Leader-Member Exchange (LMX) theory asserts that leaders develop relationships with each member of their work group. A high quality relationship is characterized by the member having high levels of responsibility, decision influence, and access to resources. Members who enjoy a high quality LMX relationship are said to be in the IN-GROUP. A low quality LMX relationship is characterized by the leader offering low levels of support to the member, and the member having low levels of responsibility and decision influence. Members who have a low quality LMX relationship are said to be in the OUT-GROUP.

The quality of the leader-member exchange relationship is theorized to be related to work and attitudinal outcomes. For example, exchange quality has been demonstrated to predict such outcomes as employee withdrawal or resignation, salary and promotion, productivity, job satisfaction, and organizational commitment.

For example, imagine a writing class where students must interact with their teacher. Those students who are considered to be in the In-group may have a great deal of interaction time with the teacher. For example, if Chris's writing style is similar to the teacher's writing style, then the teacher may spend extra time meeting with Chris to discuss writing. This high level of interaction may increase the likelihood that Chris will be in the In-group. Additionally, those students within the In-group may be given extra responsibility in the classroom.