The basic premise of the theory is
that leaders develop an exchange relationship with each subordinate as the two parties mutually
define the subordinate’s role. The exchange relationships are formed on the basis of personal
compatibility and subordinate competence and dependability. According to the theory, most
leaders develop a high-exchange relationship with a small number of trusted subordinates who
function as assistants, lieutenants, or advisors. These relationships are formed gradually over a
period of time, through reciprocal reinforcement of behavior as the exchange cycle is repeated
over and over again. Unless the cycle is broken, the relationship is likely to evolve to the point
where there is a high degree of mutual dependence, loyalty, and support.