Transformational Leadership,Transactional Leadership,and Employee Creativity in Entrepreneurial Firms

Abstract

Drawing on organismic integration theory, we propose that transformational leadership and transactional leadership are most likely to predict outcomes, under uncertain social contexts, when accompanied by organizational financial and nonfinancial rewards. Using survey data from professional employees and their supervisors, from 260 Chinese enterprises, with less than 5 years of entrepreneurial experience, we found that (1) transformational leadership is not significantly related to employee creativity, while transactional leadership is positively related to followers’ creative behaviors, (2) synergy between transformational leadership and financial rewards and between transactional leadership and nonfinancial rewards accentuate the effect on employee creativity respectively, (3) psychological empowerment fully mediates the aforementioned relationship. These findings offer a new theoretical framework for future theory development of leadership.

Keywords

transformational leadership transactional leadership financial rewards nonfinancial rewards psychological empowerment employee creativity entrepreneurial firms

Substantial evidence indicates that the main source of organizational innovation and competitive advantage is employee creativity (Amabile, 1996; Shalley, Zhou, & Oldham, 2004), defined as the production of novel and useful ideas by an individual or a group of individuals working together (Madjar, Oldham, & Pratt, 2002; Shalley, Gilson, & Blum, 2000; Zhou & Shalley, 2003). Therefore, organizations are increasingly seeking ways to encourage creativity among employees (Hirst, Van, & Zhou, 2009; Zhou & George, 2001).

Managers have great influence over the context within which creativity occurs (Shalley & Gilson, 2004). A number of studies have investigated the impact of leader behavior and/or leadership on creativity (i.e., Amabile, Schatzel, Moneta, & Kramer, 2004; Pieterse, van Knippenberg, Schippers, & Stam, 2010). Among these studies, transformational and transactional leadership are the two modes of leadership most often compared, dominating the leadership literature, especially Western research (Judge & Piccolo, 2004; Bass & Riggio, 2006), since its introduction by Burns (1978).

A majority of studies on transformational and transactional leadership have focused on the effects on employee creativity. Empirical evidence of the relationship between transformational leadership and employee creativity is mixed, including positive (Gong, Huang, & Farh, 2009; Shin & Zhou, 2003), negative (Basu & Green, 1997), and nonsignificant direct relationships (Wang & Rode, 2010). Empirical evidence linking transactional leadership and employee creativity is also not consistent. For instance, Si and Wei (2012) Feng found a negative relationship between transactional leadership and employee creativity. Joung and Lee (2011) reported that transactional leadership has no direct effect on employee creativity. Wei et al. (2010) and Pieterse et al. (2010) reported that transactional leadership could either foster or impair individual creativity, depending on situational factors.

These equivocal findings suggest that new empirical investigations use a fresh theoretical perspective to better understand the relationship. Drawing from a contingency perspective, the relationship between transformational and transactional leadership and employee creativity may be clarified through the identification of a moderator variable—on which these relationships are contingent. According to organismic integration theory (a subtheory of self-determination theory) extrinsic motivation or social–contextual factors can either promote or hinder intrinsic motivation and self-regulation (Ryan & Deci, 2000). Thus, transformational or transactional leadership is most likely to enhance subordinates’ creativity when accompanied by different levels of autonomous regulation, which is based on the feelings of identification and value congruence employees have toward both leadership and social–contextual conditions (Gagné & Deci, 2005). In this article, we have examined the effectiveness of transformational and transactional leadership in Chinese settings by including organizational rewards so as to explore the deep-rooted reasons and processes of how employee creativity is motivated. In modern organizations, an employee’s motivation is highly influenced by managerial behavior and/or organizational reward strategies. These two forces, and the interact between them, also affect employee creativity, leveraging human capital in a desired direction (Boxall & Purcell, 2003). Consequently, one cannot ignore variables that may interact with leadership when examining employee outcomes. Using an organismic integration approach, we combine theories to develop a moderated mediation model to examine links. Figure 1 shows our theoretical framework. The current study addresses existing research gaps by exploring how employee creativity is motivated through both managerial behavior and organizational reward strategies.

Figure 1.

Hypothesized model.

This current approach contributes to the literature in three ways. First, we develop and test a synergistic model of the process by which transformational and transactional leadership, moderated by financial and nonfinancial rewards, influences employee creativity through psychological empowerment. We suggest that both leadership and organizational rewards serve important functions that cannot be treated in isolation.

Second, our research contributes to the development and enrichment of organismic integration theory. This study pioneers the examination of intrinsic and extrinsic motivation factors within transformational and transactional leadership within the context of organizational rewards. We further discuss how extrinsic motivation is internalized and integrated into intrinsic motivation through self-regulation, promoting creativity through psychological employment.

Third, China is a Confucian country, where hierarchy and power distance are recognized as cultural values (Hofstead, 2001). In such a cultural milieu, employees who undertake new and innovative activities must do so within the context of permission from the boss. Therefore, we may deduce that in a non-Western cultural setting, transformational leadership effects may be diminished while transactional leadership effects may be strengthened.

Theory and Hypotheses

Transformational and Transactional Leadership and Employee Creativity

Employee creativity is a result of combinatorial play (Einstein)—various environmental factors, such as creativity encouragement, autonomy or freedom, resources, and even pressures (Amabile, 1996). Innovation suffers when work–environment creativity encouragement decreases or when obstacles increase (Amabile & Conti, 1999). Workplace leaders because they are able to provide creativity-supporting expertise, resources, skills, and motivation to the organization and its members, are argued to directly create ripple effects with creativity-supporting expertise, resources, skills, and motivation (Barsade, 2002).

There is a shared consensus among researchers that transformational leadership is an influential mode of leadership associated with high levels of individual creativity (Gong et al., 2009). Scholars have investigated the specific ways that transformational leaders motivate and described transformational frameworks (e.g., Bass, 1985; Shamir, House, & Arthur, 1993) that contribute to innovation behaviors within organizations (Sosik, Kahai, & Avolio, 1999). Leadership’s effectiveness may strongly interact with its context to influence output (Fernandez & Underwood, 2006). Leadership in the Land of the Dragon (Miles, 1998) indicates that within a wide spectrum of organizational contexts, transformational-type leadership attributes tend to inspire extraordinary employee actions, including creativity and exceptional performance.

Because of their charisma and narcissistic tendencies, transformational leaders are likely to be overoptimistic in regard to their own ability to influence and/or control others (de Villiers, 2014; Walton, 2013). This may have a negative impact on follower creativity, especially when the influence or control is high. Also, transformational leadership’s emphasis on future over present, spirit over material impairs employee sense of security, inhibiting creativity. Entrepreneurial firms operate in a high-growth, chaotic, no-rules environment, where employees are often led by transformational leadership. This can lead to feelings of insecurity because too much stress is placed on tomorrow rather than today, and on spirit rather than material. In such an environment, innovation suffers. Simultaneously, employees may consider transformational leaders charismatic and hold them up as models of acceptable behavior within the dynamic environment (Brown & Treviño, 2006). Thus, employees may exhibit reliance on and trust in a transformational leader (Brown & Treviño, 2006; Howell, 1988). Strong attachment to the leader may be accompanied by uncritical acceptance of his or her ideas—unconditional cognitive allegiance (Basu & Green, 1997; Eisenbeiß & Boerner, 2013). In summary, employees in entrepreneurial firms may be less likely to engage in creativity. Thus, we propose the following hypothesis:

Hypothesis 1a: Transformational leadership in Chinese entrepreneurial firms is negatively related to employee creativity.

Transactional leadership style is argued to be especially effective in crisis situations, chaotic, immature, no-rules environments, during times of uncertainty (Waldman, Ramirez, House, & Puranam, 2001), or when established procedures are insufficient. Transactional leadership directs and pushes forward more efficiently by clarifying role and task requirements and then linking these with rewards and punishments (Robbins, 2003). Such a situation is magnified in complex and/or ambiguous situations, which is exactly the context of most organizational problems (Reiter, 2004).

Moreover, extrinsic motivation, such as contingent rewards and punishment, as attributes of transactional leadership (Robbins, 2003) can be shaped to encourage creativity. For example, encouraging creativity in conditions of uncertainty or where innovation is an explicit part of the job description. Previous research has shown creative outcomes cannot be realized without a large degree of support from leaders when in complex, ambiguous situations (Reiter, 2004). Under uncertain conditions, followers look to their leaders to help set goals and priorities. Thus, we propose the following hypothesis:

Hypothesis 1b: Transactional leadership in Chinese entrepreneurial firms is positively related to employee creativity.

Psychological Empowerment as a Mediating Factor

Psychological empowerment reflects an active orientation toward a work role (Thomas & Velthouse, 1990) and has received considerable attention in recent years (Carless, 2004; Ergeneli, Arı, & Metin, 2007). As a motivational construct, psychological empowerment originates in an employee’s perception (1) that he or she has a choice in initiating and facilitating actions (self-determination), (2) that he or she has the ability to perform the job well (competence), (3) that he or she has control over the environment (impact), and (4) that he or she feels the job is important (meaning; Spreitzer, 1995; Thomas & Velthouse, 1990). Thus, psychologically empowered individuals see themselves as competent and able to influence their jobs and work environments in meaningful ways; they behave proactively, show initiative, and act independently (Laschinge & Shamian, 1994; Spreitzer, 1995; Thomas & Velthouse, 1990). Studies show that psychological empowerment also plays an important role in the willingness of employees to participate in the creative process (Zhang & Bartol, 2010). When employees perceive their jobs to be meaningful and important or have a certain amount of freedom to decide what to do and how to do it, they tend to spend more time on their work, make greater effort, and try every possible method to solve tasks. Thus, we propose the following hypothesis:

Hypothesis 2: Psychological empowerment in Chinese entrepreneurial firms has a positive effect on employee creativity.

Western research has shown that transformational leaders use intellectual stimulation to challenge their followers’ thoughts and imagination, and recognize their value, beliefs, and mind-set (Avolio, Zhu, Koh, & Bhatia, 2004), which enables employees to feel competent and confident in influencing the organization. However, we assert that such motivational forces face headwinds in a Chinese cultural setting. This type of supervision could actually demotivate, sabotaging employee efforts. The Western cultural assumption is that transformational leadership depends on the autonomous employees who are free to have divergent thinking (van Knippenberg & Sitkin, 2013). Past research has reported that Chinese employees show relatively high levels of compliance, deferring of power, and need for order and harmony (Tyler, Lind, & Huo, 2000). In particular, such norms are amplified when facing high uncertainty and chaos. Transformational leadership, at least in the Western sense, challenges the Chinese cultural assumptions of supervision and the prototypes of Chinese employees. The discrepancy between transformational behaviors and local norms of supervision is likely to produce dissonance among employees. Furthermore, even though transformational leadership in entrepreneurial firms provides followers with a highly motivating inspiring vision, the willingness (via psychological empowerment) to transform and innovate depends on the self-determination of employees. Individuals can be proactive and engaged or, alternatively, passive and alienated, largely as a function of the social conditions in which they develop and function (Ryan & Deci, 2000). When led by high transformational leaders, the natural processes of self-motivation and healthy psychological development is undermined due to a lack of a sense of safety, such as in entrepreneurial firms. In such situations, employees may feel anxious and even devalued (i.e., “how can I handle this?”). Therefore, the absence of specific directions and the loss of a sense of hierarchy are likely to decrease the psychological empowerment for Chinese employees in entrepreneurial firms.

A transactional leader, in contrast, is more like to effectively motivate employees, in a Chinese cultural setting, by supplying them with specific orders and the feeling of dependence (Judge & Piccolo, 2004). The psychological empowerment of Chinese employees often comes from the completion and error-free execution of leader-assigned tasks. This is especially true in entrepreneurial firms; the contingent-reward carried out by transactional leaders makes employees feel the context is more predictable and in control. Furthermore, when facing difficulties, in the start-up phase, transactional leaders communicate what is expected of followers in terms of performance and then observe if those expectations are met. As we can find in the prior literature, transactional leadership provides consistent honoring of transactional agreements that build trust, dependability, and perceptions of consistency with leaders (Judge & Piccolo, 2004). Such clear expectations, goals, and rewarding of followers for goal attainment will more likely encourage confidence to fulfill expectations. Thus, we argue that transactional leadership will be positively related to the psychological empowerment of Chinese employees in entrepreneurial firms. We then make the formal hypothesis:

Hypothesis 3a: Psychological empowerment in Chinese entrepreneurial firms plays a mediating role between transformational leadership and employee creativity.

Hypothesis 3b: Psychological empowerment in Chinese entrepreneurial firms plays a mediating role between transactional leadership and employee creativity.

Financial and Nonfinancial Rewards as Moderating Factor

According to self-determination theory, the maintenance and enhancement of the inherent propensity requires supportive conditions (Ryan & Deci, 2000). Employees can be motivated to be more creative by their leaders through specific methods, however, it is bound by many factors within the organization—for example, formal rules and regulations, compensation and benefits, and so on (Farh, Podsakoff, & Cheng, 1987). These different elements of the organizational context, independent of leadership, are argued to be more effective predictors of creative work performance compared with other factors (Zhou, 1998) and can influence employee motivation (Zhou & Shalley, 2003). Consequently, we need to make a closer examination of how social–contextual variables interact with leadership to affect psychological empowerment.

Organizational rewards refer to anything that employees perceive as satisfying needs (Reif & Louis, 1976). The reward infrastructures of modern organizations are composed of two major categories: financial and nonfinancial (Armstrong & Murlis, 2007; Milkovich & Newman, 2008). Financial rewards include fixed rewards such as basic wages or salary, benefits, and overtime and holiday pay premiums, as well as variable rewards related to performance. Nonfinancial rewards benefit employees in a nonmonetary sense; examples include recognition, alternate work arrangements, and training and development opportunities. While financial rewards are commonly used as motivating tools, increasing pressures to control or reduce costs have led to the proliferation and increased use of nonfinancial rewards (Wah, 2000). Many rewards (e.g., salary increases, employee benefits, or preferred job assignments) are controlled at the organization level (Kanungo & Hartwick, 1987) rather than by leaders themselves.

In this section, we develop the hypothesis that rewards strengthen the association between leadership and psychological empowerment. Specifically, we posit that financial rewards moderate the relationship between transformational leadership and psychological empowerment, while nonfinancial rewards moderate the relationship between transactional leadership and psychological empowerment. The central logic underlying this hypothesis is that leadership takes on different degrees of autonomous regulation depending on the type and level of organizational rewards.

We develop the hypothesis that the level of organizational financial rewards weakens the negative association between transformational leadership and psychological empowerment in entrepreneurial firms with transforming and dynamic environments. Transformational leadership motivates employees by articulating a sense of mission, focusing on intrinsic needs (Burns, 1978) and encouraging individuals to subsume or even transcend self-interest for the good of the collective (Avolio & BassBass, 1995). We can deduce that transformational leadership achieves goal by stimulating intrinsic motivation; tapping into deep interest and involvement with the job, curiosity, enjoyment, and/or a personal sense of challenge. However, rhetoric alone may not be sufficient to trigger such behaviors (Grant, 2012). Subordinates are proactive agents rather than passive agents. While transformational leadership stimulates employees, the desire to expend effort based on intrinsic motivation (Gagné & Deci, 2005; Ryan & Deci, 2000) is weaker than extrinsic motivation in obtaining outcomes apart from the work itself (Amabile, 1993). In organizations that provide a high level of financial rewards, individuals are motivated to expend greater effort to produce output because they feel strong organizational support. More important, high levels of financial rewards mitigate the uncertainty employees feel and decrease the sense of insecurity. In that situation, transformational leadership is characterized by identified regulation: Employees feel that making a choice in initiating and facilitating actions is safe, so they enjoy the process of making decisions and believe that the job is meaningful. In organizations that provide a low level of financial rewards, transformational leadership is characterized by introjected regulation: Employees do not enjoy the process of making decision; instead, they feel pressure to transcend themselves to make decisions. Because making decisions independently (psychological empowerment) may lead to implicit or explicit criticism, employees may not be willing to take such a risk if their leaders only articulate mission but do not provide substantial rewards.

Moreover, we propose that the level of organizational nonfinancial rewards strengthens the positive association between transactional leadership and employee creativity in Chinese entrepreneurial firms. As discussed, transactional leaders prefer to exchange tangible rewards with their employees, achieving their goals by stimulating extrinsic motivation of employees, for example, the need to be rewarded. It can be deduced that employees under transactional leaders are usually driven by the desire to attain something that has little or no relationship with the work itself. High levels of nonfinancial rewards, such as recognition, skills training, and employment security, in the turbulent Chinese job market, counterbalance and supplement the economic and exchange characteristics of transactional leadership. According to organismic integration theory, when under a high level of nonfinancial rewards, transactional leadership is characterized by identified regulation: Employees enjoy the process of personal development with nonfinancial rewards, and they are dedicated to complete what transactional leaders expected and believe that the process is meaningful. In contrast, low levels of nonfinancial rewards, raise sensitivity to economic and exchange issues, leading employees to feelings of vulnerability to passivity (Ryan & Deci, 2000). In this situation, transactional leadership is characterized by introjected regulation: Employees do not enjoy the process of making decision on their own because they are not intrinsically motivated; instead, they passively complete what leaders order and seldom make decisions independently.

Amabile (1993) proposes that when extrinsic motivation serves for intrinsic motivation, it develops into a motivation synergy that ultimately leads to high levels of employee satisfaction and performance. Based on organismic integration theory, we further assert that an appropriate match between certain types of organizational rewards and leadership styles can be constructive when coherent with employee value systems (Deci & Ryan, 2000). Therefore, we propose the following hypotheses:

Hypothesis 4a: Financial rewards in Chinese entrepreneurial firms positively moderate the relationship between transformational leadership and psychological empowerment. The higher level of the financial rewards, the weaker the negative association between transformational leadership and employee creativity.

Hypothesis 4b: Nonfinancial rewards in Chinese entrepreneurial firms positively moderate the relationship between transactional leadership and psychological empowerment. The higher level of the nonfinancial rewards, the stronger the positive association between transactional leadership and employee creativity.

The Moderated Mediation Role

Since we hypothesize that psychological empowerment will fully mediate leadership and employee creativity (Hypotheses 1-3) and that organizational rewards will moderate the leadership–psychological empowerment relationship (Hypothesis 4), we can by extension predict that organizational rewards will offer a more viable explanation for the relationship between leadership and employee creativity as organizational rewards increase. That is, the rationales behind Hypotheses 1, 2, and 3 are combined to support the moderated mediation model depicted in Figure 1. More specifically, given the combined rationales of Hypotheses 1, 2 and 3, we propose the following hypotheses:

Hypothesis 5a: Financial rewards in Chinese entrepreneurial firms positively moderate the relationship between transformational leadership and employee creativity, such that the negative relationship is weaker for a high level of financial rewards than for a low level of financial rewards.

Hypothesis 5b: Nonfinancial rewards in Chinese entrepreneurial firms positively moderate the relationship between transactional leadership and employee creativity, such that the relationship is positive and stronger for a high level of nonfinancial rewards than for a low level of nonfinancial rewards.

Research Method

Participants and Procedures

To ensure the sample frame included only non-Western culture settings, we deliberately collected data from four large-scale companies with less than 5 years of entrepreneurial period. Two were electronic finance companies located in a large city in Eastern China, while the other two were subsidiaries located in Western China, related to real estate industry. These firms are not traditional manufacturing companies and do not face typical pressures of small margins and competitive market share. Compared with state-owned or foreign companies in China, start-up companies, like these, have a higher level of uncertainty and lack clear rules and regulations.

Minimizing common method bias, we obtained data from multiple sources (Podsakoff, MacKenzie, Lee, & Podsakoff, 2003). Separate questionnaires were developed and administered to 285 employees and their 120 direct supervisors. Each employee completed a survey containing the independent variables, moderating variables, mediating variables, and control variables. Their direct supervisors provided rating of the employee creativity. Respondent confidentiality was assured.

A total of 260 employees and their 113 supervisory ratings of employee creativity were retained for data analysis (an average of 2.30 subordinates per supervisor). Participants were mostly frontline employees, supervisor level or below (72.3%), including tele-interviewer, marketing specialist, sales representative in the electronic finance companies, and product/quality engineers, customer service staff and sales representatives in the real-estate company. The average firm age is 3.5 years. More than half of the participants were male (58.1%), aged between 26 and 35 years (64.6%), and fairly well educated (78.9% had completed vocational/technical training or university degrees).

Measures

Measurements were performed using a 5-point Likert-type scale, with 1 = Not at all characteristic and 5 = Very characteristic. All the scales described below were translated using the translation and back-translation procedure (Brislin, 1986).

Transformational Leadership

The current study operationally defines the transformational leadership construct by using one single behavioral component to examine how leaders’ transformational behaviors affect employee creativity. For the purpose of our study, we focused on the inspirational motivation component of transformational leadership, which is the degree to which the leader articulates a vision that is appealing and inspiring to followers (Goodwin, Wofford, & Whittington, 2001). Transformational leadership was measured using a seven-item scale developed by Waldman et al. (2001). Because our article focuses on how employees are motivated, we used the four items which measure the extent to which a leader articulates a vision that is appealing and inspiring to followers (Wofford, Whittington, & Goodwin, 2001) instead of the whole scale. This follows van Knippenberg and Sitkin’s (2013) call to employee separate dimensions. A sample item is “My supervisor shows determination when accomplishing goals.” Cronbach’s alpha was .773.

Transactional Leadership

Transactional leadership was measured using a six-item scale developed by Bass and Avolio (1995), which consisted of two three-item subscales measuring contingent rewards and exceptional management. A sample item is “My leader provides assistance in exchange for one’s effort.” Cronbach’s alpha was .784.

Psychological Empowerment

Psychological empowerment was measured using a 12-item scale developed by Spreitzer (1995), which consists of four 3-item subscales measuring meaning, competence, self-determination, and impact. A sample item is “The work I do is very important to me.” Cronbach’s alpha was .872.

Financial and Nonfinancial Rewards

Financial and nonfinancial rewards were measured, respectively, using a 3-item and a 12-item scale developed by Rousseau (1990), Robinson and Rousseau (1994), and Herriot, Manning, and Kidd (1997). A sample item for financial rewards is “I can get a competitive salary.” A sample item for nonfinancial rewards is “I can get recognition for contributing to the organization.” Cronbach’s alpha values were .775 and .739, respectively.

Employee Creativity

Employee creativity was measured using a 13-item scale developed by Zhou and George (2001). Employees were rated by their corresponding supervisors. A sample item is “He/she comes up with new and practical ideas to improve performance.” Cronbach’s alpha was .961.

Control Variables

In accordance with previous research (Janssen & Huang 2008), we controlled for employees’ gender, education, and organization tenure, characteristics that would be likely to influence creativity. One dummy variable was created to control for gender. Education level was measured on a 5-point scale, ranging from 1 (middle high school) to 5 (doctoral degree). As explained, all the sample frame firms are enterprises with less than 5 years of entrepreneurial experience.

Analysis and Results

Reliability and Validity of Constructs in the Models

The means, standard deviations, and correlations of the variables are shown in Table 1. Based on the bivariate correlations, transactional leadership is positively correlated with psychological empowerment (r = .39, p < .01) and with employee creativity (r = .35, p < .01), while transformational leadership is positively associated with psychological empowerment (r = .21, p < .01). Also, a positive relationship was found between psychological empowerment and employee creativity (r = .64, p < .01). Results provided preliminary support for some of the hypotheses.

Table 1.

Descriptive and Correlations of Variables.

Variables	Mean	SD	1	2	3	4	5	6	7	8	9	10	11	12
1. Gender	1.43	0.50
2. Age	2.96	1.12	−.11
3. Marriage	1.44	0.56	.08	.08
4. Education	2.95	0.75	−.09	−.02	−.02
5. Tenure	2.77	1.31	−.16**	.46**	−.27**	.08
6. Level	1.95	0.89	.10	−.18**	−.18**	.20**	.24**
7. Transf. L	4.01	0.63	−.12*	−.10	−.10	−.09	.04	−.12*	(0.79)
8. Transa. L	3.61	0.66	−.12	−.08	−.08	−.31*	−.03	.40**	.40**	(0.71)
9. Financial R	3.29	0.77	−.01	−.17**	−.17**	−.25**	.04	.20**	.20**	.49**	(0.84)
10. Nonfina.R	3.63	0.78	−.07	−.15*	−.15*	−.13*	−.02	.22**	.22**	.36**	.38**	(0.75)
11. PE	3.71	0.528	.08	−.11	−.11	−.14*	−.01	.21**	.21**	.39**	.30**	.19**	(0.68)
12. Creativity	3.54	0.57	−.05	.07	−.12	−.10	.09	.07	.16**	.35**	.25**	.20**	.64**	(0.79)

Note. SD = standard deviation; Transf. L = transformational leadership; Transa. L = transactional leadership; Nonfina. R = nonfinancial rewards; PE = psychological empowerment.

*p < .05. **p < .01.

Before testing our hypotheses, we followed a two-step analytical procedure (Hair et al. 1998) to examine the validity of all main variables. First, we used CFA to assess the independence of six variables included in this study. As shown in Table 3, Model 1 fit the data well and provided substantial improvement in fit indices over the alternatives (Models 2-6). As shown in Table 2, confirmatory factor analysis indicated a satisfactory fit, supporting a six-factor model (χ² / df = 2.87, root mean square error of approximation [RMSEA] = 0.07, comparative fit index [CFI] = 0.91, Tucker–Lewis index [TLI] = 0.90). We next measured composite reliability and average variance testing convergent validity. As shown in Table 3, all the measures reach the recommended levels, with composite reliability ranging from .86 to .96 and an average extracted variance ranging from 0.46 to 0.70.

Table 2.

Comparison of Structural Models.

Models	Factors	χ²	df	χ²/df	RMSEA	CFI	TLI
Model 1: Baseline model	Six factors: Transformational and transactional leadership, Financial and Nonfinancial rewards, Psychological empowerment, employee creativity.	2931.06	1091	2.87	0.07	0.91	0.90
Model 2	Five factors: Transformational and transactional leadership combined into one factor	3119.45	1012	3.40	0.09	0.82	0.81
Model 3	Five factors: Financial and nonfinancial rewards combined into one factor	3050.72	1024	2.97	0.11	0.79	0.76
Model 4	Four factors: Transformational and Transactional leadership combined into one factor; At the same time, financial and nonfinancial rewards combined into one factor	3226.18	1028	3.13	0.12	0.77	0.75
Model 5	Three factors: Transformational leadership, transactional leadership, financial and nonfinancial rewards combined into one factor	3518.97	1031	3.41	0.14	0.74	0.71
Model 6	One factor: All variables combined into one factor	5644.385	1034	5.459	0.25	0.52	0.48

Note. RMSEA = root mean square error of approximation; CFI = comparative fit index; TLI = Tucker–Lewis index.

Table 3.

Measurement Models.

Variables	Composite reliability (acceptable > .7)	Average variance extracted (acceptable > .5)
Transformational leadership	.87	.62
Transactional leadership	.86	.51
Financial rewards	.87	.70
Nonfinancial rewards	.92	.57
Psychological empowerment	.92	.46
Employee creativity	.96	.63

As summarized in Table 1, the square root of average extracted variance for each construct was greater than the correlations between the constructs and all other constructs. These results suggest an adequate discriminate validity of the instruments.

Hypothesis Testing

Multiple regression analysis was used to test Hypotheses 1 to 4. Results are shown for Model 6 and Table 4, indicating that transactional leadership positively affected employee creativity (β = 0.35, p < .001), this supports Hypothesis 1b. However, transformational leadership was not significantly related with creativity (β = 0.02, ns). Thus, Hypothesis 1a is not supported. Model 7 shows a significant positive correlation between psychological empowerment and employee creativity (β = 0.64, p < .001); supporting Hypothesis 2. To examine the mediating effect, we first tested the effects of leadership on psychological empowerment. Model 2 shows that transactional leadership was positively correlated with psychological empowerment while transformational leadership was not (β = 0.36, p < .001; β = 0.07, ns). We then included psychological empowerment in the regression equation. In Model 7, we found that transactional leadership still significantly affected employee creativity, while the significance level decreased (β = 0.14, p < .05) when compared wiith the previous regression coefficients (β = 0.35, p < .001). This indicates that psychological empowerment played a partial mediating role between transactional leadership and employee creativity. Thus, Hypothesis 3 is partially supported.

Table 4.

Results of Hierarchical Linear Modeling Analyses.

	Psychological empowerment				Employee creativity
Variables	Model 1	Model 2	Model 3	Model 4	Model 5	Model 6	Model 7
Gender	−.10	−.04	−.05	−.03	.015	.00	.03
Age	.06	.12	.12	.15*	−.046	.05	−.02
Marriage	−.08	−.02	−.00	.02	−.041	−.04	−.03
Education	−.16*	−.05	−.04	−.06	−.017	−.01	.02
Tenure	−.07	−.08	−.08	−.04	.094	.04	.09
Level	.06	.08	.07	.05	.041	.09	.05
Transformational leadership		.07	.06	.10		.02	−.02
Transactional leadership		.36***	.30***	.14		.35***	.14*
Financial rewards			.11	.09
Nonfinancial rewards			.03	.21**
Psychological empowerment					.64***		.60***
Transformational * Financial				.23**
Transformational * Nonfinancial				−.01
Transactional * Financial				−.01
Transactional * Nonfinancial				.35***
R ²	.05	.18***	.19***	.33***	.43***	.25***	.46***
ΔR²	.02	.15***	.16***	.29***	.41***	.23***	.44***

p < .05. **p < .01. ***p < .001.

In our test of Hypothesis 4a, we found that transformational leadership interacted significantly with organizational financial rewards to influence psychological empowerment in Model 4 (β = 0.23, p < .01, and ΔR² = 0.29, p < .001). Transactional leadership, on the other hand, interacted significantly with organizational nonfinancial rewards to influence psychological empowerment with a positive coefficient (β = 0.35, p < .001, and ΔR² = 0.29, p < .001). Two simple slope tests, as shown in Figures 2 and 3, indicated that both transformational and transactional leadership had a stronger positive effect on psychological empowerment when financial and nonfinancial reward levels, respectively, were higher. Thus, Hypotheses 4a and 4b were supported.

Figure 2.

Moderating effect of financial rewards.

Figure 3.

Moderating effect of nonfinancial rewards.

To test Hypothesis 5a, we adopted the Preacher, Ruker, and Hayes (2007) and Hayes and Scharkow (2013) approach to test the moderated mediation effect of the conceptual model. We used the bootstrap approach to examine the indirect effects with a bootstrapping sample size of 1,000. First, we included organizational financial rewards as the moderating variable in the moderated mediation model of transformational leadership—psychological empowerment—employee creativity. As shown in Table 5, the confidence interval of the mediating effect did not include 0 [lower limit of confidence interval, LLCI = 0.04, upper limit of confidence interval, ULCI = 0.20] [LLCI = 0.14, ULCI = 0.40] when financial rewards were at medium or maximum (1 SD). The results indicated that the mediating role of psychological empowerment via transformational leadership, moderated by financial rewards, had a significant impact on employee creativity. Thus, Hypothesis 5a was supported.

Table 5.

Results of the Moderated Indirect Path Analysis.

	Mediating variable: Psychological empowerment
Independent variables	Β	SE		t	p
Intercept	6.00	.74		8.13	.00
Transformational leadership	−.73	.19		−3.97	.00
Financial rewards	−.91	.23		−3.96	.00
Transformational leadership × Financial rewards	.28	.06		4.83	.00
	Dependent variables: Employee creativity
Independent variables	Β	SE		t	p
Intercept	.88	.24		3.73	.00
Psychological empowerment	.69	.53		13.09	.00
Transformational leadership	.02	.04		0.54	.59
	Indirect path effect
Mediating variable	Financial rewards	Β	Boot SE	LLCI	ULCI
Psychological empowerment	2.52	−.03	.04	−.12	.05
Psychological empowerment	3.29	.12	.04	.04	.20
Psychological empowerment	4.06	.26	.07	.14	.40

Note. n = 260, bootstrap sample size = 1,000. LLCI = lower limit of confidence interval; ULCI = upper limit of confidence interval.

Similarly, we tested Hypothesis 5b by including organizational nonfinancial rewards in the model of transactional leadership—psychological empowerment—employee creativity. As shown in Table 6, the confidence interval of the mediating effect also did not include 0 [LLCI = 0.06, ULCI = 0.18] [LLCI = 0.17, ULCI = 0.35] when nonfinancial rewards were at medium or maximum (1 SD). Changes in significance of the mediating role indicate that the indirect effects of transactional leadership on employee creativity were moderated by organizational nonfinancial rewards. Thus, Hypothesis 5b was supported.

Table 6.

Results of the Moderated Indirect Path Analysis.

	Mediating variable: Psychological empowerment
Independent variables	Β	SE	t	p
Intercept	6.29	.65	9.69	.00
Transactional leadership	−.90	.20	−4.44	.00
Nonfinancial rewards	−.91	.16	−5.62	.00
Transactional Leadership × Nonfinancial rewards	.30	.05	6.04	.00
	Dependent variables: Employee creativity
Independent variables	Β	SE	t	p
Intercept	.77	.21	3.71	.00
Psychological empowerment	.65	.06	11.69	.00
Transactional leadership	.10	.10	2.29	.05
	Indirect path effect
Mediating variable	Nonfinancial rewards	Β	SE	LLCI	ULCI
Psychological empowerment	2.85	−.03	.05	−.12	.06
Psychological empowerment	3.63	.12	.03	.06	.18
Psychological empowerment	4.42	.27	.05	.17	.35

Note. n = 260, bootstrap sample size = 1,000.

Discussion and Conclusions

We attempt to better understand the complex relationship between leader behavior and follower creativity in a non-Western culture setting, that is, Chinese cultural entrepreneurial stage companies. Specially, we draw the following conclusions: (1) transformational leadership is not significantly related to employee creativity, while transactional leadership is positively related to employee creative behaviors in Chinese entrepreneurial firms; (2) synergy between transformational leadership and financial rewards and between transactional leadership and nonfinancial rewards accentuate the effect on employee creativity; (3) psychological empowerment fully mediates the above relationship.

Contributions and Implications

Theoretical Implications

This study makes three significant theoretical contributions. First, our findings provide evidence that the relationships of transformational and transactional leadership with employee creativity are not always self-evident; instead, as previous studies have found, the relationship between these two elements may be mixed. That is, in the context of the Confucian culture that advocates hierarchy, a fast pace of change, high levels of uncertainty, employee lack of job security, and unclear rules and regulations to guide workplace efforts magnify transactional leadership’s advantage and minimize transformational leadership’s strength. This is consistent with prior theories that assert cultural and societal factors can greatly affect leadership effectiveness (Peterson, 2004). We also reimagine prior theories that creative outcomes cannot be achieved without a large degree of problem-solving support from organizational leaders (i.e., Reiter, 2004). Our findings highlight the potential for rethinking both transactional and transformational leadership theory that has traditionally been U.S.-centric. Therefore, our results extend the generalizability of leadership theory.

Second, the current findings advance existing knowledge about the conditions under which transformational or transactional leadership is most likely to contribute to employee creativity. The goal of the present study was to shed light on these relationships by examining organizational rewards as a moderator in a non-Western cultural setting. By building a conceptual model, we incorporate financial and nonfinancial rewards as important moderators of the impact of leadership on employee creativity. We also draw the conclusion that organizational rewards can supplement leadership style in ways and these two can approaches interact to produce synergistic effects on creativity. The findings highlight organizational rewards as an important boundary condition for the benefits of transformational and transactional leadership.

Third, our research offers contributions to organismic integration theory and substitutes for leadership theory as well. Drawing from leadership substitutes theory (Kerr & Jermier, 1978), some typical types of substitutes may render the leader superfluous (Kerr & Jermier, 1978). Our results show that organizational context, such as rewards, that are not controlled by leaders, may supplement leader effectiveness. Self-determination theory has traditionally treated different forms of self-regulation as mutually exclusive, with little attention to interactions among variables (Gagné & Deci, 2005). Our findings expand current understanding by integrating leadership and organizational rewards under certain conditions. Whereas researchers have primarily studied leadership and organizational rewards in separate threads of literature, our research has taken conceptual and empirical steps to clarify the nature of and relationship between them. Results demonstrate that the two variables are positively related but clearly distinguishable and that they can thereby interact to predict important outcomes in organizations. Therefore, this attention to leadership takes a step toward contextualizing organizational rewards research.

Practical Implications

The current results imply that we need to have a new look at the effectiveness of leadership in organizations. It is important for management to design organizational financial and nonfinancial rewards that function well under transformational or transactional leadership. For teams led by transformational-style leaders, organizations may use a high level of financial rewards to provide employees the security they need to be brave enough to innovate. In contrast, for teams operating under transactional-style leaders, organizations should consciously design and implement more nonfinancial rewards such as promotion or developmental training, as the addition of moderate nonfinancial rewards would cause employees to redefine their relationship with the organization, adopting a long-term orientation rather than seeing their labor as a simple exchange for money. Under such an orientation, employees would feel more trusted and respected, and would be more inclined to create innovative solutions to problems and employee-creative ways to accomplish tasks.

Questions, Limitations, and Future Research Directions

The current study raises two questions that should be explored in further research. First, our study used data collected only in China. It is possible that some cultural characteristics could play a role in influencing our findings. For example, employees in cultures characterized by high power distance, such as China (Hofstede, 2001), are more likely to follow their leaders and be influenced by leaders. In addition, we only focused on Chinese entrepreneurial firms, which may limit the generalization of our findings. Future research may test different sample frames to generalize our findings.

Second, the cross-sectional design of the research prevents and claims of causal relationships among variables. A longitudinal investigation or experimental design would provide further insights into the dynamic nature of psychological processes and employee creativity.

Third, our study only considered employee gender, education, and organization tenure as control variables. However, other variables, such as job characteristics, may not only determine the extent to which employees can be creative but also play a role in the relationship between leaders and employees (Liu, Liao, & Loi, 2012). Thus, future research should control for other job characteristics to further replicate our results. Additionally, following previous creativity literatures, we asked employee respondents’ direct leaders to evaluate employee creativity. Such supervisory evaluations may be subject to numerous contextual and personal biases (Landy & Farr, 1980). Recently, studies on creativity tend to use objective measures of creativity such as creative performance, bonuses, inventions, disclosure forms, research reports, and patent announcements (e.g., Liao, Liu, & Loi, 2010; Tierney, Farmer, & Graen, 1999). Therefore, it would be worthwhile to investigate if objective and subjective measures of employee creativity may generate convergent results for our proposed research model.

Last, even though we conducted the research in China, stressing the importance of Chinese Confucian context, we failed to consider Chinese culture as a variable in our research model, nor did we measure the level of Confucian culture. Future research should include such variables so as to draw more solid conclusions.

Conclusions

When and how are transformational and transactional leadership styles effective in promoting employee creativity? The current research outlines a non-Western cultural setting and an uncertain business context that magnifies the requirements for characteristics of transactional leadership instead of transformational leadership. Under uncertainty and Confucian culture settings, where followers look to their leaders to help set goals and priorities, transactional leader behaviors may lead to greater creativity. Furthermore, this study suggests a fit between financial rewards and transformational leadership, and between nonfinancial rewards and transactional leadership. In conclusion, there is no single most suitable leadership style, but rather a match between leadership and organizational rewards under certain situations when promoting employee creativity.

Footnotes

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: We thank the Fundamental Research Funds for the Central Universities of China (Grant No. 17JCYA19), the “One Belt One Road” project of the Chinese Academy of Science (Grant No. 17Z20320037), National Natural Science Foundation of China (Grant No. 71602140).

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