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The Leader-Member Exchange theory of leadership (Also known as LMX, LMET or Vertical Dyad Linkage Theory) is a type of leadership theory that focuses on the dyadic relationship between leader and follower where the leader treats individual followers differently, resulting in two groups of followers—an in-group and an out-group. The in-group consists of a small number of trusted followers with whom the leader usually establishes a special higher quality exchange relationship.
The out-group includes the followers with whom the relationship of the leader remains more formal. It focuses on increasing organizational success by creating positive relations between the leader and subordinate (follower). The theory asserts that leaders do not interact with subordinates uniformly. ‘In-group’ followers perform their jobs in accordance with the employment contracts and can be counted on by the supervisor to perform unstructured tasks, to volunteer for extra work, and to take on additional responsibilities.
Supervisors exchange personal and positional resources (inside information, influence in decision making, task assignment, job latitude, support, and attention) in return for subordinates’ performance on unstructured tasks. High LMX relationship achieves increased mutual trust, confidence, job satisfaction, organizational commitment, common bonds, open communication, independence respect, rewards & recognition and hence benefits both the organisation and the employee.
Recognizing the existence of the in-group and out-group, could be discriminating against the out-group thus affecting employee turnover based on bad-quality LMX and job dissatisfaction. This is because members of ‘out-group’ Example of an organization that has successfully used this theory is ‘E-Myth Worldwide’