Business is all about relationships. 

People work with people they trust, and many great deals and big partnerships come as a result of a meaningful relationship or a deep bond formed through years of loyalty. But that is not to say that you should work with, hire, promote or even keep employees that are no longer the right fit for your company. 

Here's why:

Loyalty to undeserving employees will end up hurting your company. 

I tell this story in full in my book, All In. A person I'll call Steve worked for my earliest company, Wilmar Industries, for 10 years. A few years after I left the company, he went to work for one of our competitors that was a lot smaller. After working there for some time, he told me, "Bill, you'll never believe what they do. They can have an awful employee, but because that employee has been there for years, they let them stay. They will never fire anybody."

I asked him, "How do they plan on becoming a great company that way?"

His response, "They never will."

Steve nailed it. 

When a company finds its stride and begins to experience rapid growth, one of two things happens as a result. Either the company chooses to keep or promote sub-par employees simply because they have been there the longest, or the inadequate performers are replaced with top-tier talent so that the company's growth can continue. 

As a leader, you have to remember that you aren't looking to build a decent team, or even a pretty good team.

You're looking to build a championship team. And in order to build a championship team, you can't let loyalty cloud your judgment. Jobs within fast-growing companies outgrow people, plain and simple--and it's your job to put the right people in the right positions, even if that means letting some people go.

It's a hard discipline to adopt because emotions become involved when you work with people over long periods of time. They work for your company, and when they do a good job, they become like family. But what if you have great people working for you who don't have the skills to move up the ladder?

I have employed a number of people over the years who did amazing work in their existing positions, but lacked the right skill sets to be promoted to upper management. When they asked me, "Why am I not getting a promotion?" It was not an easy conversation to have. I had to give it to them straight: they weren't qualified.

But imagine what would happen if you had made your decision based on the number of years they had been at your company--opposed to their ability to deliver on their newfound responsibilities. Then, both parties would lose. And not only that, but the company as a whole would suffer. 

That's one triple-whammy you want to avoid.

It's what they call the Peter Principle. 

In a hierarchy, individuals tend to be promoted to the level of their own mediocrity.

In other words, a person may be really great in the mail room, but only mediocre in actually managing the mail room. Since typically, in most organizations, people get promotions whether they deserve them or not, suddenly you have someone running the mail room who is only mediocre at it. He or she isn't terrible, but certainly not the best fit either. And since he or she is not proficient enough to receive another promotion, you now have someone sitting there running the mail room in a mediocre way--sometimes until retirement. 

This is not how you build a great business. 

Hiring and promoting individuals within your company is one of the most challenging parts of any entrepreneurial endeavor. 

Who you hire (and who you keep around) is everything, which means if you're making decisions from a place of loyalty then you're putting your company at risk. 

I've learned over the years that it's far better not to give promotions to people who don't deserve them. Find some other way to reward them for being great at what they do, train them to move up the ladder, or cut them loose. But don't give anybody a job or a promotion just because it seems like the friendly thing to do. You'll only end up doing them a disservice by placing them in a role that isn't the right fit, and doing yourself and your company a disservice by hiring someone who isn't able to deliver.

Be honest. Be empathetic.

Tell your under-qualified employees why you cannot promote them. Then tell them you believe in them and suggest ways they can improve their skills in order to get promoted. Your employees may not like what you have to say, but they will thank you in the long run for being honest with them and providing a roadmap to getting a promotion later on when they truly deserve it.

The same goes for hiring people close to you: friends, family members, friends of friends, etc. Hiring someone's kid or cousin or brother "as a favor" is a mistake. Instead, tell them the truth. Explain what you're looking for, and if they seem like a good fit them you can give them a shot. But you have to walk into the relationship knowing that if they can't deliver, they can't keep that spot--which is the predicament most hiring managers and bosses run into, when they hire friends.

Your company is only as successful as the people you have helping build it.