How Diversity Increases Productivity

Diversity results in better decision making. That’s well-known. Diverse groups consider a broader range of ideas and produce more possible solutions.

But additional gains come when diverse employees are located throughout an organization. That’s the insight of groundbreaking research^[1] from Orlando Richard (University of Massachusetts Amherst), Maria Del Carmen Triana (Vanderbilt University), and Mingxiang Li (Florida Atlantic University).

Importance of racial diversity across all levels of an organization

Companies benefit most when upper management and lower management are both racially diverse, the researchers found. A 1% increase in racial diversity similarity between upper and lower management increases firm productivity by between $729 and $1590 per employee per year.

The data come from two workplace diversity studies. The researchers first examined all US-based computer companies with more than 100 employees, from 2007 to 2011. They found the $729 per employee benefit. Then they looked at Fortune 500 firms during the same period, finding the even greater benefit.[1]

Why diversity throughout management increases productivity

Diversity in both upper and lower management levels is valuable for several reasons, according to the authors.

Better strategy and implementation

First, diversity is a “knowledge-based asset,” with real advantages for strategy and implementation. Diversity leads people to consider^[2] multiple perspectives and develop better, more complex approaches.

For senior management, a diverse workforce means greater creativity, innovation, and flexibility in formulating strategy.

For lower-level management, this means better problem-solving in implementation, and more original ideas that they can share with senior management.

Enhanced collaboration

Diverse upper and lower management brings another advantage. People identify^[3] with others who are like them. Interactions and information exchange become easier.

What if both levels of management aren’t diverse?

Diversity throughout management brings benefits. But upper management, especially, often is not diverse. For example, a 2018 study found that while racial minority employees^[4] represented 33% of the entry-level workforce, they occupied only 13% of C-suite positions.

Most firms have many more^[4] racial minorities in lower management positions compared to senior management.

Productivity implications across management levels

Here’s how productivity differs depending on where your diverse employees are.

It’s best to have racial diversity at both levels: firms with diverse upper and lower management do better than firms without diversity at either level. Diverse firms’ productivity is 1.32 times higher than firms lacking diversity.

If there’s a mismatch — racial diversity in lower or upper management, but not in both — there’s more advantage to racial diversity in upper management. Firms with high racial diversity in upper management and low racial diversity in lower management outperform those with the reverse dynamic by 2.03.

The strategic advantage of upper management racial diversity

What’s the added advantage of upper management racial diversity? It likely comes from the benefit for strategy and the novelty (because racial diversity in upper management is so rare, it is even more of a competitive advantage).

Interestingly, even when upper management and lower management are both low on racial diversity, firm productivity is slightly higher than when lower management is high on racial diversity and upper management is low on racial diversity. This may be because there’s less trust between dissimilar levels, and so less information exchange and willingness to act.

How diversity in upper and lower management affects productivity

What to do if your firm isn’t diverse

Build diversity, the researchers say. Firms that have diversity throughout management levels are already creating competitive advantage.

Building diversity means bringing more diverse members into the organization – and keeping them.

Set diversity goals, collect data, and track change over time. Benchmark your company’s diversity performance against other companies in your industry – just like you might do with your profit metrics.

Build inclusive hiring practices. For example, ensure any candidate screening technologies your company uses do not have inherent biases built in.

Ensure your organization has processes in place for all employees to be heard. When employees raise problems or ideas, be transparent about how their perspectives can lead to organizational change. Invest in the professional development of diverse employees in lower levels of the organization, ensuring they have access to mentorship and support necessary to progress into management.

Learn more about how to improve diversity, equity and inclusion in your organization in this NBS article.  

Building a culture that embraces diverse perspectives

Here are some strategies that can help ensure your organization values learning from different perspectives:

• Hire humble leaders. If firm leaders are modest people who values learning and knowledge while deemphasizing status and position, diverse individuals in lower management are more likely to feel valued and empowered to make recommendations —  even if upper management diversity is low.

• Create an empowering culture. When lower management feel valued, included, and encouraged to make contributions, they are more likely to speak their minds about what needs to be done in the organization.

Increased diversity means gains for organizations and society. There has always been a moral case for action on diversity. Now, the business case is undeniable as well.^[5]

[1] Productivity was measured as revenue divided by number of employees. Racial diversity was assessed with five categories of race (White, African American, Hispanic, Asian, and Native American). “We examine racial diversity rather than other demographics such as gender because research measuring both racial diversity and gender diversity shows stronger effects for race,” the researchers note.