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5 Tips to Successfully Manage 'Friends and Family' Hires Yes, the labor market is tough. But be careful about hiring someone you know. That move could lead to a long-term damaged relationship.

By Doug and Polly White Edited by Dan Bova

Opinions expressed by Entrepreneur contributors are their own.

PhotoAlto/Eric Audras | Getty Images

Unemployment is at its lowest rate in almost 20 years nationwide and at an all-time low in many areas of the country. This is making hiring in today's environment tough, especially for small or startup firms.

Related: 25 Reasons Why Hiring Your Relatives Is an Even Worse Idea Than You Suspected

Paychex's chief executive, Martin Mucci, noted to the Washington Post, for example, that smaller businesses need to "step up their game if they want to find people in an ever-decreasing pool."

The ever-decreasing labor market also causes many entrepreneurs to hire friends and family. That's an easier choice than navigating the labor market for new hires; and the business owner knows and feels comfortable with these people.What's more, if they need a job, it's nice to be able to provide them with one.

Yet, while this might be the easy choice, we caution against it for two reasons. First, your business is your livelihood. You should hire the person who is best for the job. Perhaps that is a friend or family member, but often it isn't. Second, the time may come when, for the good of your business, you have to make a decision that that friend or family member won't like (e.g., you'll have to terminate or layer the person).

Unfortunately, we've seen this lead to damaged relationships that last a lifetime.

If you do decide to hire a friend or family member, we suggest that you follow the five tips below. They are good management practices with any employee, but they can also help you avoid having to make a decision that will alienate a friend or family member.

1. Don't promote automatically.

The best widget maker is not necessarily the best manufacturing manager. Too often, entrepreneurs hire a widget maker (let's say, Uncle Fred). Then, when a second widget maker is needed, he or she naturally reports to Uncle Fred because Fred is experienced at making widgets.

Related: Advice From 9 Entrepreneurs Who Made Partnering or Hiring Friends Work

If the business thrives, before long, Uncle Fred is managing a staff of widget makers; he has been automatically promoted. Unfortunately, if Uncle Fred doesn't have the skill set to be a manager, you've got a problem. Make sure that promotions into management positions are explicit decisions, not unconscious progressions.

2. Assess the employee's skills early.

Make a conscious decision regarding the ability of your first employees to grow into management positions within the organization. Make this assessment long before you need to promote someone to a management position.

Don't give people management responsibilities if they don't have the skills to succeed. At our co-working space, Gather, we work with each of our employees to create a personal development plan. This helps us to understand each employee's skills and development needs and lets us know where he or she wants to be in two years.

3. Invest if that's appropriate.

You may have an employee who you believe could develop the skills to manage with some training. Just remember, this is a process, not something that happens within a single seminar. Begin investing long before you need the employee to accept management responsibility. Give him or her opportunities to practice the new skills before being promoted.

For example, give this person responsibility for managing a task force or a special project and provide feedback on his or her performance.

4. Keep salaries in line.

One of the biggest problems we see occurring is when employees who lack the skills to succeed as managers are promoted and their compensation is increased to match the job title. When such employees fail, the company is left with unattractive alternatives: (1) Let the failed manager continue to underperform (the worst possible choice for the enterprise, but one we see small businesses make too frequently); (2) Terminate the employee; (3) Demote the employee and reduce his or her compensation; (4) Demote the employee but allow him or her to keep the higher compensation.

There are no good choices here. Which one is the "least damaging" will depend on the situation. The decision is more difficult when the employee is a friend or family member. And, in fact, promotions don't have to come with an immediate compensation increase. A survey by Korn Ferry found that nearly two-thirds of respondents (63 percent) would rather get a promotion with no salary increase than a salary increase with no promotion. Our advice is to not raise a new manager's compensation until he or she is succeeding in the new role.

5. Set the employee's expectations well in advance.

Have candid conversations with employees about their aspirations and your perspective on their abilities. If you believe that an employee does not have the skills to become a manager, let him/her know that at some point you will be hiring a manager from the outside. Don't let employees develop false expectations. That will only result in a disgruntled employee at some point in the future.

Related: 5 Things to Consider When Hiring Friends

There are some real pitfalls associated with hiring friends and family members. If you decide to go in that direction, the tips above will help you avoid uncomfortable situations.

Doug and Polly White

Entrepreneurs, Small Business Experts, Consultants, Speakers

Doug and Polly White are small business experts, speakers and consultants who work with entrepreneurs through Whitestone Partners. They are also co-authors of the book Let Go to GROW, which focuses on growing your business.

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