The Effect of Leadership Styles and Relational Contracts on Compensation Effectiveness and Employee Performance

Abstract

This study examines how managerial leadership styles influence the perceived effectiveness of compensation systems and employee performance. While prior research on organizational control has focused on optimizing compensation structures, it often neglects the role of managers within these systems. Drawing on survey data from a large international bank in Serbia, the study finds that transformational leadership enhances employees’ perceptions of compensation system effectiveness. Furthermore, managers who rely more extensively on relational contracts foster greater intrinsic motivation and perceptions of fairness, thereby increasing system effectiveness. The study also reveals that managerial performance evaluations significantly affect employee productivity—but only when the compensation system is perceived as effective. This research contributes to the literature on leadership by highlighting the substantial impact of leadership styles on the use and outcomes of relational contracts within organizations.