more about each employee, they should develop training or
skill-building opportunities that are unique to that individual. For example, if an employee
discloses that they want to learn more from the team, a manager may schedule regular coaching
sessions or form a peer-to-peer mentorship program. If an employee is interested in learning
something new, a manager can set them up with webinars or in-person training sessions.
If a manager is still unsure if they can trust a team member to perform well, they can start
by assigning low-risk responsibilities to the employee to evaluate how they do. If they do well,
they can continue to take on more for the manager to assess. If they do not do well, it still
provides the leader with the opportunity to discuss their work and train the employee on how to
succeed next time.

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Pros of the Leader-Member Exchange Theory
A major pro of the leader-member exchange theory is that it encourages leaders to
evaluate their team members. Even if it's subconscious, they can take the necessary steps to
correct any unfair notions and remain objective in their evaluations.
This approach ensures in-group members are deserving of the benefits they receive and
gives out-group members the chance to earn recognition. Yet another benefit of the theory is the
development of a team with diverse personalities and skills.

Cons of the Leader-Member Exchange Theory

One con of this theory is it assumes that all team members are created equal, but that's not
always the case. Employees differ in their abilities and trustworthiness, and it's important for the
manager to assign the right tasks to the right people. It's natural to provide certain opportunities
to those who have the experience and skills to complete it for the greater good of the
organization.

Strengths of Leader-Member Exchange Theory

 LMX theory is an exceptional theory of leadership as unlike the other theories, it
concentrates and talks about specific relationships between the leader and each subordinate.
 LMX Theory is a robust explanatory theory.
 LMX Theory focuses our attention to the significance of communication in leadership.
Communication is a medium through which leaders and subordinates develop, grow and
maintain beneficial exchanges. When this communication is accompanied by features such as
mutual trust, respect and devotion, it leads to effective leadership.
 LMX Theory is very much valid and practical in it’s approach.

Criticisms of Leader-Member Exchange Theory

 LMX Theory fails to explain the particulars of how high-quality exchanges are created.
 LMX Theory is objected on grounds of fairness and justice as some followers receive special
attention of leaders at workplace and other followers do not.

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IMPLICATIONS
According to many studies conducted in this area, it has been found that leaders
definitely do support the members of the in-group and may go to the extent of inflating their
ratings on poor performance as well. This kind of a treatment is not given to the members of the
out-group.
Due to the favoritism that the in-group members receive from their leaders, they are
found to perform their jobs better and develop positive attitude towards their jobs in comparison
to the members of the out-group. The job satisfaction of in-group members is high and they
perform effectively on their jobs. They tend to receive more mentoring from their superiors
which helps them in their careers. For these reasons, low attrition rate, increased salaries, and
promotion rates are associated with the in-group members in comparison to that of the out-group
members.

References:
 https://managementstudyguide.com/lmx-theory.htm
 https://www.indeed.com/career-advice/career-development/leader-member-exchange-theory