Why Diversity in the C-Suite Isn’t Enough Without Equity

Corporate America is at a crossroads when it comes to Diversity, Equity, and Inclusion (DEI). Over the past decade, DEI initiatives have flourished, but recent political and economic shifts have sparked new scrutiny and pushback. Some companies are scaling back their commitments, questioning the effectiveness of diversity programs, and debating the role of DEI efforts in corporate success. While much of the debate centers around diversity in hiring and representation, there’s less focus on equity. Do minorities have the same opportunities to succeed as their majority peers? Are all executives compensated fairly and given equal opportunities to advance, regardless of their background? What are the consequences of cultivating a corporate culture that guarantees fairness across executive teams?

A new study by Felipe Cabezón, Eliezer Fich, and Lubomir Litov sheds light on the issue of equity in executive compensation, revealing significant disparities in how ethnic minority executives are compensated compared to their White counterparts. The study, titled “Racial Diversity and Inclusion Without Equity? Evidence from Executive Compensation,” provides compelling evidence that even when minority executives make it to the upper echelons of corporate leadership, they continue to face unequal and less lucrative pay structures.

The Pay Disparity That DEI Forgot

The study analyzes a large dataset of executive compensation spanning from 2006 to 2020 and uncovers a puzzling pattern: Black, Hispanic, and Asian executives consistently receive less equity-based compensation (such as stock options and performance-based stock) than their White peers. Instead, their pay tends to be more heavily weighted toward fixed salaries and cash bonuses—structures that provide fewer opportunities for wealth accumulation.

Why does this matter? Equity-based compensation is where the real wealth lies in the corporate world. When companies perform well, the value of stock-based compensation can skyrocket, creating significant wealth for executives. However, if racial minorities receive proportionally less of this wealth-building incentive, they are effectively being excluded from the full financial rewards of executive leadership.

Why Does This Happen? Two Theories

The study explores two potential explanations for this disparity. The first, the Preference Hypothesis, suggests that minority executives may choose to receive less equity-based pay due to risk aversion or concerns about shorter tenure in their roles—factors such as corporate politics or visa-related uncertainties may contribute. Alternatively, the compensation differences may reflect underlying workplace dynamics, where minority executives have weaker networks, limited access to mentorship, and reduced negotiation power compared to their White counterparts. Circumventing these issues to allow minority executives to learn about alternative (and potentially more lucrative) compensation structures might take time. This is the rationale underlying the Ethnic Affinity Hypothesis.

Changing Corporate Culture, Societal Pressures, and Mentorship

A key finding of the study is that these compensation disparities are not simply a result of personal preferences. The study reveals that changes in corporate leadership and social conditions can significantly alter compensation structures. For instance, when a minority executive becomes the CEO of a company, the pay gap for minority executives tends to narrow. Similarly, when minority executives move from a company with a White CEO to one led by a minority CEO, their compensation package becomes 32% more similar to that of their White colleagues, using our metric of pay structure similarities between Whites and minorities. The same effect occurs when a minority director is appointed to the compensation committee. These changes suggest that corporate culture and ethnic affinity, especially at the highest levels, play a significant role in shaping executive compensation.

The study also shows that societal factors, such as the location of a company near Black Lives Matter (BLM) protest events or in areas with lower racial animus and inequality, can influence these compensation disparities. These findings indicate that external societal pressures, rather than executives’ preferences, are driving changes in compensation structures.

Does Equity in Pay Structure Matter for Firm Performance?

The study offers a hopeful perspective: as minority executives remain with a firm over time, the ethnic pay structure disparity tends to narrow. As these executives grow with the company, they learn about the benefits of alternative pay schemes, communication improves, and the corporate culture evolves, leading to more equitable compensation structures. This raises an important question: If racial pay disparities are rooted in a corporate culture that requires time to foster inclusivity, does this culture have an impact on other aspects of firm performance?

The answer is yes. Companies that promote equitable pay structures for executives tend to perform better across several metrics. They exhibit fairer compensation practices not just for executives but for their broader workforce as well. Higher racial pay structure similarity is associated with better employee salaries relative to the CEO. These firms also show stronger financial performance, including higher market valuations, better returns on assets, and greater returns per employee. Additionally, they have lower instances of financial fraud, suggesting that an equitable corporate culture is linked to stronger ethical standards and operational efficiency.

Diversity and Inclusion Aren’t Enough

Corporate America may still be debating the relevance of diversity and inclusion, but this research underscores a critical gap: without equity, these efforts are incomplete. True progress requires more than diverse representation; it demands a corporate culture where executives from all backgrounds have equal access to opportunities, rewards, and long-term wealth creation. Companies that cultivate such an environment not only uphold fairness but also unlock greater collaboration and employee efficiency, which result in improved stock market valuations. Ultimately, a truly inclusive corporate culture is not just about hiring talent—it’s about ensuring that talent thrives.

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By Felipe Cabezon (Virginia Tech - Pamplin College of Business)

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