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Is Your Loyalty to Your Employees Hurting Your Company?

Loyalty is a fine quality unless it is killing your business.
Is Your Loyalty to Your Employees Hurting Your Company?
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Dozens of surveys exist related to employee engagement and loyalty. And most of them point to a strong correlation between these characteristics and business success, lower costs and higher profits. But, what happens when employer loyalty to long-term employees actually gets in the way of that employer's business growth and, often, profitability?

Related: 5 Ways to Determine Which Applicants Will Be Loyal Employees

Over the years, we have personally watched several companies struggle with profitability due to their owners' inability to make the business decision to let go of employees who no longer add appropriate value to the organization. We don't mean to be harsh: We understand that terminating employees disrupts organizations and can, at least temporarily, upset the company culture.

However, the cost of carrying these highly paid employees, and the damage to the organization of keeping them on board, makes these tough decisions necessary.

Let us give a theoretical example: You start your business and hire your first employee or two. In the early days, these employees help with everything and wear a lot of hats. They aren't paid much. You can't give them benefits. They work long hours. And, even if they aren't family or friends (as they often are) they become family.

Then, as the business grows, these first employees take on supervisory roles. That makes sense. They know more about the business than the newer employees. But then the next phase starts when you increase their compensation in keeping with their new titles. As the company continues to grow, you promote these long-term employees into leadership positions and increase their compensation further.

Then, one day, your problem becomes acute.

When you really do have to take action

The problem becomes acute when you realize that you need a true senior manager or C-suite employee and that the employees who have been with you from the beginning just don't have the skills and business experience to succeed in that role. You would like to bring in someone from the outside who could help you to take the business to the next level, but you feel that you can't for two important reasons.

Related: Are Your Most Loyal Employees Also the Most Likely to Be Disengaged?

First, the money needed to pay a high-priced resource is tied up in the salaries of the long-term employees. Second, even if you could afford to pay the compensation for an outside resource, you would have to layer the long-term employees under him/her, essentially demoting (and demotivating) these employees. This would damage your culture and cause the long-term employee to feel that he/she had been passed over or misled.

Real-life examples

We know of several businesses where the owner could not part with or demote his/her friends. In one case, the owner cut her own salary to help the profitability of the organization, rather than terminate a long-term employee. Making matters worse, this employee, by her own admission, worked only about 18 hours a week, but was the most highly paid employee in the firm.

In another case still going on, we know an owner who is planning to sell a division of his company. The division is run by a long-term employee who is not capable of taking the business to the next level. The owner says he would rather sell this part of the business than terminate his long-term employee, whom he considers a close friend.

In addition, a business we know employs a family member, who the owner knows does little of value in the business. Yet, the owner has decided that retaining this individual is a part of his role in taking care of his family, giving back. And when the owner complains about the profitability of his business? We remind him of this decision.

So, how can you avoid these land mines at your own business? We have four suggestions to follow as you bring on employees and grow your organization:

1. Keep expectations realistic.

Talk with your employees from the beginning of their employment. Tell them that you plan to grow the organization. Explain that there may come a time when you need to bring in outside talent to help the business grow. If you are honest with them, they will be more understanding when the time comes to layer them.

2. Don't overpay employees.

You need to keep employees' compensation in line with what they can earn on the open market given their skill set and experience. People create a lifestyle in keeping with their compensation. If you raise their wages above the market rate, you are doing the employee and yourself a disservice. What we often see is an owner who is reluctant to terminate an employee because he/she knows that employee will be unable to replace this inflated salary.

3. Realize that there is never a good time to make the change.

Unfortunately, there won't be a good time to terminate or layer the employee. Waiting won't help. You need to rip off the bandage and address the situation. This normally means terminating employees and allowing them to move on. You might layer them, but this can lead to issues within the organization unless these people have the ability to do a true self-assessment of their skills and see realistically where they fit in the company.

What we have traditionally seen is that owners will attempt to have their cake and eat it too. They'll push the long-term employee to the side. Perhaps the employee is given a special assignment or another job title that moves him or her out of a previous leadership role. However, not once in our experience has the owner reduced the employee's compensation.

The over-inflated salary continues to be a drain on the company's finances. The long-term employee stays on but has less and less to do with the success of the organization. The owner knows this. The company's employees also see what is happening and in most cases, the long-term employee understands what is happening, as well. The situation becomes uncomfortable for all involved.

4. Decide what is important to you.

If the business were publicly held, you would have a fiduciary responsibility to make it as profitable as possible and deliver shareholder value. But, it is probably privately held. Therefore, you get to make decisions that are more personal in nature.

Do you want a business that is as profitable as possible? Do you want a business that has access to the very best talent it can afford? If so, you need to be honest with yourself about the long-term employee's value to the organization and his/her talent level. Perhaps your friends and family are the best possible fit for your organization, but probably not. However, if it is more important to you to retain these people who are close to you, that is your decision.

Related: 6 Best Practices for Managing Unhappy Employees

Again,our point isn't to be hard. Hopefully, these examples will help some owners avoid the mistakes that happen all too frequently. For those who find themselves in a similar situation, knowing that others have had the same experience will give them the courage to make the changes that put their company's growth and profitability before a single employee's position within the organization.

Loyalty is a fine quality unless it is killing your company.