How do you manage a narcissistic employee?

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It is absolutely essential that you first be sure that your employee is in fact a narccissistic individual or else your remedy for the situation may just end up alienating a normal healthy person who is adapting to the relative dysfunction (stress) of the office environment that you have become accustomed to.

Discuss the problem openly and courteously with the employee in a private situation with another impartial person present. Lay out your complaint in a simple language. Do not be confrontational. Nerves are already frayed, you do not want to exacerbate the situation, you want to resolve it.

It is easy to jump to conclusions and label individuals who you don't get along with as narccissistic, arrogant, stupid, ignorant and so on, but doing so, does not ultimately lead to a constructive conclusion or a productive working environment.

Conflict in the workplace is a complex matter and should be dealt with by professionals who have the knowledge, training or experience to manage situations like these.
Professional advice is particularly important when dealing with a true narcissist. A true narcissist is very different from someone who is self-centered but can acknowledge mistakes, or someone who gets angry when crossed but can empathize with other's feelings.
Most people don't even know they are dealing with a narcissist until it is too late, including supervisors who, to the narcissist, are just stepping stones in the career ladder. The outward persona of many narcissists is quite charming and they quickly make friends. The important difference between them and a normal easily-likeable person is that once you get to know them, you find out that all their emotions revolve around maintaining their self-image, and they will do anything to preserve that image, including destroying the people around them who may threaten it.
Because they are so charming, they are often able to disguise poor work performance to others, depending on their charm to get ahead. Supervisors who attempt to address a narcissist's poor work performance directly may soon find their own job in jeopardy because the narcissist has been charming the supervisor's boss behind the scenes, and spreading lies and undermining the supervisor's authority with other employees.
If you are a supervisor dealing with a real narcissist, talk to your own managers and human resources department first. Make sure you have people on your side so that if you end up a target, you'll have help.
Always have another person with you to witness any disciplinary conversations with a narcissist. In your conversation with the narcissist, emphasize their good points. The problem behaviour needs to be addressed as a simple infraction, like forgetting to turn your car lights on when it gets dark, or accidentally turning into a one-way street. Emphasize the rewards of changing the behaviour and discuss the consequences of not changing it in a simple matter-of-fact way. End the conversation with some appreciative remarks.
Most important, document everything and stay in contact with your own management and human resources professionals regarding the issues.
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