Group and Exchange Theories

Social Exchange Theory:

Social exchange theory proposes that social behavior is the result of an exchange process. The purpose of this exchange is to maximize benefits and minimize costs. Social Exchange Theory is a social psychological and sociological perspective that explains social change and stability as a process of negotiated exchanges between parties. Social Exchange Theory posits that all human relationships are formed by the use of a subjective cost-benefit analysis and the comparison of alternatives.

Costs are the elements of relational life that have negative value to a person, like time, money, effort etc. and on the other hand rewards are the elements of a relationship that have positive value like sense of acceptance, support, and companionship etc. The Social Exchange perspective argues that people calculate the overall worth of a particular relationship by subtracting its costs from the rewards it provides. If worth is a positive number, it is positive relationship. On the contrary, negative number indicates a negative relationship. The worth of a relationship influences its outcome, or whether people will continue with a relationship or terminate it. Positive relationships are expected to endure, whereas negative relationships will probably terminate.

Benefits V/s Burden Costs in Leadership:

Social exchange theory can also be applied to leadership studies as reported by Hollandder and Julian (1969). They propose that the leader provides more benefits or regards than burden or costs to the followers who in exchange help him achieve the goals of the organization. There must be a positive exchange between the leader and followers in order for group goals to be accomplished. According to this group of theories, a leader provides more benefits/rewards than burdens/costs for followers.

How it Works for Leader-Follower Situations?

In a group, members make contributions at a cost to themselves and receive benefits at a cost to the group or other members. The leader can give rewards to his followers in the form of appreciation or monetary increments or promotion for accomplishment of the organizational goals or tasks. These rewards have positive impact on attitudes, satisfaction and performance of the followers.

In return of these awards, followers respect the leader and give him due regard for his status and esteem and believe in his heightened influence. The leader tends to follow initiating structure when followers do not perform very well and increases his emphasis on consideration when the followers do a good job.

In this balancing act, the perception of his followers of his being an effective leader increases and this equation is mutually beneficial for both the leader and the follower. Interaction continues because members find the social exchange mutually rewarding.

Leadership Lessons from Group and Exchange Theories:

• In work organizations, the key partners involved in exchange relationships of investments and returns are superiors and subordinates. Superiors make investments in and receive returns from subordinates; subordinates make investment in and receive returns from superiors; and the investments and returns occur on a one-to-one basis in each superior-subordinate dyad.
• It is an exchange process where followers also impact leaders. Leader behavior changes with subordinate behavior, leaders bending towards initiate structure or towards consideration.
• Subordinates have to be trained to be good followers so that group overall emerges as successful. Followers have to support the leader and make leader be successful for their own success.
• Subordinates who are committed and who expend a lot of effort for the group are rewarded with more of the leader’s potential resources than those who do not display these behaviors.
• Perceived similarity between the leader and the subordinate leads to higher quality leader-subordinate relationship.
• In the balancing act, leaders try to change the self-concept of the subordinate to improve the performance of the subordinate. Similarly subordinates also shape leader’s self-concept through their responses.
• If every member of the group has to get more reward than his personal cost, the group must have synergy. The individual contributions result in bigger output due to group synergies.