Setting Key Performance Indicators and Targets for those who report to you works. Through having a discussion with the person you can define goals and targets for them to reach over a certain period of time.
KPI's are generally used for two things - ironing out small areas of inefficiency or business growth.
I like to set no more than 4 targets for my reports. Any less that and they become too easy, any more than that and the chances of being able to achieve them reduce exponentially according to the increase in targets listed.
Another thing I like to do is set a mixture of soft and hard targets. That is some targets are based on physical actions and outcomes, whereas soft targets deal with relationships and things that can't be measured physically.
Ongoing feedback and communication is vital and important but doesn't provide the necessary formal layout that an appraisal and KPI does. By defining goals and targets (and reviewing them quarterly) you can empower your reports to achieve more.