Leading Through Crisis: Transformational Leadership Boosts Performance and Well-Being

Leadership is widely recognized as a key factor in the success of individuals, teams, organizations, and even societies. Which leadership style best supports productivity and mental well-being, however, may depend on the environment. The question as to which leadership is most suitable in crisis became particularly urgent during the COVID-19 pandemic, when businesses faced unprecedented disruptions and employees were confronted with uncertainty, stress, and rapidly shifting demands.

A new research paper by TRR 266 researcher Hoa Ho and her co-authors Kristina Czura, Florian Englmaier and Lisa Spantig, recently published in Management Science, takes on this critical issue by asking: How do transactional and transformational leadership styles affect employee performance and well-being in times of crisis versus stability?

We test these hypotheses on two well-known leadership approaches:

• Transactional leadership: built around incentives, and clear performance targets. Effective in stable environments with measurable outcomes.
• Transformational leadership: emphasizes vision, inspiration, and intrinsic motivation. Leaders encourage employees to see meaning in their work. Effective in fostering resilience and adaptability during crisis.

Data and study background

Our data comes from a large Indian not-for-profit microfinance institution. In this organization, branch managers act as frontline leaders, directly supervising loan officers who are the employees who build and maintain relationships with clients. This setting has been particularly affected by the pandemic. Microfinance institutions in low- and middle-income countries target remote and underserved communities. Loan officers, who normally travel to villages to conduct transactions in person, were suddenly restricted by lockdowns. At the same time, nationwide debt moratoria allowed borrowers to postpone repayments, putting additional strain on the institution’s cash flow. Thus, the pandemic brought dramatic disruption to these operations. As a result, the work environment became more complex and uncertain, and the usual incentive systems could no longer be applied.

Transactional leadership appears to be more effective under stable conditions, whereas transformational leadership shows advantages during periods of crisis.

The results suggest that the environment determines the effective leadership style:

• In normal times: Employees of transactional leaders performed better financially, serving more clients and ensuring higher repayment rates. Transformational leadership was linked to slightly weaker financial outcomes.
• In crisis (COVID-19): Employees under transformational leaders matched or outperformed peers on financial measures and—importantly—reported higher well-being and lower stress. These employees maintained motivation and working hours despite lockdowns and disruptions.

Why This Matters Now

Organizations are still grappling with the repercussions of COVID-19, such as hybrid work, talent shortages, and growing concerns about burnout. At the same time, geopolitical instability, climate risks, and technological disruption mean “crisis conditions” are no longer rare exceptions. This research suggests companies cannot afford to rely solely on transactional leadership. When structure breaks down and standard incentive systems become inapplicable, leaders who inspire and instill purpose and resilience can prevent declines in both performance and well-being.

Implications for Stakeholders

For Business Leaders

• Invest in balanced leadership development: Transactional skills may be sufficient in routine operations, but cultivating transformational behaviors—like articulating vision, empowering employees, and fostering trust—is essential for navigating volatility.
• Reframe leadership ROI: While transformational leadership does not necessarily maximize short-term financial metrics in stable periods, it could deliver long-term benefits such as greater employee resilience, lower turnover, and better crisis preparedness.

For Policy Makers and Regulators

• Support mental health initiatives at work: Evidence that leadership styles directly influence well-being strengthens the case for integrating mental health into labor and management policy (e. g. through offering counseling and mental health services preemptively).

Leadership as Risk Management

The study highlights that leadership style can influence how organizations respond to changing conditions. Firms that emphasize transactional incentives may perform well in stable markets but could face challenges when unexpected disruptions occur. In this context, transformational leadership appears to offer some protection against uncertainty, helping to support both performance and employee well-being.

To cite this blog: Czura,K., Englmaier, F., Ho, H., Spantig, L. (2025). Leading Through Crisis: Transformational Leadership Boosts Performance and Well-Being. TRR 266 Accounting for Transparency Blog. https://www.accounting-for-transparency.de/transformational-leadership/