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What’s the best way to deal with an employee you’ve had to demote either for business reasons or because the person was not a good fit for the position?

Over the years, I’ve seen more cases of this than I can count. I’ve demoted a few people myself. Some of the demotions went well, others didn’t, and I learned valuable lessons I can share with you. The strategy and tactics you can use to demote someone vary tremendously based on the reasons for the demotion and your long-term intentions with that person.

First, let’s look at why you’re demoting the person. Is it truly a business reason that’s beyond the individual’s control? Is it really more of a performance issue? Has he or she been previously promoted beyond the appropriate level? Is it an attitude problem? Depending on your intentions, each of these will require a different type of corrective action and transitioning. Simply demoting someone does not correct performance or attitude issues.

What are your intentions? Are you trying to retain the individual or are you trying to drive him or her out? Do you want the person on the team when business rebounds? Is the person most valuable to the team in a lower role, or do you plan to promote the person back to his or her previous job when business allows?

Conversely, was the demotion intended to drive the employee out? There are several advantages to this tactic. First, you need not pay severance. If done successfully, this approach can save the company considerable money, retain the organizational knowledge during the management transition, and make the transition much less dramatic.

On the other hand, a demotion can easily produce the opposite results. You could produce a disruptive, ineffective, disgruntled employee who could cause all sorts of problems after being demoted, including:

  • Being grumpy and unproductive.
  • Slowing down the team.
  • Demoralizing coworkers and perhaps driving out your top performers.
  • Quitting just after becoming productive again, which means you just paid for the person’s job search.
  • And, worst case, actively sabotaging the work.

Demoted employees should always be viewed as having one foot out the door. If you hand them a key project when you demote them, you should have a contingency plan in place in the event the demoted employees suddenly walk out on you.

Think carefully about whether you really want to retain the employees—if that is the best solution for the organization. Then, if that’s what you believe is best, invest considerable time and energy in a retention program. Here are some suggestions:

  • If at all possible, communicate with them before you pull the trigger. This will help them get over the shock.
  • Be thorough about your communication with them when you demote them.
  • Continue the communication after the demotion.
  • Make sure they receive attention from senior management.
  • Give them meaningful work.
  • Establish a bonus program for sticking around. This should be considered only if the demotion is truly based on external circumstances.
  • If a pay cut comes with the demotion, give them a transitional salary.
  • Provide regular public recognition of their value in the new role.

You may be wiser to lay them off or fire them rather than demote them. Depending on how fluid and flexible your organizational structure is, their future may be very limited after accepting a demotion. Their career aspirations and ego may be tied to their current rank, so you may need to offer them the option of leaving.

And, no matter how thoroughly you plan your strategy, expect surprises. In most cases, I predicted fairly well how people would handle their demotions. However, some of the reactions surprised me, so you should expect them to surprise you.

Preparation and communication—with senior management, HR, and then the person in question—are critical. The best surprise is always no surprise, so if you keep the communication lines open, you’ll be able to handle whatever comes your way and position your part of the organization for even better performance.