Don't wait for the annual performance review. You will spend the year frustrated at the person's performance. And the employee will spend the year doing career-damaging things, and feeling neglected, which contributes to a negative attitude. Give feedback at pre-determined breakpoints during the year, or anytime a negative attitude arises. This is not quite what I was looking for.
Employees are sensitive to criticism.
Maintain morale by emphasizing the positive while you point out the specific negative behaviors that must be changed if your business is to succeed. Think about the best sports coaches. You realize they get winning teams by telling players what they can do better, as opposed to what they are doing wrong. And successful coaches give feedback after every inning not once a year. So think of yourself as a coach not a disciplinarian.