From the May 2007 issue of Investment Advisor • Subscribe!

Management Mayhem

Terminating employees should always be the last--not the first--resort

I was born into a long line of entrepreneurs, so it was no surprise to anyone that I started my first business at age 14. It was a chain of large concession stands at county baseball diamonds in rural Kansas. (Don't laugh; my Trump-size lemonade stands more than paid for my college costs.) Prior to selling the business, over the next seven years,

I employed 30 people ranging in age from 16 to 45. Of those, we only lost two. One was injured in a non-work related car accident. The other, I terminated.

Running that business made me grow up fast. What I miss the most was at that age everything seemed so simple. I was too naive to know any different and my management style was the same way. For example, I gave everyone working for me three chances. When a big mistake was made by any of my employees, I took the blame, thinking I had not done my job and properly trained my people. I made a note of it, retrained them, and moved on. The second time they made the same mistake, I placed the blame on them. I felt I did my job, but now they were not doing their job. Again, I documented it, helped them understand what they missed before, asked for an apology, and set a consequence if it happened again. The third time the mistake was made, I enforced the consequence. With big mistakes, the consequence was termination. In the fifteen years that I have been operating my own businesses and managing people, only one employee ever made a big mistake twice.

Managing people is difficult, and getting them to perform the way you want is even harder. But over the years that I've been working with independent advisors, I've noticed a troubling trend that seems to be getting worse: Advisors are very quick to jump toward the idea of terminating their employees, even ones they confidently hired only a few years prior. Even worse, that thought frequently turns into action--often for all the wrong reasons--which usually costs them hundreds of thousands of dollars in effort, resources, and headaches.

The reason for this rush to a costly judgment? A surprising number of advisors have no idea what to do when an employee isn't performing as expected. Consequently, as if that would solve the problem, the only real thing they grasp is the thought of getting rid of them. The problem is that many planners have simply never been taught how to manage people. As a child, I was taught this principle by watching my grandfather manage his engineering business, and while my management style in my first business was quite basic and somewhat "ice-queen-like," I did trust it. I had to. It was the only thing I knew at the time, and the only way I could get people to respect me, despite my age. Our retention rates proved it worked.

How you handle various situations will depend largely on your management style. Having worked for, and with, many planners, I've learned that there are three very dominant, somewhat chaotic management styles in this profession that cultivates the "firing-is-the-only-option" mentality.

The first is what I call the "Snapper." Snapper managers are very tolerant. They don't like conflict and, consequently, their employees can push them further than other managers, such as continuing to make the same mistakes over and over again. But to avoid conflict, a Snapper will ignore the problem until it builds up to a level where one day, they've had enough and well, snap. Then, in an out-of-the-blue second, they decide to get rid of what they believe to be the problem--the employee.

In shock, I watched a text-book Snapper in action during one of my first consulting relationships. My client had an employee who'd been at his firm for three years. This person showed up to work 20, 30, or even 40 minutes late every day. It bugged the heck out of my client (as it should have) and every time he talked to me, he complained about it. Yet, he'd never addressed the issue with his employee, even after I told him how to broach the subject. One day he simply broke, still never addressing the problem with the employee. You can guess the outcome.

The second type of manager is the "Yapper." Yappers are eternally idealistic and employees love to hate them. In their eyes, their practice is a Garden of Eden and their recruits are working in Paradise. Because everything is perfect in the Garden, they expect perfection from their employees. Like drill sergeants, they pound into the heads of their employees that it better be done just right, or else. Yappers are just the opposite of snappers, giving little, if any tolerance for error. Ironically, when you've observed advisory businesses long enough, you learn that Yappers go on firing binges in down markets; a cosmic movement as unexplainable as the increase in ER patients when the moon is full.

Two years ago, I recruited an employee for a large practice that was having a hard time finding the right person. We took our time and filled the position. Over the years, I periodically checked in to make sure everything was going well with the hire. The only thing I ever heard from the firm was how wonderful that employee was. He was learning fast, was motivated, hard working, and, they said, a "delight." But recently, he made his first (and last) big-mistake: A trading error that cost the company roughly $2,300. Considering that it's going to cost well over $2,300 to find, recruit, and train his replacement--not to mention the opportunity cost of lower productivity during that time--holding employees to zero tolerance for error is just plain dumb.

Finally, there is the "Trapper." Simply put, Trappers set their employees up to fail. In my experience, the vast majority of managers are Trappers. As with Snappers and Yappers, I don't believe employers ambush their employees intentionally. Most often, they hire too late, when the firm's workload is approaching crisis proportions, which leads to trading training for a trial by fire. Then, when the Trapper gets tired of answering all the urgent questions and dealing with all the mistakes, often big ones, they replace their employees, instead of confronting the real problem.

Manage, Don't Terminate

You probably recognize that the major commonality of these dysfunctional (if perhaps too-cutely named) management styles is the end result: Terminating talent, usually over and over again, rather than properly managing it. Effective management methods are proactive, not reactive. Finding your own effective style is a challenge, but here are three realizations I've had about managing employees that helped me find my unique style, that just might help you find yours a bit faster.

  1. See things as they are. Is the problem really the employee , or you? It's easier to blame other people than it is to face our shortcomings. But sometimes, taking a realistic assessment of the mistakes being made will help you determine who's to blame. At the end of the day, employees are only as effective as their manager. If your employees are making unnecessary mistakes over and over again, then I hate to break it to you, but that means you are not doing your job managing them.
  2. Confront the problem. Employees want your feedback. They want to be told what they are doing right and they want to be given constructive criticism. If you don't confront a problem, you are sending the message that their performance is acceptable, when it's not. Do yourself a favor, be a leader and address each problem immediately. Don't wait for it to create so much tension that you ruin what could potentially be a high-quality, working relationship.
  3. Train and Retrain. Like many parents, managers often believe that they can tell their employees something once and they will get it. Rarely is that the case. The best way to learn is through constant repetition of a concept. How many times did we have to practice the alphabet before we had it stored in our brains forever? My point is that assuming your employees will get it the first time is asking them to be perfect. The recognition that you might have to train a concept several times before it's mastered is a good way to keep your expectations in check.

Please don't misunderstand me. I am not saying managers are all to blame, and that employees are perfect and shouldn't be terminated. If you've given an employee a reasonable chance, and they still can't or won't meet their job requirements, then it may well be time to cut the cord. But I don't think it's a stretch to say that managers who pull the trigger rather than address easily resolvable situations cost the advisory profession millions of dollars each year.

I still have a lot to learn, but, one thing that I have learned is that when I looked in the mirror and changed myself first, I was much happier with the people around me and, as a result, they were more productive and motivated to follow my lead.

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