Hire the Right PeopleFirst and foremost, recruit the right people! This seems simple and silly, but more often than not employers choose the safe choice - the middle of the pack applicant that won't stir up trouble. Applicants who are too opinionated or have "too much personality" are often nixed from the list of potential hires due to their unpredictability. This would be a huge mistake - often these individuals possess leadership characteristics which would enhance your workforce.
Identify Existing Skills and Areas for PotentialFrom your workforce, you should assess individual potential. Maybe your data entry grunt actually has skills in other areas, such as product design or technical writing. Get to know your employees, their past experiences and their interests. Often times, an unhappy employee is simply a bored one, stuck in an unchallenging and unfulfilling post. Maybe a certain employee doesn't have outside skills, but has such a mastery of their job that they can be given the responsibility of training new hires. Or maybe they have outside skills that can be pursued in their free time - for example, search giant Google used to require that its programmers set aside 20% of their time on personal pet projects, in an effort to foster creativity. You can even rotate employees between positions to insure that everyone understands the different jobs at your company, so they can substitute each others' jobs, if need be.
Understand if your employees are natural leaders, followers or innovators. If there are a few cogs that are getting stuck, such as irreparably disgruntled employees, these toxic employees will have to be removed from the equation to insure smooth operations. Nurture and develop talent in house. If you followed the steps above you should have a good idea of who your future leaders will be. Train them continuously, and have them train others. These prospective leaders should also be aware of your intentions to promote them. Let them know that you have your eye on them, to keep them competitive and vying for your attention. Reward these employees generously in the form of awards, bonuses of more flexible work hours. Give them recognition and make them feel like an integral, irreplaceable part of the company. These are the employees you want to pass along professional information and contacts to, in hopes that they will one day rise to a management position. Allow these employees to organize and lead company events in your place.
Consistent Performance Reviews & FeedbackStay up to date with appraisals and feedback. Employees need to be thoroughly and continuously evaluated - not only when they are up for a raise. Set up a fair rating system - efficiency, punctuality, teamwork, attitude - and discuss the results with them after each appraisal. At each appraisal, have the employee set his or her goals for the next appraisal, which will be subsequently gauged. This keeps employees aware of their own goals, and if they stayed their original course or strayed from it. If they stay with it, reward them - if they strayed off the path, remind them of their preset goals.
In addition, require employees to take risks. You don't want employees who will always play it safe, or act as yes men. Reward employees who take risks and attempt to think outside the box, even if they fail, since this is a hallmark of a true leader.
Now, if you have non-performing employees, even after encouragement, it may be time to part ways. Clearly warn and let go of these employees for non-performance. There's no point in subtlety here if you want to maximize your employees' overall performance. Make it clear to other employees that the employee was let go because they failed to improve or contribute to the workplace.
These ideas should get you better in tune with maximizing employee potential, and as a result, make you a better manager!