Leader-Member Exchange (LMX) Theory and the Problem of Cliques

Note: This paper was written as part of my requirements for a Doctorate in Strategic Leadership at Liberty University. I’m sharing this here for those who may be interested in some of the theories of leadership. Let me know if you have any questions.

Introduction

The leader-member exchange (LMX) theory, originally called the vertical dyad linkage (VDL) theory, focuses on the vertical dyad linkages between leaders and followers (Dansereau et al., 1975). In the LMX theory, researchers demonstrated a reciprocal relationship between leaders and followers in which both parties contribute to the quality of the relationship. As such, LMX became one of the first leadership theories that included leaders and followers in the study of leadership (Schyns & Day, 2010).

Dansereau et al. (1975) showed that a leader’s limited resources of time and energy are inadequate to perform all the job requirements. Because of this, leaders cannot devote the required time and energy to all of their followers to help them reach optimum performance. Therefore, leaders spend a disproportionate amount of their resources on certain team members. This difference causes the formation of in-groups and out-groups, where in-group members gain more support and attention from the leader than out-group members (Seo et al., 2018).

LMX theory demonstrates how cliques can form in organizations. Because of leadership resource constraints, some groups of followers receive more information, attention, and support than others (Dansereau et al., 1975). This preferential treatment can be seen as unfair and discriminatory for out-group members and cause disunity and discord in the organization.

This literature review aims to develop a comprehensive understanding of the LMX theory, consider the challenge of cliques and discord in the workplace, and determine the best ways researchers have found to build unity. The information in this review comes from a select group of peer-reviewed articles chosen from the broad collection of papers written on this subject over the past 50 years.

LMX Theory, the Problem of Cliques, and Finding Unity

LMX Theory

LMX theory considers leadership as a process. The unique two-way relationship between a leader and each follower plays a significant role in developing the attitudes and behaviors of followers (Harris et al., 2014). Those attitudes and behaviors can provide both beneficial and detrimental impacts on the organization. In this section, we will review many key elements of the LMX theory that researchers have considered.

The Significance of Followers

At the heart of the LMX theory is the overall relationship quality between the leader and the follower. The LMX theory was the first to introduce a relationship-based approach to leadership theory (Buengeler et al., 2021). The relationship quality between the leader and the follower has a meaningful impact on a follower’s life. A high-quality relationship with the leader will lead to a higher status, opportunities, support, autonomy, and greater access to information (Liden et al., 2006). In exchange, the leader gains greater trust, loyalty, competence, support, and performance from the follower (Dienesch & Liden, 1986). Because the LMX theory is based on individual relationships, each leader-follower dyadic relationship will be unique (Schyns & Day, 2010).

In-Groups and Out-Groups

Chen and Zhang (2021) remind us that “people were born equal, yet they are treated differently everywhere” (p. 1074). This fact is especially true for followers in organizations. Followers with high-quality LMX relationships gain shared trust, open communications, and mutual support from leaders. On the other hand, followers with low-quality LMX relationships are limited to basic contractual duties and responsibilities (Chen & Zhang, 2021).

In early studies of long-term dyadic relationships with managers and followers, Dansereau et al. (1975) discovered the emergence of two nearly equal-sized groups. There was an in-group, characterized by expanded roles and a deeper relationship with the supervisor, and an out-group, which resembled a formal employment contract. Dansereau et al. (1975) discovered that the unique relationships between individual leaders and followers created a differentiated LMX over time.

A differentiated LMX means that in-group members receive more input, information, support, and concern from their leaders. In response, in-group members are more engaged, dependable, and supportive of their leader. In-group members go the extra mile for their leader, and the leader does the same for them. On the other hand, out-group members perform their duties but don’t go beyond their basic job description. Dansereau et al. (1975) explain that in-group members are led while out-group members are supervised.

LMX and Role Theory

LMX theory shows that leaders develop differentiated relationships with followers. Role theory suggests that the roles people occupy provide the context by which they establish relationships with one another. Role theory helps us understand the role-taking and role-making process as part of the LMX relationship. In LMX, the role-taking process unfolds when a leader communicates expectations to a follower. Based on that input, the relationship with the leader will evolve to higher or lower quality during the role-making stage. Once the relationship has evolved and is established, the roles between leader and follower become more stable and routine (Matta et al., 2015).

LMX and Social Exchange Theory

LMX theory is centered on the unique dyadic relationship between a leader and each follower. That relationship has a significant impact on follower motivation. The social exchange theory helps us understand how leaders and followers exchange benefits. The social exchange theory is based on the idea that relationships are created through a cost-benefit analysis process. As a part of that theory, reciprocity norms demonstrate that people return favors and acts of kindness. Followers in high-quality LMX relationships are highly motivated because of the beneficial social exchange. The leader provides support and resources beyond the formal employment contract in exchange for follower effort that goes beyond the formal job description (Wang & Hollenbeck, 2019).

LMX and Psychological Contracts

Another important concept to consider in the LMX theory is the psychological contract theory. Psychological contracts are implicit. In other words, psychological contracts are different from the explicit agreements in an employee’s formal employment contract. A psychological contract is an implied agreement. It describes the informal promises, commitments, and joint agreements that make up the relationship (Henderson et al., 2008).

Psychological contract fulfillment refers to a follower’s perception that the leader has met the contract fairly and equitably. High-quality LMX relationships maintain followers’ psychological contract fulfillment (Chen & Zhang, 2021). Psychological contract fulfillment has been shown to increase employee performance and organizational citizenship behavior (Henderson et al., 2008). The challenge for leaders is maintaining the fulfillment of psychological contracts of all employees, not just the in-group members.

 LMX Structures

An essential characteristic of the LMX theory is the LMX structure in the organization. Researchers have shown that not all LMX structures look and behave alike. Dansereau et al. (1975) originally observed two nearly equal-sized subgroups of employees with different characteristics. They called these groups the in-group and out-group. Later, this structure was referred to as the bimodal configuration (Seo et al., 2018) and LMX separation (Buengeler et al., 2021).

Bimodal configuration and LMX separation are characterized by nearly equal-sized subgroups of followers (50:50 or 60:40) with similar characteristics (Seo et al., 2018). There is an in-group and an out-group. The in-group members have a higher-quality LMX relationship with the leader compared to the out-group members, and the variation within the subgroup is low (Buengeler et al., 2021).

Researchers next considered the LMX structure called fragmented configuration (Seo et al., 2018), also known as LMX variety (Buengeler et al., 2021). In this structure, there are no subgroups. Every follower has a unique LMX relationship with the leader that varies in quality. No two followers have a similar relationship. In the fragmented configuration and LMX variety structure, the leader seeks to discover each follower’s unique talents and motivations during the role-making process (Seo et al., 2018). The leader customized his investment and interaction with the members based on their individual needs and preferences (Buengeler et al., 2021).

The final structure researchers considered was the solo-status configuration (Seo et al., 2018), also known as LMX disparity (Buengeler et al., 2021). In this structure, there are two subgroups, one large and one small (as few as one member), with two different LMX relationships. One subgroup has a higher-quality LMX relationship than the other. Seo et al. (2018) further break this structure into two forms: the solo-status high LMX configuration and the solo-status low LMX configuration.

The solo-status high LMX configuration is characterized by the leader forming a high-quality relationship with one or a few followers while maintaining a lower-quality relationship with the rest of the group. The solo-status low LMX configuration is characterized by the leader forming a high-quality relationship with most members and a low-quality relationship with one or a few followers (Seo et al., 2018).

The LMX Problem

LMX theory shows that leaders develop differentiated relationships with followers over time. From the earliest studies on this theory, researchers discovered a problem. Dansereau et al. (1975) referred to it as the “consequences of vertical exchanges” (p. 71). Some followers will get attention and support from the leader, and others won’t. Because of this disparity, out-group members feel left out and discriminated against. As a result, they experience less job satisfaction and increased turnover (Dansereau et al., 1975).

The problem with LMX is the formation of cliques in an organization due to LMX differentiation. In-group members get disproportional attention from leaders, which other members see as unfair. This special treatment for some employees creates conflict, discord, and an “us and them” environment inside the organization. In this section, we review how LMX differentiation creates problems in the workplace.

The Problem of Resources

Leaders are often asked to do more with less so being a good steward of workgroup resources is critical to success. The LMX theory shows that resource deployment in an organization is directly influenced by the quality of an employee’s relationship with their leader (Omilion-Hodges et al., 2013). Since company resources (money, space, people, and equipment) and leader resources (time and energy) are limited, leaders must decide to apply them in the best way possible. Studies show they use them disproportionately for high-quality LMX members doing critical tasks (Dansereau et al., 1975).

Employees in high-quality LMX relationships get more resources from their leaders than their low-quality LMX counterparts. The fact that some employees get preferential access to resources hurts the collective functioning of the group (Omilion-Hodges et al., 2013). There is an overall perception of unfairness in the organization, especially when leaders don’t fully explain why they favor certain groups of employees (Liden et al., 2006).

The Problem with Similarity

Another source of problems for the LMX theory occurs in the role-taking and role-making process. At the beginning of the LMX relationship, the leader initiates the connection with the follower through role-taking. In role-taking, the leader determines the relationship’s quality based on initial impressions of the follower’s capabilities and weaknesses. After this initial process, the leader and follower enter the role-making stage. In this stage, both the leader and follower are active participants. In the role-making stage, the leader and follower become emotionally entrained (Cropanzano et al., 2017).

The problem with this process is the similarity-attraction paradigm. This paradigm states that people are drawn to other people with similar demographics, characteristics, activities, and attitudes (McClane, 1991). Followers similar to the leader are more likely to develop a greater LMX relationship with the leader through role-taking and role-making. If this occurs, these individuals will gain greater access to resources than those dissimilar to the leader. This disparity could lead to feelings of discrimination in the workforce (McClane, 1991). This bias is especially problematic for organizations if the discrimination is based on gender, age, ability, national origin, or race.

The Fairness Dilemma

Procedural justice relates to fairness in allocating resources, resolving disputes, and making decisions. Followers perceive procedural justice when a leader’s decisions are made fairly and consistently based on unbiased merit (Chen et al., 2018). A procedural justice climate exists when followers perceive fairness in organizational decision-making because it is consistent, accurate, and unbiased (Jung et al., 2022). Followers also sense procedural justice when they have some level of control or influence over the outcome of decisions, such as opportunities to participate in the decision-making process (Chen et al., 2018).

By its very nature, LMX is biased toward in-group members. In-group members with a high-quality LMX relationship have more input and influence in disputes, decisions, and resource allocation. LMX differentiation decreases followers’ feelings of procedural justice because followers are treated differently based on their LMX status (Chen et al., 2018). The challenge for leaders is establishing and maintaining a procedural justice climate in an environment where LMX differentiation exists.

Effects on the Organization

The LMX differentiation process creates a favored group of followers in the workplace. This differentiation runs counter to the human need for fairness. In-group members with a high-quality LMX relationship receive preferential treatment from the leader. The existence of this special status could create a situation where social categorization would begin to emerge in the organization. Followers with similar high-quality LMX status may create a clique that excludes those with a lower status, thus creating an isolated minority. Followers in the minority status are more likely to have reduced cooperative behaviors, which would create discord in the organization (Chen & Zhang, 2021).

Perceptions of unjustified LMX differentiation have been shown to impede coworker communication, damage coworker relationships, reduce organizational citizenship behavior, and decrease overall employee well-being (Omilion-Hodges et al., 2013). High LMX differentiation can trigger negative emotional responses if perceived as unfair. These responses could include anger, disgust, and contempt, which are all detrimental to organizational unity (Cropanzano et al., 2017). Research has shown that employees prefer unity and less unjustified or unexplained LMX variance in their workgroups (Omilion-Hodges et al., 2013). The question is – how can leaders create organizational unity in a workplace where LMX differentiation exists?

Finding Unity in LMX

LMX theory shows how a leader will develop differentiated relationships with followers based on their unique dyadic relationships. Followers who develop a high-quality LMX relationship with the leader will gain advantages over those with a lower-quality LMX relationship. Followers in the in-group gain shared trust, open communications, and mutual support from the leader. This preferential treatment can be seen as unfair and discriminatory for out-group members and can cause disunity and discord in the organization The challenge is to identify ways create unity in the organization where LMX differentiation exists. In examining the research, we identified a number of ways to do this.

Finding Unity in LMX Structures

Researchers have found that some LMX structures are better for maintaining organizational unity. Buengeler et al. (2021) point to LMX variety as one of those structures. In LMX variety, there are no subgroups, and every follower has a unique LMX relationship with the leader that varies in quality. These unique relationships are created based on the followers’ expertise and experience and may help the group’s overall ability to function. LMX variety is formed by a leader’s intentional efforts to build a unique relationship with each member based on their individual needs, motivations, contributions, and preferences (Buengeler et al., 2021).

This same structure is called the fragmented configuration by Seo et al. (2018). They found that the fragmented configuration led to greater organizational commitment and reduced turnover. They explain that, in the fragmented configuration, the leader develops a unique, high-quality relationship with most of the followers based on their skills and abilities. The followers reciprocate with increased loyalty, support, and commitment to the organization (Seo et al., 2018).

The only other LMX structure to show improved organization performance was the solo-status low LMX configuration. In this structure, the leader forms a high-quality relationship with most members and a low-quality relationship with one or a few followers. The minority member(s) becomes the token(s) of the group. The visibility of being the minority member(s) causes them to respond in two unique ways: increasing their efforts or trying to blend in with the majority. In either case, organizational unity is maintained, and performance improves (Seo et al., 2018).

Finding Unity in Role Theory

LMX theory is rooted in role theory based on the “developed” or “negotiated” roles that followers take on as a result of their interactions with the leader (Dienesch & Liden, 1986). Chen et al. (2018) take this concept further to show that LMX differentiation between followers is critical to group performance. They explain that a leader needs to assign tasks and resources based on the followers’ abilities. Chen et al. (2018) show that LMX differentiation benefits the group when based on followers’ ability, competence, task performance, and contributions to the organization. In other words, so long as it is merit-based. The organization’s overall performance is improved when the leader gives more autonomy and resources to top performers so they can engage in more challenging activities (Chen et al., 2018).

Chen et al. (2018) acknowledge that the outcome of LMX differentiation may still invoke perceptions of injustice among members. But, they explain that the perception of unfairness is mitigated when the differentiation is based on merit and high-quality LMX members are held accountable for higher performance levels. Chen et al. (2018) equate this acceptance to employee pay. Pay differentiation does not invoke perceptions of injustice so long as it is based on merit, task performance, and experience.

Finding Unity in a Fair Social Exchange

Studies on the LMX theory often invoke the social exchange theory and the norm of reciprocity to account for the development, maintenance, and output of individual high-quality LMX relationships (Henderson et al., 2008). These high-quality LMX relationships are based on the idea that both the leader and the member contribute valuable resources, and both parties view the exchange as fair (Schyns & Day, 2010).

Schyns and Day (2010) take this further and explain that LMX differentiation in an organization will be perceived as fair by all members so long as they see each exchange as fair and equitable, even though each LMX exchange may be different. Chen et al. (2018) explain that LMX differentiation is seen as favorable in a group so long as the differentiation is directly related to the members’ task performance variation. In other words, if employees see that the preferential treatment of certain employees is merit-based and justified, they will be more willing to accept it.

Finding Unity in Equality and Respect

Dansereau et al. (1975) tell us that leaders have a resource problem. They say that leaders “cannot devote the required time and energy to each and all of [their] members to ensure their optimum performance” (p. 72). Chen and Zhang (2021) have a different perspective. They tell us that LMX differentiation in an organization also reflects a leader’s values and motives, not just resources. Chen and Zhang (2021) state that if leaders want to avoid the formation of cliques due to the social categorization process, they need to devote more time and energy to developing high-quality relationships with all their members in an equal way. To maintain unity, leaders must also be on guard for fault lines that separate the minority from the majority (Chen & Zhang, 2021).

Chen and Zhang (2021) also encourage leaders to treat all members respectfully and politely regardless of LMX status. By doing so, leaders create the perception of strong interpersonal justice and social treatment in the organization. Out-group members will be more likely to merge into the group and engage in beneficial activities if they feel confident they will be treated fairly in the future (Chen & Zhang, 2021).

Finding Unity in LMX Excellence

Schyns and Day (2010) coined the term LMX excellence to describe three critical parts of effective LMX practice in organizations: (1) high-quality relationships, (2) leader and follower agreement about the relationships, and (3) consensus among all followers concerning relationships with the leader. They suggest four ways to achieve LMX excellence in an organization: culture, span of control, transformational leadership, and psychological climate. We also added consistency and transparency from the work of Henderson et al. (2008).

The right organizational culture can create an environment conducive to LMX excellence. For LMX to create unity in an organization, leaders must establish and emphasize group identity and a group focus. This group focus is especially important in more individualistic cultures. As members see LMX differentiation in terms of the benefits for the overall group, there is less discord and more unity (Schyns & Day, 2010).

Leaders also need to consider their span of control. Often leaders do not have the resources to establish high-quality relationships with all their followers because they have too many direct reports. Leaders with a large span of control are also less likely to accept overtures from low-quality LMX followers to develop their working relationships. Leaders with a smaller span of control are more likely to have high-quality relationships with all their followers (Schyns & Day, 2010).

Transformational leadership can also lead to LMX excellence. Transformational leaders engage in individual consideration, a behavior likely to enhance LMX quality for all employees. Transformational leaders focus on a common goal or vision which positively affects social identity and consensus. Unity is built when all members see the need to have a positive relationship with the leader to meet the collective objectives (Schyns & Day, 2010).

A climate of psychological safety can also help a leader achieve LMX excellence. Psychological safety allows for constructive dialogue between the members and the leader such that agreement and consensus will emerge in an organization. A psychologically safe environment allows followers and leaders to build trust, agreement, and unity (Schyns & Day, 2010).

Finally, Henderson et al. (2008) remind us that, to achieve LMX excellence, LMX differentiation in the workplace must be consistent with the goals, demands, and customs of the market and the group. Consistency with common practice will increase the likelihood that differentiation will be accepted by the members and will not cause conflict or a loss of motivation. They also stress the importance of transparency. The elements of LMX differentiation that are valuable to the leader and members in achieving group objectives should be communicated. Leaders need to be transparent about why some members are treated differently than others. Transparency and communications around LMX differentiation will help eliminate discord in the organization (Henderson et al., 2008).

Methods and Limitations

To tackle a literature review on a 50-year-old leadership topic such as the LMX theory, we needed a place to start. Our method was to begin with a recent article about the challenges of minority out-group members. We selected the Chen and Zhang (2021) study as our starting point because they specifically looked at the impact of cliques in the workplace due to LMX differentiation.

We then used the reference list from this paper to dig deeper into the body of work on this subject. As we uncovered a topic of particular interest, we pulled the original study to understand the topic deeper. In total, we reviewed 16 articles that span five decades. Each of these articles added to our understanding of this complex topic.

The limitations of this literature review are significant. The most important limitation was the small percentage of available studies we looked at for this review. The sheer volume of literature that has been written on this popular topic precluded us from getting a more comprehensive view of this topic. To understand the popularity of the LMX theory, consider these statistics. By 1986, researchers had written only 21 journal articles on this theory (Dienesch & Liden, 1986). In 2019, more than 1,845 articles on the LMX theory existed (Buengeler et al., 2021). Our literature review of only 16 studies was not all-inclusive and only scratched the surface of this popular and complex subject.

Questions for Further Research

Despite the relatively small sample of papers we considered as part of this literature review, we did gain an understanding of the challenges of cliques in the workplace as a result of LMX differentiation. We also learned that researchers had considered many approaches to ensure organizational unity is maintained in an environment where LMX differentiation exists.

Since LMX differentiation is often due to a limitation of resources on the part of the leader (Dansereau et al., 1975), we were surprised that we did not find many researchers considering span of control as an obvious solution to the resource problem. With a reduced span of control, leaders would have the necessary time and energy to develop high-quality LMX relationships with all their direct reports. Of all the articles we reviewed, only Schyns and Day (2010) considered this as a solution.

A search for peer-reviewed journal articles with the terms “LMX” and “span of control” in the abstract revealed only six articles written in 50 years on this topic. After reviewing the abstracts in each of these papers, we learned that none of these articles considered the interaction between span of control and LMX excellence as defined by Schyns and Day (2010). We recommend that future researchers consider studying the compelling interaction between span of control and LMX excellence to provide an optimum approach to leading a team with unity in an environment where differentiated LMX exists.

Conclusions and Recommendations

As a part of this literature review, we learned that leaders develop differentiated relationships with followers ranging from high-quality, deep relationships to more transactional ones. This differentiated approach to leadership is due to limited resources and can cause organizational problems as out-group receive less support and attention from the leader than do in-group members. We also learned that LMX differentiation could cause cliques to form in an organization.

We reviewed several potential solutions researchers have studied to maintain unity in an environment where differentiated LMX exists. Researchers discovered several viable solutions to maintain unity: optimum LMX structures, role theory, fair social exchange, equality, respect, culture, span of control, transformational leadership, psychological climate, consistency, and transparency. All of these solutions represented actions leaders can take to reach LMX excellence.

We were surprised by the lack of research on the topic of span of control which would appear to be an obvious solution to the resource problem at the heart of LMX differentiation. We recommend that researchers in the future consider studying the interaction between span of control and LMX excellence to provide additional insight on this potential solution.

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