In today’s dynamic business environment, corporate efforts to foster a positive diversity climate have grown exponentially. Although diversification is viewed as a strategic move, its impact on business success remains debated. This study addresses the gap in understanding the role of the double-edged nature of diversity on business success. Drawing on the categorization-elaboration model, this study explores how perceived knowledge diversity influences employee performance, with job equity and work engagement as mediators. A sequential mediation model was employed to investigate the indirect and sequential effects on performance. Data were collected from 184 employees across various Indian organisations and analyzed using SPSS 22.0, AMOS 27.0, and Mplus 7.4. The results showed that perceived knowledge diversity positively affected performance directly and indirectly via job equity and engagement. The study enriches existing literature by offering a comprehensive model highlighting the organisational outcomes of perceived knowledge diversity, providing key insights for improving diversity management practices.