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February 22, 2022

Start Building a Diverse Workplace as a Revenue Driver

Diversity
a row of diverse faces

Guest post by Paulette Stout, for Gusto.

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Organizations have increased workplace messaging around diversity and inclusion, developing new programs, policies, and even updating company values. But amidst all the buzz and slogans, it can be easy to lose sight of the true purpose of promoting diversity. Beyond being the right thing to do, promoting diversity and inclusion is proven to benefit businesses in countless ways, including as a revenue driver.

In this post, we will explore what it means to be a diverse workplace, why now is the right time to take it on, and how embracing diversity, inclusion and belonging can boost your bottom line.

What is Diversity and Inclusion?

According to Great Place to Work, diversity is about the composition of an organization while, while inclusion is “about how well the contributions, presence, and unique perspectives of different groups of people are valued and integrated into a work environment.” Research shows organizations are still struggling to make inroads for women and people of color when it comes to addressing workplace diversity. This applies at all levels, but particularly at higher levels of seniority and power. 

But what does diversity actually mean? Diverse in what way? Harvard Business Review tells us we can think of diversity in two distinct ways: Inherent and acquired. “Inherent diversity involves traits you were born with such as gender, ethnicity, and sexual orientation” Acquired diversity involves traits you gain from experience, such as education, work history, and industry expertise. To thrive culturally and economically, business leaders should strive to maximize both measures of diversity. And in truth, workplaces have a long way to go.

The Diversity Power Gap

McKinsey data found that while women make up 48% of all entry-level employees, they only account for 38% of first-level managers. This means women are being left behind from the very earliest stages of their careers while men ascend the leadership ladder. This gap only widens when we consider women of color who make less than their white counterparts at all seniority levels. At support levels, workplace diversity mirrors the U.S. Census data, but by the time workers ascend to executive status, racial diversity is noticeably absent. While 13.4% of the US population is Black and 18% Latinx, only 2% of executives are black and 3% Latinx, respectively. 

The Engineering Diversity Gap

Representation is equally uneven in fields like engineering where Pew found the ethnic makeup to be 5% Black, 9% Latinx, 13% Asian and 71% White. This leads to sizable pay gaps in STEM fields like engineering, with Pew data showing Black and Hispanic women earning only 44% of the top earner group — Asian men. When it comes to engineering leadership positions, the gender distribution is equally bleak. Women only comprise 3.9% of executive leadership of US construction companies. Though the work pipeline to leadership is broken when it comes to advancing women and under-represented groups, today's workers feel the urgency. They want their organizations to change, and in a hurry. 

The Mixed Appetite for Change

As a study by the Harvard Business Review and SHRM found, “the best intentions won’t affect change without real, measurable action.” Growing public pressure and social activism have pushed the issue of workplace equity to the top of societal consciousness. The study found 65% of respondents said “diversity, equity, and inclusion (DEI) is a high strategic priority.” And Gallup found 42% of working women cited equal pay as the most important issue they face, followed by equal opportunity for advancement. There is a growing thirst for change by disaffected workers, yet those in positions of power are key to determining whether change actually happens.

Accountability for Diversity and Inclusion Goals

While the desire for change is growing, organizations must better define what diversity and inclusion means in practice, so appropriate policies and key performance indicators (KPIs) can be set. The Harvard/SHRM study found companies leading in DEI  were more likely to assign accountability beyond human resources, to extend to the CEO (71%), business unit heads (54%), and even managers (44%). Leaders in DEI were also more likely to track whether all staff was treated equitably 56% vs. 11% for companies lagging in DEI. 

Moreover, when a CEO sets DEI strategy, companies are 6.3 times more likely to have a diverse leadership team and are more likely to be among the DEI leaders in their industry segment. Conversely, companies lagging behind their peers tend to delegate achieving equity gains solely to their DEI leaders. And while DEI leaders can of course make an impact, 72% of workers in companies lacking diversity say DEI gains are held back by a “lack of diversity at senior levels of the organization.” 

To make substantive and lasting gains, leaders must embrace the opportunities presented by increasing workplace diversity. Offering equal access to jobs, mentorship, and promotions to all — especially to under-represented communities — is not only the right thing to do, it benefits companies in the most fundamental way possible: by fueling the bottom line. 

How Diversity Fuels Growth and Innovation

An extensive analysis by Josh Bersin tracked business performance of 450 companies alongside 128 measures of talent management, for two years. The study proved “that companies with great diversity outperform their peers by a significant margin.” Diverse companies demonstrated:

  • 2.3 times higher cash flow per employee
  • 1.8 times more likely to be change-ready and be innovation leaders in their market
  • 3.8 times more likely to be able to coach people to improve performance

Other studies further confirmed the business performance edge for diverse organizations: 

  • McKinsey found ethnically-diverse companies were 35% more likely to outperform peers.
  • Boston Consulting Group found companies with above-average diversity on their management teams reported revenue 19% higher than those with below average diversity scores. 
  • HIgh-skilled immigration has shown to increase innovation, as measured by the 27% increase in per-capita secured patents. This was achieved by increasing the college-educated/advanced-degree holding immigration by as little as one percent.. 

Driving ROI with Diverse Talent

The more analysts dig, the more evidence they uncover about the powerful role diversity plays in elevating company performance. The thinking is that more diverse perspectives and life experiences help yield better decision making, and those decisions produce better results. Gallup shows this appears to hold true across countries and industries:

  • Gender-diverse business units in the retail company have 14% higher average comparable revenue than less-diverse business units (5.24% vs. 4.58%). 
  • Gender-diverse business units in the hospitality company studied show 19% higher average quarterly net profit than less-diverse business units, which grows to 58% higher net profit when business units are both diverse and highly engaged.

McKinsey research “reinforces the link between diversity and company financial performance.” It makes the business case for diverse teams, noting those in the top quartile for gender diversity on their executive teams were 21% more likely to outperform their bottom quartile peers on EBIT margin, even though women remain under-represented in these elite spaces. Ethnic and cultural diversity, both in terms of absolute representation and ethnic mix, were 33% more likely to outperform their peers on profitability. Yet here too, under-representation persists. 

Looking at data from the United States, Black Americans comprise 10% of college graduates, but only hold 4% of senior executive positions. For Hispanic Americans, the gap is 8% graduates to 4% executives, and 7% of graduates to 5% of executives for Asian Americans. 

There is a strong, growing, and statistically significant body of evidence that diversifying employees and leadership yields tangible ROI for companies. This is a reality organizations ignore at their peril given the diverse makeup of younger generations of workers.

Population Changes and the War for Diverse Talent

Ethnic diversification of the US population will have enduring implications for employers. For instance, 48% of Gen Z are racial/ethnic minorities, and their age group is predicted to be a majority non-white by 2026. Millennials are more likely to be foreign-born with a first language other than English. The Deloitte Millennial Survey shows that 74% of these individuals believe their organization is more innovative when it has a culture of inclusion. Taken together with current workforce dynamics, it is increasingly vital for companies to understand how to attract and retain diverse talent to remain relevant and competitive in today’s marketplace.

How DEI Impacts Talent Retention

As Josh Bersin’s Deloite’s research demonstrated, “people perform best when they feel valued, empowered, and respected by their peers.” But what happens when they don’t? Far too many DEI efforts emphasize diversifying hiring practices, yet fail to address employee engagement, organizational culture, and the changes needed to promote employee retention. When employees don’t feel included, or are consistently reminded of their “otherness,” they will seek greener pastures.  A survey by Korn Ferry found that 84% of respondents said a lack of attention to diversity, equity and inclusion contributed to employee turnover. That drain of talent and institutional knowledge comes at a price. SHRM noted companies spend between 50% - 500% of a worker’s salary on replacing lost workers. It’s far better, and more economical, to not lose your talent in the first place.

How to Achieve Lasting Organizational Diversity

With disparities this vast and culturally ingrained, it will take a strong and determined commitment to set it right. Far too many DEI efforts only make superficial changes yielding little, if any, impact. Studies show blanket policies do nothing to improve gender or ethnic diversity, often failing when employees of color view actions  as “diversity theater.” Gallup reports women who suspect being hired to fill quotas experience negative after effects when trying to form relationships with coworkers. Deloitte's Global CIO survey found only 1 in 4 women felt they had benefited from their organization’s DEI programs. 

According to Josh Bersin, building an inclusive environment “will take a systematic and top-down approach, embedding diversity and inclusion into hiring, leadership assessment, development and performance management.” It also “demands fairness in career discussions, performance management, and forced diversity in leadership and succession planning.” He found those most successful instituted tangible accountability at several touch points, including unconscious bias training, analytics tools and scorecards, and establishing diversity metrics that were benchmarked and tracked.

Tips for Improving Workplace Diversity

A Harvard Study found several steps have been shown to produce lasting results when implemented with rigor and executive commitment:

  • Establish clear job performance evaluation criteria: Employees of color and women are often forced to over-perform for the same career benefit. Having clear criteria levels the playing field for all.
  • Analyze HR data by gender, race: Too often racial disparities exist between genders, with women of color making less than white women. Companies need deep data to make effective corrections.
  • Mentor emerging leaders: When rising talent has access to mentoring, coaching and career stewardship, they become more likely to ascend to leadership roles — and succeed when they do so.
  • Develop sponsorship strategies: Sponsorship is most successful when it happens organically, but companies can develop nuanced strategies to encourage deeper career sponsorship for under-represented leaders. Employees of color and women often lack sufficient senior management access to form the close ties sponsorship demands. 
  • Value diverse leadership styles: Welcoming diversity into leadership ranks means being open to new ways of thinking and problem solving. These are the same factors that will lead to higher company performance, but may require establishing new cultural norms within these formerly exclusive spaces.
  • Be open to honest dialogue: True progress can only be achieved when we confront the issue head on. Be open to having difficult conversations that will help you collectively grow as people — and as a company

Take Aways

Establishing an inclusive culture and belonging is essential for all companies, regardless of industry sector, size, or country. Demonstrated disparities do exist, persisting despite conversations and programs touting the need for change. However, true change will not occur without demonstrated top-down commitment from the executive level, that also weaves throughout the organization and across all departments. Diversity initiatives must be tied to accountability metrics to track diversity gains and shortfalls. 

Data confirms the superior company performance, innovation, employee satisfaction, and retention that accompanies increasing workplace diversity, inclusion, and belonging. There are clear steps that have proven to be successful at achieving change. What remains now is for executive leaders to embrace DEI, so they have the thriving talent they need to secure their company’s long-term future.