Explain leader-member exchange theory.

Answers will vary. Leader-member exchange theory, or LMX, recognizes that leaders may form different relationships with followers. The basic idea behind LMX is that leaders form two groups of followers: in-groups and out-groups. Ingroup members tend to be similar to the leader and are given greater responsibilities, more rewards, and more attention. They work within the leader's inner circle of communication. As a result, in-group members are more satisfied, have lower turnover, and have higher organizational commitment. In contrast, out-group members are outside the circle and receive less attention and fewer rewards. They are managed by formal rules and policies.
Research on LMX is supportive. In-group members are more likely to engage in organizational citizenship behavior, while out-group members are more likely to retaliate against the organization. And the type of stress varies according to the group. In-group members' stress comes from the additional responsibilities placed on them by the leader, whereas out-group members' stress comes from being left out of the communication network. One surprising finding is that more frequent communication with the boss may either help or hurt a worker's performance ratings, depending on whether the worker is in the in-group or the out-group. Among the in-group, more frequent communication generally leads to higher performance ratings, while members of the out-group who communicate more often with the superior tend to receive lower performance ratings.
In-group members feel more empowered, and this contributes to their higher performance. Empowerment also keeps in-group members healthier by buffering them from emotional exhaustion and depression.
In-group members may also be more creative. When employees have a positive relationship with their supervisor, it increases their confidence and self-efficacy, which in turn increase creativity. Followers view communication from leaders differently, and it seems to depend on whether the leader is viewed as "one of us," as shown in neuroscience studies. Followers processed the same statements differently depending on whether the leader was an in-group leader or an out-group leader. This could explain why President Barack Obama was considered an inspirational speaker but may have found it challenging to inspire people who saw him as associated with an out-group instead of an in-group. Neuroscientific studies show that when in-group leaders speak for "us," followers find them inspirational. Please see the section "Recent Leadership Theories" for more information.