Purpose: While extant literature is replete with studies on actual diversity, research on perceived diversity is scant. The authors examine perceived diversity as an underlying mechanism explaining the effect of actual diversity on affect-related outcome (employee well-being). Design/methodology/approach: In total, 617 full-time employees from large organizations representing varied industries in India have participated in the survey-based study. The authors used PROCESS macro for mediation analysis. Findings: An index estimating actual surface-level diversity was found to correlate significantly with perceived surface-level diversity. Perceived diversity was found to significantly impact employee well-being, thereby, demonstrating its mediating role in the link between actual diversity and well-being. Research limitations/implications: Beyond the underlying processes of diversity, effects such as diversity perceptions, contextual factors conditioning diversity effects need exploration. Practical implications: Investigation of both actual and perceived diversity improves the explanation of diversity effects. Besides compositional mix, managers must tap on employee perceived differences to understand and leverage diversity and its effects. Originality/value: Besides contributing to the emerging interest in empirical examination of perceived diversity on employee outcomes, this study develops an index to estimate actual surface-level diversity. © 2018, Emerald Publishing Limited.