Leader–member exchange theory
The leader-member exchange theory of leadership focuses on the two-way relationship (dyadic relationships) between supervisors and subordinates. The theory assumes that leaders develop an exchange with each of their subordinates, and that the quality of these leader-member exchange (LMX) relationships influences subordinates' responsibility, decision influence, access to resources and performance.  This theory promotes positive employment experiences and also augments organizational effectiveness. Also known as LMX, LMET, leader–member exchange focuses on increasing organizational success by creating positive relations between the leader and subordinate.
Managerial leadership theory was improved in the 1970s when Graen (1976) published his “Role-making processes in complex organizations” in the Handbook of Industrial and Organizational Psychology. Role-making according to the Leader-Member Exchange theory expanded role theory beyond the limits Katz and Kahn’s (1966) “role-taking” defined as the process whereby employees accepted roles prescribed by their employer and employer’s agent. Graen’s theory hypothesized that particular actor, behavior and context variables which increased the probability that employees would form alliances that were instrumental for them, their managers and coworkers to change their roles. This was different from Graen’s models Vertical Dyad theory that simply predicted managers would treat their direct employees differently (Dansereau, Graen & Haga, 1975). For example, Leader-Member Exchange theory prescribes that product managers uniquely design their teams for maximum sources of collaboration by proactively fostering unique strategic alliances between the leader and each team member and between each team member before turning to the other big five steps in competing team leadership (Graen, 2013). Dansereau, F., Graen, G. B., & Haga, W. (1975). A vertical dyad linkage approach to leadership in formal organizations. Organizational Behavior and Human Performance, 13, 46-78. Graen, G. B. (1976). Role making processes within complex organizations. In M. D. Dunnette (Ed.), Handbook of industrial and organizational psychology. (pp. 1201–1245). Chicago: Rand-McNally. Graen, G. B. (2013). The missing link in network dynamics. The Oxford Handbook of Leadership, Michael G. Rumsey (Ed.). London, UK: Oxford University Press, 359-375. Katz, D., & Kahn, R. L. (1966). The social psychology of organizations. New York: Wiley. lmxlotus.com
LMX theory suggests that group members often separate into subgroups, as some members may have similar interests or personalities. In one of those groups, leaders have special relationships with an inner circle of assistants and advisors, who often get high levels of responsibility and access to resources. This is often called the “in-group,” and their position can come with a price. The other group is known as the “out-group,” and they typically prove to be less motivated or less competent in comparison to the other group. In-group employees are more willing to put in profound efforts, are more committed to task objectives, and share more administrative duties. However, leaders spend more time working with these individuals, value their opinions more than the out-group and also provide them with more resources. In-group members are more likely to report high satisfaction with their role in the group, are less likely to leave the group and are more likely to get promoted than others.  They are also expected to be totally committed and loyal to their leader. Conversely, subordinates in the “out-group" are given low levels of choice or influence and put constraints on the leader. Out-group members do what work is necessary in their role, but they contribute less to the group than in-group members. They are less likely to be presented with opportunities to grow and have less challenging work than the individuals of the in-group. The out-group also express less loyalty and support for the leader 
Leader-member exchange does not just define what the exchange between leader and subordinate is, but it also determines what expectations and behaviors the leader will have. Having a good rapport with subordinates is important for the leader because it is through them that the leader reaches the goals of the business.
Psychological research in the theory of LMX has empirically proven its usefulness in understanding group processes. The natural tendency for groups to develop into subgroups and create a clique of an in-group versus and out-group has been found by researchers (Bass, 1990). Those who form the in-group were also found to be more likely to behave in a way that benefits the group; these include helping other members, supporting changes within the group and common courtesy (Ilies, Nahrgang & Motegeson, 2007). However, the amount of differentiation within a group can vary between groups or organizations. A group may be cleaved into very diverse in-groups or out-groups, while other organizations may be low in differentiation. If a leader can recognize this hierarchy within a group, he or she can improve their relations with their group by minimizing the number of individuals in the out-group (Graen & Uhl-Bien, 1991). Conversely, other research has shown that some differentiation is healthy in a group, as this causes the out-group to recognize that they must work harder to achieve the leader's approval (Liden et al., 2006). 3 stages of LMX Soon after a person joins a team and goes through several stages, leader-member relationship are formed. The stages one must go through are as follows:
1. Role-taking:The member joins the team and the leader evaluates his or her abilities and talents. Based on this, the leader may offer opportunities to demonstrate capabilities. This is the stage where a leader is able to gain insight into what areas a member will do best in.
2. Role-making: In the second phase, the leader and member take part in an unstructured and informal negotiation whereby a role is created for the member and the unspoken promise of benefit and power in return for dedication and loyalty takes place. The theory says that, during this stage, managers sort new team members (often subconsciously) into one of two groups: In-Group is if team members prove themselves loyal, trustworthy and skilled, they're put into the In-Group. This group is made up of the team members that the manager trusts the most. Managers give this group most of their attention, providing challenging and interesting work, and offering opportunities for additional training and advancement. This group also gets more one-to-one time with the manager. Often, people in this group have a similar personality and work-ethic to their manager. Out-Group is if team members betray the trust of the manager, or prove that they're unmotivated or incompetent, they're put into the Out-Group. This group's work is often restricted and unchallenging. Out-Group members tend to have less access to the manager, and often don't receive opportunities for growth or advancement. Trust-building is very important in this stage, and any feelings of betrayal, especially by the leader, can result in the member being demoted to the out-group. This negotiation includes relationship factors as well as pure work-related ones, and a member who is similar to the leader in various ways is more likely to succeed. This perhaps explains why mixed gender relationships regularly are less successful than same gender ones. The same effect also applies to cultural and racial differences.
3. Routinization: In this last phase, a pattern of ongoing social exchange between the leader and the member becomes established. Habits and routines are formed in this stage. In-Group team members work hard to maintain the good opinion of their managers, by showing trust, respect, empathy, patience, and persistence. Out-Group members start to dislike or distrust their managers. Because it's so hard to move out of the Out-Group once the perception has been established, Out-Group members may have to change departments or organizations in order to "start over." Once team members have been classified, even subconsciously, as In-Group or Out-Group, that classification affects how their managers relate to them from then on, and it can become self-fulfilling. Being a successful member or becoming an in-group member usually includes being similar, in many ways, to the leader. The members work hard at building and sustaining trust and respect from their leader. The members are often empathetic, patient, reasonable, sensitive, and are good at seeing the viewpoint of other people, especially their leader. Characteristics that are often shared by the out-group include aggression, sarcasm and a self-centered view.
Followers’ unethical behavior can be triggered by leader-member exchange. According to research from Western Researchers (Gerstner & Day, 1997), harmonious relationships between subordinates, leaders, and the organization are required to achieve job satisfaction. The satisfaction received in the workplace result in higher level of organizational commitment by employees who are within the in-group. However, employees in the out-group with lower LMX will be more likely than those with higher LMX to engage in unethical behavior in order to compensate for their feeling of unfair treatment. Unethical behavior is harmful behavior that is considered to be unacceptable and illegal by the general public and research have indicated that unethical behavior in the workplace can be due to lack of job satisfaction. Therefore, it is believed that LMX is linked directly to job satisfaction and employees’ unethical behavior. In term of practical actions, managers can reduce unethical behaviors of employees by increasing social exchange and in turn improving employees’ job satisfaction.
How to use the theory: When joining a team, it is important to join the inner circle, take on more than your share of administrative and other tasks in order to gain trust from your leaders.
The quality of the LMX relationship varies. It is most efficient on one of the two ends of the spectrum in terms of extremities: either extremely low or extremely high. The size of the group, financial resource availability and the overall workload are also important. The theory can also work upwards as well. The leader can gain power by being a member of his or her manager's inner circle, which the leader can then share with subordinates.
The main limitation of leader–member exchange research is that it is not particularly helpful in describing the specific leader behaviors that promote high-quality relationships. At best it only implies generalities about the need for leaders to show trust, respect, openness, autonomy and discretion.
The Leader-Member Exchange Theory can be utilized outside of the workplace. It can be applied to group projects for school, clubs, etc. By using LMX in such circumstances, you can learn more about how you see your team members. First, you must determine who your out-group consists of. When you do this you have to make sure you know how they ended up under this title. Compare facts with your perception of the events. The next step you must take requires you to re-establish the relationship with those in the out-group. In doing so, you will gain respect as a leader. It may also boost morale for those members of the out-group. However, make a mental note that those members will have their guards up at first when you try to give your support to them. Make it sincere by approaching each member one-on-one. Take time to get to know a little more about them. This can also help you learn more about what drives them. From that point on, try to keep the reconnection going by keeping in touch with those members. Make an effort to offer your guidance on any of their tasks if they need assistance. Your third and final step to apply the Leader-Member Exchange Theory is to offer some form of mentoring or coaching. This allows a type of opportunity for the member to advance in the group. Start first with low risk assignments
Pro's • This theory is dynamic and points to possible ways for employees or managers to either weaken or strengthen relationships. • It provides a structure for both modeling specific situation and solutions to the problems • The theory explains the mechanics of loyalty to leader and corruption
Con's • The theory does not account for the leader's personalities • It does not account for the fact that values also affect group dynamics. It does not state clearly how values will affect the relationship between the leader and group.
There are some faults in the Leader-Member Exchange Theory, however. The theory involves the assumption that each individual is worthy of the same amount of trust, chance of project responsibility, and opportunity for advancement. This is not always the case. The members with the most talent will receive the better opportunities than those in the out-group, perhaps. Because of this reason, the leader must make sure that he or she is using the theory to help themselves be objective in the manners in which they deal with others.
- Deluga, R. J. (1998). "Leader-member exchange quality and effectiveness ratings: The role of subordinate-supervisor conscientiousness similarity". Group and Organization Management 23 (2): 189–216. doi:10.1177/1059601198232006.
- Liden, R. C.; Sparrowe, R. T.; Wayne, S. J. (1997). "Leader-member exchange theory: The past and potential for the future". Research in Personnel and Human Resources Management 15: 47–119.
- Seibert, S. E.; Sparrowe, R. T.; Liden, R. C. (2003). "A group exchange structure approach to leadership in groups". In Pearce, C. L.; Conger, J. A. Shared leadership: Reframing the hows and whys of leadership. Thousand Oaks, CA: Sage Publications. ISBN 0-7619-2623-2.
- Template:Millennial Management: designing the future of organizationsGrace M. & Graen G. B. Infoagepun, 2014
- Graen, G. B.; Uhl-Bien, M. (1995). "The Relationship-based approach to leadership: Development of LMX theory of leadership over 25 years: Applying a multi-level, multi-domain perspective". Leadership Quarterly 6 (2): 219–247. doi:10.1016/1048-9843(95)90036-5.