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I spoke about this subject earlier when I mentioned that making people feel good can come into conflict with the company's success at times. This is especially painful when the people you are managing are your friends.
My recommendation is to set expectations properly and then be tough on accountability. This means being tough on hiring. Don't let five people who half-heartedly interview someone and pass the buck to each other cause you to hire someone inappropriate for the job.
Also, when you're giving someone feedback, of course you want to spare hurt feelings. But be careful that you do communicate. Some people who've recently been failing build towering rationalizations that need knocking down. I've had meetings when I fire someone, and they don't understand they've been fired.
Or I chew someone out and they don't understand that I'm unhappy, and that the reason I'm unhappy is them, and that they should in the future change their behavior.
Without agreement that a problem exists, there can be no change. Therefore, I encourage you to use the "F" word, which here is "Failure" or "Fire".
Finally, it's tough but you need to fire people who are not exactly performing badly, but their performance is at best mediocre. Such people cause a morale drain on the employees who are getting paid the same but are working harder.
It's funny, I don't think I've ever had to fire an employee and had morale go down. Usually by the time I get to it, the employees (who work with this person more closely than you do as a manager) already know that he or she is not pulling a fair share of weight.
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