Leader-Member Exchange (LMX) Theory: Key to Effective Leadership

LMX theory, or Leader-Member Exchange theory, is a unique approach examining the intricate connection between leaders and followers. Proposed in 1975 by Fred Dansereau, George Graen, and William Haga, LMX theory emphasizes the “dyadic” approach, focusing on the interaction between two individuals within formal organizations.

Unlike traditional leadership models, LMX theory recognizes the dynamic, two-way relationship between a team leader and their employees. These relationships are shaped by unique connections and interactions that vary from person to person.

LMX theory provides valuable insights into the interpersonal dynamics that drive success by analyzing leader-member relationships within organizations. It enables leaders to optimize these relationships, foster productivity, and enhance overall organizational performance.

Discover the untapped potential of leadership through the lens of LMX theory, and build strong, mutually beneficial connections with your team members.

What Is LMX Theory?

Leader-Member Exchange (LMX) Theory is a conceptual framework that explores the relationship between leaders and their followers within an organization.

It emphasizes the idea that leaders do not treat all their subordinates equally, but instead form unique relationships with each individual.

LMX Theory suggests that leaders develop different levels of exchange, ranging from high-quality relationships with a select few (in-group) to low-quality relationships with the rest (out-group).

The in-group members receive more attention, support, and access to resources, leading to greater job satisfaction and performance.

LMX Theory highlights the significance of interpersonal dynamics and individualized leadership approaches in shaping employee experiences and outcomes.

Stages In Developing The Leader-Member Exchange (LMX) Theory

George B. Graen and Mary Uhl Bien’s approach to the development of the Leader-Member Exchange theory has four progressive stages that are as follows –

Stage 1: Vertical Dyad Linkage

This theory states that any research related to the Leader-Member Exchange theory begins with research on socializing and vertical dyad linkage. Here the leader needs validation for differences that occurred in the relationship for whom reported against them. 

After analyzing the reports and studies, George and Mary concluded that the employees described the manager differently and noticed few excellent relationships.

Stage 2: Leader-Member Exchange

In the second stage, the description is given about the change from stage 1, i.e., from vertical dyad linkage to leader-member exchange theory. 

Here the study takes a curve as it moves forward from describing the relationship to the consequences they can face due to the developed relationship on an organizational relationship.

Graen and Uhl-Bien described the LMX Concept as – “the development of the LMX relationships depends upon the influence of features and behaviors of the leader and his group members via a rule-making process.”

And secondly that “the good quality LMX relationships are the examples of positive outcomes for the leader, group members, the organization and the other staff people.” 

Stage 3: Leadership Making

In the third stage, Graen and Uhl-Bien described how the theory moved forward from “in-groups” and “out-groups,” Now, its focus has shifted more towards the practical production process.

The main difference in this stage is that now it states that the managers should focus on producing high-quality LMX relationships that stay available from all employees and team members rather than having the differentiated relationships as in stage 1, i.e., vertical dyad linkage (VDL).

Stage 4: Team Making

In the fourth and last stage, Graen and Uhl-Bien aimed to use the system’s perspective to understand how differentiated dyadic relationships make larger networking systems. 

Graen and Uhl-Bien explained that the leadership structure develops from the relationships made and mutual dependencies that automatically gets fulfilled as soon as the employees fulfill their roles and achieve their task.

Alterations Over Time In The Leader-Member Exchange Theory

1st Is Role Taking – Little Responsibility And Simple Tasks

Whenever a new employee or staff member joins the organization or the working team, the leader of that department or that group allots minor and little responsibility to these employees or team members by giving them simple and easy tasks.

These tasks and duties help the employees prove and demonstrate their capabilities and responsibilities to the organization and their leaders.

2nd Role Making – Need To Earn Trust, Members Categorized

It is a process where the leader and the employees have an informal and unformed, and shapeless negotiation on work-related factors. Employees with the same attributes and characteristics as the leader are positive signs.

Here in this stage, if the leader loses his focus even for a second, it might be a betrayal by the employees. 


  • During the role-taking and the beginning of the rule-making stage, the team member shows the manager they are loyal to the group, hard workers who deserve trust and have the skills to perform their job well. 
  • Evaluating these strengths, the manager will place them in the in-group.
  • This group will receive more opportunities, more challenging or exciting work, and more attention from their manager. 
  • The manager may also consider providing them with resources like access to conferences and training sessions to improve their skill set or give them advancements considering their work development.
  • The members in the in-group are similar, with related skills and personalities. Managers and other employees find it easier to form relationships with people similar to them.


  • In contrast, managers classify out-group members in ways where, 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. 
  • Group members are mostly considered not as valuable as in-group members due to them being unmotivated or incompetent in their lack of skill set or their inability to work as persistently as in-group members.
  • 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. Managers don’t tend to communicate with these employees as much as they do with in-group members.
  • A manager may reduce an out-group team member’s responsibilities or abilities to make work decisions without the manager’s approval. 
  • 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.

3rd Leadership Making – The Transformation From An Unknown To A Good Friend In Groups Has Security; The Out-Group Gets Left Behind.

This stage of Leadership shows the transformation of the leader-member relationship from a relationship between two strangers to becoming good friends. 

The members who work together in a group pass through many stages and hence become friends as they get enough time to get to know each other and start getting connected.

The members working inside the group have more financial and job security than those outside the group. These members always have the limelight on them as they are under continuous surveillance of their leader, who keeps working on sharpening their skills and knowledge. 

The other members who work outside the group get little time to interact with each other and are often left behind. Because of this, they do not feel connected and remain strangers to each other.

The employees who work outside the group don’t get the advantage of getting expert guidance. 

As the main work of the project gets performed by the employees working in the group, the other employees do odd jobs, so they are paid a very minimum salary compared to that of the group members.

4th Team Making – The Final Stage

It is the last and final stage of forming a leader-member relationship. This stage clearly shows the bond between the team leader and his team members, i.e., the employees. Here the bond is justified based on the work done by them. 

A good team has a strong bond capable enough to produce more units, whereas a weak team with a soft bond struggles to meet the minimum requirement. 

Even a good team with weak bonds cannot have a good amount of units because of wrong or weak bonds.


  • This stage enables the establishment of routines between team members and their managers.
  • In-Group team members work hard to maintain the good opinion of their managers by showing respect, persistence, trust, empathy, and patience.
  • Out-Group members may start to dislike or distrust their managers. It is very hard to move out of the Out-Group once the perception has been established; thus, members of an out-group may change departments or organizations in order to start from scratch.
  • Once team members have been classified as In-Group or Out-Group, the classification affects how their managers relate to them from then on, and the teams function accordingly.
  • In-Group team members are often seen as leading members, and the manager trusts them to work and perform at a high level. The in-group is also the group that the manager interacts with the most, offering the members support and advice, and they’re given the best opportunities to test their skills and grow. 
  • The manager also provides the team with resources like access to conferences and training sessions to further improve their skill set and ensure that they give their best output. Hence, the in-group is more likely to develop in their roles.
  • This also holds true for the Out-Group. The manager spends little if any, time trying to support or develop this group. They receive few challenging assignments or opportunities for training and advancement. Due to the fact that out-group members are never tested, they have little chance to change the manager’s opinion.

How Are The Consequences Of The Leader-Member Exchange Theory (LMX Theory) Measured?

Whether the LMX theory is successful for an organization is challenging as it depends upon the consequences that follow it. 

These consequences are measured by analyzing the company’s total sales, actual sales, and overall organization’s employee behavior by examining the positive and negative commitments, customer satisfaction, payment satisfaction, political environment, and many more.

Reducing Leader-Member Exchange Theory Effect: Leader Tips

To reduce the effect of the Leader-member Exchange theory, the leader should follow these steps –

1. Allocate more time to socializing

Graen and Uhl-Bien found that when the team focuses more on socializing with each other, the chances of being an in-group or out-group member decreases. 

Through socializing, the employees of both categories get time to spend together and know each other well. 

Hence, a common bond gets formed between all the employees, and then there is one group of people. It also decreases the chances of sidelining any employee.

2. Acknowledge your unfairness

As a group leader, you are responsible for focusing on every employee in your organization. But then liking someone with common likes is very typical human nature. 

Hence, the leader should keep acknowledging the areas he usually needs to focus on, as this habit does not lead him to become a good and lovable leader who is liked by all.

3. Conduct leader-to-member interactivities

When the leader and the members spend more time together, they get to know each other better. So the leader and the employees should spend more time together.

For this, the leader should conduct fun and adventurous activities, parties, and many more interactivities so that he can interact with his employees and spend time with them while enjoying and having fun.

Leader-Member Exchange Theory Pros And Cons

Pros Of The Leader-Member Exchange Theory

  • A major advantage of the leader-member exchange theory is that it encourages leaders to evaluate their team members. 
  • Managers can take the necessary steps to correct any unfair notions and remain objective in their evaluations, to balance out the interaction for both teams.
  • This approach ensures in-group members are deserving of the benefits they receive and gives out-group members a chance to earn recognition. 
  • Another benefit of the theory is the development of a team with diverse personalities and skills, improving the interaction between members.

Cons Of The Leader-Member Exchange Theory

  • One con of this theory is it assumes that all team members are equal, which is not always the case. 
  • Employees differ in their abilities, interactive skills, and trustworthiness, and it is important for the manager to assign the right tasks to the right people. 
  • The manager must not be subjective in his decisions and assign the task to only those he/she thinks is worthy.
  •  It is important to let members who might be deficient in certain skills try new challenges to strengthen their field of abilities. 
  • It’s natural to provide certain opportunities to those with the experience and skills to complete them for the organization’s greater good.

Key Takeaways

  • LMX Theory: Leader-Member Exchange (LMX) theory emphasizes the dynamic relationship between leaders and followers. It focuses on unique connections and interactions.
  • Four Stages of LMX Theory Development: The stages include Vertical Dyad Linkage, Leader-Member Exchange, Leadership Making, and Team Making.
  • Role Taking and Role Making: Initial stages involve assigning minor responsibilities and negotiating work-related factors to establish trust. In-group and out-group classifications are formed based on trustworthiness and performance.
  • Leadership Making and Team Making: These stages focus on creating high-quality LMX relationships available to all employees and building stronger bonds for better team performance.
  • Measurement and Leader Tips: Consequences are measured by analyzing sales, employee behavior, commitment, satisfaction, and the organizational environment. Leaders should allocate time to socialize, acknowledge unfairness, and conduct interactivities to build strong relationships.


How does LMX theory impact organizational outcomes?

LMX theory suggests that high-quality leader-follower relationships positively impact organizational outcomes, including employee satisfaction, motivation, organizational citizenship behavior, and overall performance.

Can LMX theory be applied to all leadership styles?

Yes, LMX theory can be applied to various leadership styles. It focuses on the quality of relationships rather than specific leadership styles.

However, certain leadership styles may facilitate or hinder the development of high-quality leader-member exchanges.

How can leaders enhance the quality of leader-member exchanges?

Leaders can enhance the quality of leader-member exchanges by promoting open communication, providing support and feedback, recognizing and valuing their followers’ contributions, and treating followers fairly and equitably.

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