Unintended Consequences of Closing Pay Gaps Across Multiple Groups: A Formal Modeling and Simulation Analysis of Allocation Methods

In recent years, many firms have prioritized both pay equity (i.e., closing pay gaps associated with target groups such as women and racial minorities) and equitable representation (i.e., ensuring these target groups are fairly represented across a firm’s hierarchy). We use formal modeling and simulations to show how efforts to close pay gaps across multiple groups can undermine equitable representation. Specifically, our analysis suggests that pressure for pay equity creates a cost-based financial incentive to enact a subtle form of tokenism: A firm may minimize the cost of closing pay gaps if it maintains a workforce with a small number of minority women whom it pays well in order to compensate for underpaying larger numbers of majority women and minority men who resemble each other in terms of job attributes and personal qualifications. A firm can avoid these outcomes if it focuses on ensuring that employees from target groups are equitably rewarded for job attributes and personal qualifications rather than minimizing cost. But an equitable-rewards approach can be substantially more expensive than a cost-minimization approach, especially if pay gaps are larger in high-wage jobs or if there are many target groups. We conclude by offering testable empirical predictions and recommending a practical solution, namely to include terms for intersectional categories (e.g., minority women) in the regressions used to estimate pay gaps. Supplemental Material: The online appendix is available at https://doi.org/10.1287/orsc.2023.18306 .