By Joo Hun Han, Hui Liao, Jian Han and Alex Ning Li

In any leader-follower work group, the leader will differentiate amongst group members, creating individual leader-member exchange (LMX) relationships and a form of social hierarchy amongst the group.

While there is a vast body of scholarly research on the effects of LMX differentiation on group performance, there is currently no clear consensus on these effects, with studies variously showing positive and negative correlations, inconsistencies or even no relationship between LMX differentiation and group performance at all.

A recent study we have conducted, however, addresses this gap in the understanding of LMX dynamics by creating a contingency model examining how group member performance and a leader’s personal liking of members act as primary bases for LMX differentiation.

As part of our study, we examined data from the sales performance of 328 sales groups, consisting of 1,356 group members, working for a major electrical appliance retailer in China.

We found that when LMX differentiation is based more on group members’ performance, and less on the leader’s personal liking of individual members, such differentiation helped to foster positive co-operative interactions amongst the group. Contrastingly, when LMX differentiation is based primarily on a leader’s personal preferences towards various group members, it can have a negative impact on the group’s functioning by encouraging ‘group social undermining.’

Put simply, LMX based on an individual member’s performance was seen by the group as a legitimate response from their leader, and encouraged them to emulate the better performers and boost performance overall; LMX based on personal liking (e.g. favours, personal ties, etc.) was seen as illegitimate or unfair differentiation, and led to antisocial behaviours that inhibited work-related success (i.e. group social undermining).

Alongside these two bases of LMX differentiation (performance and personal liking), our study also examined the impact of reward interdependence (i.e. rewards being dependent on collective performance). We found that reward interdependence had a magnifying effect on the influence of both forms of LMX differentiation. When rewards were dependent on collective performance, groups more strongly accepted LMX differentiation based on group member performance, and were more likely to display co-operative behaviours. Similarly, when greater rewards were on the line, groups reacted more harshly to LMX differentiation based on their leader’s personal liking of specific members, as they saw it as an obstacle to their being rewarded.

The practical implications of our study relate to helping leaders and HR managers better understand how they can drive optimal group outcomes through appropriate LMX differentiation. Our findings clearly suggest that such differentiation should be based on performance, not personal preferences, and that this will be most effective if all group members are in a position to benefit from it.

More broadly, our study provides insight into how organisations can promote leadership styles and compensation practices that are beneficial in forging the kind of differential treatment that ultimately boosts the performance of work groups, without hampering their cohesion. Additionally, organisations should consider creating avenues for collaboration between group managers and HR managers to ensure that they can find ways to better differentiate and create mutual benefits amongst group members.

There are also wider implications on pay structure to consider. Our findings were consistent with prior research stating that pay dispersion (or differentiation) only contributes to workforce productivity when it is based on “legitimate reasons” such as employees’ performance differences, rather than interpersonal ties between employees and leadership figures.

Accordingly, our study expands the research on LMX differentiation and the influence of its various forms on work group performance. Our principal findings suggest that it is not the level of LMX differentiation per se (which has been the dominant focus in previous research), but how this differentiation is formed that determines its impact on group outcomes.

This article refers to the study entitled, “When Leader-Member Exchange Differentiation Improves Work Group Functioning: The Combined Roles of Differentiation Bases and Reward Interdependence,” originally published in Personnel Psychology here.

Joo Hun Han is an Associate Professor at the School of Management and Labor Relations at Rutgers. Hui Liao is the Smith Dean's Professor in Leadership & Management at Robert H. Smith School of Business at the University of Maryland. Jian Han is a Professor of Management at CEIBS. For more on her teaching and research interests, please visit her faculty profile here. Alex Ning Li is an Assistant Professor at Neeley School of Business at Texas Christian University.