Strategies for small manufacturers to manage underperforming employees

Every company has one or two; most managers don’t know what to do about them. They’re underperformers, and their presence undermines everything you’re trying to do as a small business owner. Getty Images

Editor’s Note: From her days as a teenager making parts for her parents’ fabrication company (Superior Tube Products, Davenport, Iowa) to her return to the business years later as a sales executive, columnist Lisa Wertzbaugher has lived the life of a metal fabricator. Her position as a director of the Tube & Pipe Association, International, and her new role as a consultant provide additional insights concerning the operation of a small to medium-sized businesses.

As a consultant who deals with clients that vary in annual revenue from $300,000 to $500,000,000, I’m usually hired to work on specific projects, each with a unique focus. However, my role doesn’t prevent me from taking in quite a bit of additional information about my clients, and several trends have been easy to spot. One concerns underperforming employees. Many companies have underperformers, and nearly all of them are reluctant to take action. The result is a problem I call the talent drain.

The U.S. Department of Labor estimates that a bad hire costs a company approximately 30 percent of the employee’s annual salary. I think the costs are far higher when all of the factors are included—the effect on culture, the demotivation of high performers, and the negative influence on new hires coming into the organization.

So, why is it so hard to people let go? Several reasons come to mind, but here are the biggest: The employee is a friend or relative; the company doesn’t have a transition plan to manage the work load; the company is worried about financial and legal liability; and—the most common one—dealing with it is uncomfortable and managers don’t want to do it. As far as the last one, I make no judgments—I have been in those shoes myself.

You probably have a plan for most contingencies, so why not develop a plan for dealing with underperforming employees?

Opening the Door, Preparing the Exit

Here are some options for addressing this situation.

From the start, don’t make the mistake of hiring friends and relatives. Owners of small and midsize businesses are typically focused on the day-to-day operations and growth. As the company increases in size, it’s easy to start taking shortcuts in hiring. Most owners I work with regret hiring family and friends. If you have a personal relationship with a highly qualified candidate, make sure you clearly define job responsibilities in a job description signed by the employee upon hire. Assign someone other than family or a friend to be their supervisor, and use an objective review form to communicate performance deficiencies.

You need bench strength. Most owners intuitively know who their most reliable employees are, but it’s not enough that the owners know. Let everyone know! Maintain an updated organizational chart that identifies all positions—full-time, part-time, temporary, future positions, and future phaseouts. Define the position of everyone in the business on the chart. This exercise defines how employees move throughout the company, making it easy to fill roles that open. Share the organizational chart with the entire workforce, and train employees that have the potential to move up in the organization.

Develop a transition plan. I spent more than 10 years in medical device sales and helped cover open territories several times. Extra (temporary) compensation was customary for this sort of situation, so why not adopt this strategy for your shop? Identify one or two employees in each department who could provide coverage when a position is vacated. Meet with the employees to reassign open job tasks and agree on priorities until a new hire is made. Communicate how they will be compensated for the extra work. A side benefit is that word will spread, likely motivating others to step up their game.

As far as liability, how do you calculate it? Many would consider paying unemployment compensation, but before doing that, go back to the statistic from the DOL: Keeping a bad employee can cost 30 percent of the employee’s annual salary, and that’s year after year. From a dollars-and-cents standpoint, do you really want to pay four years of wages for three years of productivity?

Work with the human resources (HR) staff to review (or develop) a performance improvement plan. Have an HR representative and the employee’s supervisor go over the plan, detailing the areas that need improvement. A savvy employee knows that this is a good time to consider a job search. Meanwhile, go over severance package options and vacation payout requirements. Be prepared to follow through.

Many tools are available to help mitigate company liability when working on a termination. If you don’t have a full-time HR manager, talk to your insurance company; some offer HR support at no charge.

You probably have a comprehensive hiring process that includes an application, testing and screening, successive interviews, and a criminal background check. This is as good a time as any to develop a comprehensive plan for terminating a worker’s employment. If you already have a strategy, this is a good time to build a team to review it, make any necessary changes, and train all management personnel in how to use it.

When One Door Closes, Another Opens

An underperformer probably isn’t happy with his situation. He might not be happy anywhere he works, and you can’t do anything about that. Then again, maybe he just needs to find a job that is a better fit for his personality, aptitudes, and skill set. Keep in mind what we all know: If he’s not succeeding where he is, this is just as detrimental to his long-term career goals as it is to your company’s long-term success.

It’s uncomfortable to deal with, but so are other parts of the job, and they get done, so underperforming employees need attention as well. Most owners know they have employees that have received too many chances. It’s always best to deliver bad news as soon as possible, so don’t put off a conversation that needs to happen now.

The most important consideration when formulating an exit for an underperformers is the effect on your high performers. Nothing is more demotivating to a good employee than a bad employee. The cost of turnover in a high performer far exceeds the cost of keeping an underperformer on staff, so get started rebuilding your workforce today.

Lisa Wertzbaugher, founder of Wertzbaugher Consulting, can be reached at wertzbaugherconsult@gmail.com.