Defend Truth


Employment Equity – time to drop the Peter Principle?

De Vos is a director with strategic consultancy QED Solutions.

From the beginning of this month, the amended Employment Equity Act and a whole raft of regulations came into force. This being South Africa, these changes are already the subject of a dispute. Notably, the DA has come out against these regulations, particularly those that deal with national and regional demographics (the “black” category of employees is divided into African, coloured and Indian) and how they apply.

On the face of it, the new regulations might struggle to see off a Constitutional Court challenge because the Supreme Court of Appeal, in the case of Barnard v SAPS, made specific findings on the constitutionality of affirmative action on matters of substantial equality reflected in section 9(1) of the Constitution. This section distinguishes unfair discrimination from permissible affirmative action as set out in section 9(3) of the Constitution. Briefly – and this is a complex area – affirmative action measures only comply with the Constitution if they meet the rationality and fairness requirements, and this requires meticulous scrutiny.

This case followed an earlier case of Naidoo v SAPS, in which the Labour Court observed that “[t]he inability by an employer to act in a rational and fair (or situation-sensitive) manner creates a real danger of perverse race and gender rivalry” and may “produce in consequence confrontation and alienation and will, in the long run, undermine the promotion of substantive equality and the creation of a non racial and non-sexist society”.

To be clear, the Barnard case is on appeal to the Constitutional Court to be finally determined there. The prospects of success though look dim – another Labour Court judgment, this time against the Department of Correctional Services undertook a thorough review of Constitutional provisions as they relate to employment equity.

The given reasons for need for stricter laws and regulations on Affirmative Action is justified on the outcome of a the 2013/2014 Annual Report of the Commission for Employment Equity, which produces measurements of the participation of different racial groups within the Economically Active Population in different levels of designated firms, or firms that are subject to the provisions of the Act (basically, firms employing 50 people or a turnover measurement adjusted for a particular sector).

That racial “representivity” is hugely skewed in the formal sector of our economy is not in dispute by anyone, and most reasonable people think that this cannot continue. The ANC recently received a very clear mandate from the electorate on the basis that it would focus on affirmative action, so affirmative action will be with us for a while yet. The trouble with opposing the Act and its regulations is having to deal with the charge that one is anti-transformation, which is how the DA got itself into a jam – inconveniently for them – just prior to the elections. The ANC, for its part, seeing some slippage in black middle class support, likes to have the centre of gravity in the affirmative action debate right where it is, and looks like it plans to keep it that way.

But maybe we should re-engage in the debate by asking why so little progress is being made since the Employment Equity Act was first introduced back in 1998. Perhaps some of the problems lie in the conceptual foundations on which the EEA and its regulations rests?


An outsider, not knowing our history and looking at the Act, its regulations and the associated codes of good practice, would likely point to the drafter’s own concept or theory of the firm. This is represents a whole separate discipline of economic theories that describe and predict the nature of the firm (or a company), its behaviour, structure and relationship to outsiders. This includes how firms may be able to combine labour and capital to lower the costs of output, via returns to scale. Early on, Ronald Coase, an economist, suggested that people begin to organise their production in firms when the transaction costs of co-ordinating production through the market exchange, given imperfect information, is greater than within the firm.

More recently, other more credible theories have emerged that include the behavioural theory of the firm which explains how decisions are made within the firm. Theorists of this school argue that the firm is not a monolith because different individuals and groups within it have their own aspirations and conflicting interests, and that firm behaviour is the weighted outcome of these conflicts.

The EEA, with its regulations, exposes a particular conception of the firm with different layers of management that is then measured against the racial profile of either the country or the region in which the company is located. This idealised conception of the firm is mostly different from most of the designated employers who have to report progress on a template provided. The necessary implication of the EEA regulations is that skills, qualifications and experience should not prevent the achievement of racial representivity.

This recalls the Peter Principle, named after the Canadian psychologist Laurence Peter, who in the 1960s suggested a rather paradoxical principle that “every member in a hierarchical organisation climbs the hierarchy until he/she reaches his/her level of maximum incompetence.” So, in an organisational structure, the assessment of the potential of an employee for promotion is often based on their performance in the current position. This climbing through the ranks eventually lands the person in a role in which they are not competent, referred to as their “level of incompetence”. So an efficient and diligent debtor’s clerk might well be incompetent as a manager of the accounts department and it is at that point that the erstwhile debtor’s clerk reaches her career ceiling. A more recent development of this idea comes from a paper produced by Alessandro Pluchino, Andrea Rapisarda, and Cesare Garofalo of the University of Catania, Italy, who within a game theory-like approach, explore different promotion strategies and come to the strange conclusion that an organisation would become more efficient if they promoted people at random. One could argue that one’s racial category is just another random selector and would satisfy the requirement of randomness. However, the Italian authors of the study received the 2010 Ig Noble Management Prize for Improbable Research. This is to say that the idea does not have much currency – anywhere.

Even the most aggressive proponent of affirmative action recognises that skills are important. So, while the government may promote randomly at the SABC, doctors and pilots work their way up on the basis of proven qualifications and skills. The lack of skills is generally cited as the biggest hurdle to the so called Transformation Project. To be sure, skills development or skills transfer is an important part of the EEA and all companies who employ people are subject to a skills levy. A good part of the Broad-Based Black Economic Empowerment Act is about skills development and skills transfer.

What about progress through the ranks and the question of experience and skills? Perhaps the problem with the EEA and its regulations is that the obligation to achieve targets, whatever they are, is not what stymies progress. It is the approach of those with the skills, often white employees employed on the basis of their skills or qualifications. Game theory, a study of models of conflict and co-operation between intelligent rational decision-makers, may help. At its most basic level, the subject addresses zero-sum games or situations in which a participant’s gain (or loss) is exactly balanced by the losses (or gains) of the other participant. If the total gains of the participants are added up, and the total losses are subtracted, they will sum to zero.

What happens in a firm subject to Employment Equity rules? It is not hard to work this out – one can be sure that not many white employees see their everyday work lives in the context of the greater transformation project. Their own skills, particularly if they are critical to the company’s business, become the difference between a secure salary and being pushed out in favour of an employee from a designated group. One can be confident that the white employee, notwithstanding instructions from management who are keen not to be fined, will not easily share his/her skills or even make it easy for the black employee. Seen in this way, the problem is not the firm but the existing employees within the firm – their interests are wide apart. Even if the policy is applied rationally as our courts require – the words of the Labour Court in the Naidoo case about a “spectre of perverse race and gender rivalry” producing “in consequence confrontation and alienation” gets played out in our workplaces on a daily basis. As the salary premium for experienced and skilled black management grows, the elevator to produce these individuals is not working. The resign-one’s-position-to-be-contracted-back strategy, as an independent consultant, to perform the same tasks, does little to improve the situation.

None of this excuses the alienating and hostile work environment that emerges in reports by young black people, but it may provide some comfort if one is able to understand the dynamics that partly explain what is going on rather than to fall back only on the well-worn tropes of white racism.

The elephant in the room is the dire state of our education. A recent study shows that many of our maths teachers, even at primary school level, are themselves unable to do the basic maths expected of 12-year-olds. As one may expect, white children don’t go to these schools. In this way, our future as a deeply unequal society gets to be “baked in” on an inter-generational basis. If those with skills, funded by the taxpayer, leave the country (Howzit Dubai, Perth) the skills premium in favour of those that remain simply grows and we become even more unequal. According to another study commenting on the dispute between Gilad Isaacs and Mike Schussler, the biggest divide in our country is between those employed in the formal sector and those either unemployed or informally employed. That divide, in turn, is largely a function of a reasonable education. Fixing our education system is critical to everything.

Advocates of our EEA say the market alone will not address our racial disparities and might even increase them – and this is true, but our current policies have not made us a more equal society either. There is no other way out of this other than growing our economy. A recent IMF publication is sobering. While labour market rigidities are criticised, business in South Africa is also taken to task. The rate of creation and survival of new companies is one of the lowest anywhere in the world while our corporate sector is more profitable than their peers in most other equivalent emerging markets. This underlines our lack of competitiveness. A World Bank study on South Africa’s export competitiveness, more or less, says the same thing. If these diagnoses are correct, then our product and service markets lack dynamism and nothing much changes – including the racial profile and structure of the economy. The markets in South Africa can’t help solve the problems that employment equity tries to address because they are not helping much in other important respects either.

A different way of solving the racial profile of our formal economy, other than through time alone, involves moving away from our zero-sum orientation because if we don’t do this, we will need to get used to a long line of disappointing annual equity reports. The EEA is not going to fix this, because it can’t. DM


Please peer review 3 community comments before your comment can be posted

MavericKids vol 3

How can a child learn to read if they don't have a book?

81% of South African children aged 10 can't read for meaning. You can help by pre-ordering a copy of MavericKids.

For every copy sold we will donate a copy to Gift of The Givers for children in need of reading support.