Leader–member exchange theory argues that leaders establish a special relationship with a small group. These individuals make up the ingroup—they are trusted, get a disproportionate amount of the leader’s attention, and are more likely to receive special privileges. Other followers fall into the outgroup. LMX theory proposes that early in the history of the interaction between a leader and a given follower, the leader implicitly categorizes the follower as an “in” or an “out”; that relationship becomes relatively stable over time.

Leaders induce LMX by rewarding employees with whom they want a closer linkage and punishing those with whom they do not. How the leader chooses who falls into each category is unclear, but there is evidence that ingroup members have demographic, attitude, and personality characteristics that are similar to those of their leader. Research to test LMX theory has been generally supportive, with substantive evidence that leaders do differentiate among followers.

Followers with ingroup status receive higher performance ratings, engage in more helping or citizenship behaviors at work, engage in less deviant or counterproductive behaviors at work, and report greater satisfaction with their superior. When the treatment of the ingroup is starkly different from the treatment of the outgroup (e.g., when the leader plays favorites), research indicates that both the ingroup and the outgroup realize negative effects from LMX. Close-knit teams may be able to help outgroup members to retain their confidence by offering support.