From the July 2001 issue of Entrepreneur

At first, Elizabeth McRae Smith, 37, couldn't put two and two together. But soon she suspected the truth: One of her employees was hopelessly incompetent.

A pattern of typos and bad grammar was hurting Smith's business. "This person had incompetence in a number of areas that are important to public relations and even caused some problems with clients that I had to fix," says Smith, founder and CEO of The McRae Agency, a PR firm with six employees.

"You just can't save some employees from themselves. Entrepreneurs can work too long trying to fix things."

She found that gentle reminders didn't work, so she started amassing a paper trail of the employee's mistake-laden projects, e-mails and reports. Last summer, one year after the employee was hired on at the 6-year-old San Francisco firm, she decided on a performance review where she and another supervisor would individually rank the employee on a number of skill sets, while the employee would rate herself. Smith was dumbfounded when the two sides compared notes. She and the supervisor thought that improvement was needed in every category, but the employee rated herself as good or excellent in every category.

Chances are, you'll eventually have employees who rate themselves as "above average" in a wide array of abilities they clearly don't have. Maybe it's an employee who thinks she's an outstanding public speaker but isn't, a secretary who fancies himself a writer but puts out horribly disjointed memos, or a sales rep who greatly overestimates her ability to close big deals.

But here's the rub: What you see as a glaring deficiency, these employees view as a strong competency. Smith's employee saw herself as supremely qualified-if not destined-for a career in PR, but Smith saw a gaping set of obstacles the worker could not seem to grasp.

Sheer Incompetence

Had Smith seen the research of David Dunning, a psychology professor at Cornell Universtiy in Ithaca, New York, she wouldn't have had to learn the hard way that there's a subset of people in the workplace who simply can't gauge their own areas of incompetence. Dunning, who originally wanted to learn how people know when they're performing poorly, has found that people who do things spectacularly badly are often as confident in their abilities as highly competent individuals.

In a series of studies, Dunning and his researchers found that people who scored in the bottom 25 percent on humor, grammar and logic tests consistently overestimated their performance and ability. Although these people's test scores tended to put them in the 12th percentile, they saw themselves ranking around the 62nd percentile-even after they were confronted with the entire group's test results.

Because these employees don't see their own incompetence, it's up to you to tell them. But how do you break it to an employee that she's incompetent, especially if it's in her chosen profession?

Raising the Bar

It's easy to let the situation fester. But without feedback, incompetent employees overestimate themselves even more, according to Dunning. "These people need a strong external push," he says. Meet privately with them, and be prepared for resistance. "They will argue back with their positive qualities and why they should keep doing a task," Dunning says.

You'll need to back up your arguments with concrete evidence. Show the employee examples of good work, and explain what you expect. Keep the focus on performance, set benchmarks over a specific period of time, and use 360-degree feedback. Offer training, too. If you have an employee who insists on writing company reports but lacks competency, explain why you can't use him or her on the project and offer some training. "If you have to give the project to someone else, explain that it's a hard decision and say 'This is what I want you to work on,' " Dunning says. "Opportunities for training are important."

These overconfident types, however, may not see the need for training. In fact, Frank Shipper, a management professor at the Perdue School of Business at Salisbury State University in Salisbury, Maryland, warns that incompetent employees who can't see their deficits may just lead you around in circles. "Even when you're blunt, they won't see it," Shipper says. "It all hinges on the employee's acceptance of the problem." If all else fails, it may be better to cut your losses. "You just can't save some people from themselves. Entrepreneurs can work too long trying to fix things."

Smith's solution was a 45-day review period along with grammar and computer classes at the company's expense, a proposal the employee found insulting. Instead, the employee wanted a raise, a personal assistant, a new computer and more responsibility. "In her mind, she was a great writer and communicator who had a college degree," Smith says. "She simply couldn't see the need to improve."

Not long after, the employee told Smith she was looking for another job, and the two mutually agreed that it was time to part company. "It's sad," says Smith. "But at the end of the day, you have to make good business decisions for your customers."