what is best for the business? Then what is best for & fair to the affected employees?
A business leader MUST understand that her or his first obligation is to the company. When family is involved that is hard, because to a person, family is the first obligation. But that does NOT mean that hurting the company is the right way to be supportive and helpful to the employee / family member. This concept is absolutely true: You must have the right people on the bus, and in the right seats on the bus. If you have someone who is not contributing adequately to forward progress, they are taking up a seat that should be occupied by someone else who is a better fit. If that person is unrelated, the decision is easier. Terminate the bad fit and hire a better fit. If that bad fit is a family member (or friend), the decision is the same, but now you have a another responsibility if you want to be fair to the individual. The way to make this work is to help the misfit employee (also a family member) find an employment opportunity that is a good fit for them.
You must remember that fundamentally, even though we focus our resumes on skills and accomplishments, the ultimate hiring decision is usually based more on the personality, work-style, ethics and other personal characteristics and how they match up between the candidate and the hiring manager. Certainly, the success of a new employee depends to a great extent upon how well they fit in and work together with the manager.
So how can you help that misfit nephew, son or sister find a good fit? Provide search assistance, career counseling, resume help, emotional support, even counseling if appropriate. There are a myriad of services available to help people find the right job. Arrange for those services, pay for them (make sure the person uses them effectively) and get them out of the office. Arrange an office at an office suite, or an incubator if that fits. Pay the employee’s salary for a pre-defined period. Pay for some assistance, such as a cell phone and/or laptop (again, pre-defined period). But get them out of your business and moving toward a career position that is a better fit for them, while you fill your vacancy with a person who is a better fit for you. If you think it will be expensive to pay your relative’s salary and career coaching costs, think about how much it is costing to have a disgruntled, poorly-fit employee on your bus.