Leaders do not typically use the same leadership style in dealing with all group members. Instead, they treat each member somewhat differently. The linkages (relationships) that exist between the leader and each individual team member probably differ in quality. In theory, the differences lie on a continuum of low quality to high quality. With group members on the top half of the continuum, the leader has a good relationship; with those on the lower half of the continuum do not.

Each of these pairs of relationships must be judged in terms of whether a group member is in or out with the leader. The positive regard that leaders and members have for each other is a contributor to the quality of their relationship. A note of caution about LMXs is that evidence suggests that the leader and the group members may perceive the quality of the exchange differently.

In-group members are invited to participate in important decision making, are given added responsibility, and are privy to interesting gossip. Members of the out-group receive little warmth, inspiration, or encouragement. In-group members tend to achieve a higher level of performance, commitment, and satisfaction than do out-group members. Furthermore, they are less likely to quit.

The in-group versus out-group status also includes an element of reciprocity or exchange. The leader grants more favors to the in-group member, who in response works harder to please the leader, a contributor to being a good team player. Another of the many consequences of positive LMXs is that they may facilitate the leader having a transformational effect. When group members perceive leaders to have high status, it is easier for the leader to form the type of high-quality relationships that contribute to good teamwork.