The Diversity Paradox: The Unintended Consequences of Gender Diversity on Gender Pay Equity

ABSTRACT We examine how gender diversity and employees' internal pay position interact to explain gender differences in pay raises. Integrating equity theory and institutional theory, we argue that pay raises are guided by equity‐based reward allocation policies. Further, we expect a decoupling between these policies and their implementation if other gender diversity goals, such as a balanced ratio of female and male employees at the work‐unit level, are achieved. Specifically, gender diversity at the work‐unit level provides legitimacy that corporate diversity goals are being pursued. This makes the implementation of reward allocation policies aimed at increasing gender pay equity less salient in work units with high levels of gender diversity. We test our hypotheses using a multilevel moderated mediation model on a longitudinal sample of 9,246 observations from 4,003 employees in a large German company. Our results show an indirect effect of gender on pay increases over 3 years via compa ratio (i.e., the relative pay position for a given job grade). In support of equity theory, the results show that women receive higher pay increases than men over time to compensate for a lower compa ratio. Moreover, in work units with high gender diversity, the indirect effect of gender on pay raise is weaker, suggesting a decoupling between equity‐based reward allocation policies and their implementation. Our results offer valuable insights into the interaction of equity and institutional theory‐based explanations of reaching corporate diversity goals.