ABSTRACT Companies are offering managers compensation incentives to increase promotions of under-represented employees to higher level organizational positions (hereafter, “diversity incentives”). This study uses an experiment to examine how diversity incentives affect managers’ promotion decisions and employees’ effort choices before and after those decisions. The results suggest that managers’ diversity incentives do not affect employees’ pre-promotion effort choices. Additional analyses indicate that both over- and under-represented employees expect managers to promote them based on effort instead of group membership. Consistent with predictions, diversity incentives increase the likelihood that managers promote under-represented employees whose pre-promotion efforts are comparable to their over-represented colleagues’ efforts. After the promotion decision, nonpromoted employees whose managers receive diversity incentives choose the lowest effort, regardless of group membership. Collectively, these results inform companies about the potential costs and benefits of using diversity incentives by demonstrating that diversity incentives can increase diversity in promotions but reduce nonpromoted employees’ efforts. Data Availability: Data are available from the author upon request.

Companies increasingly disclose human capital initiatives, such as diversity, equity, and inclusion (DEI) and non-DEI initiatives. Yet, DEI initiatives have become a focal point of debate, raising questions about whether investors view them as appropriate uses of company resources. Across two experiments, we examine how nonprofessional investors perceive DEI versus non-DEI initiatives. Drawing on equity theory, we propose that investors' fairness-based perceptions of an initiative's appropriateness depend on their underlying preferences for what companies should prioritize, and that these perceptions influence their investment willingness. Experiment 1 finds that investors perceive DEI (versus non-DEI) initiatives as less appropriate, and this difference is exacerbated when investors are more shareholder-oriented than stakeholder-oriented. Furthermore, the mediating effect of perceived appropriateness on investment willingness is stronger when company financial performance is unfavorable than when it is favorable. Building on these findings, Experiment 2 tests a boundary condition of our theory by examining whether explicitly stating merit-based selection criteria attenuates shareholder-oriented investors' stronger negative perceptions of DEI initiatives. We find that when DEI initiatives are explicitly presented as merit-based, investors' negative perceptions of appropriateness of DEI (versus non-DEI) initiatives are attenuated, and the exacerbating moderating effect of shareholder (versus stakeholder) investor orientation also diminishes. Our findings demonstrate how investors' fairness-based perceptions of appropriateness can explain divergent responses to DEI disclosures, offering timely implications for companies and regulators concerned with human capital reporting.