This research investigates the antecedents of employee engagement in Pakistan’s banks to conceptualize the idea of employee engagement. For this, the study examines the relationship between transformational leadership (TL), despotic leadership (DL), and the mediation of psychological distress (PD) with an outcome variable, employee engagement (EE). The study focused on first-line bank managers based in Punjab province using a cluster sampling technique. A questionnaire survey was used, and 341 respondents were selected for analysis using PLS-SEM. The study’s findings confirmed that all seven hypotheses tested were statistically significant. The results revealed that the transforming role of transformational leadership is more effective than despotic leadership in promoting employee engagement. The indirect link of psychological distress between transformational leadership, despotic leadership, and employee engagement also acts vice versa. The current study findings have implications for advancing our understanding of the effects of transformational leadership because of their positivity, which can reduce psychological distress and increase employee engagement in the service sector. In contrast, despotic leadership undermines employees’ abilities by increasing psychological distress and disengagement among employees. Our findings will help the banking industry understand how despotic and transformational leadership can negatively and positively affect employee outcomes.