Try to think of employee relationship as one that is a mix of a parent and a sibling combined. Do you think your father or brother will smile at you and praise you when you are using drugs? Do you think that your parents will hesitate to use the stick when you are at fault? Certainly not. In the same way, the fact that you want to maintain good relations with your employees has nothing to do with your productivity targets.
Good relations should not be used as an excuse to condone inefficiency. Rather, it should be used as a motivational factor that helps boost efficiency. Hence, if you believe that maintaining good relations means never having to fire incompetent people, then you will go out of business very quickly.
If you do not remove the dead wood from your business, your competition is going to progress and you are going to suffer. At the end of the day, you are doing business to earn profits. Smart employee relation means convincing your employees that they too stand to gain if the business earns more profit.
Of course, you will have to walk the talk and hand over a share in profit if your employees do measure up. However, maintaining good relations is, by no means, a promise of free lunch. It is one thing to cut profits to retain employees who have been loyal to the organization despite the recession.
However, it is a completely different thing to purposefully post a loss when it serves no real purpose. The idea of retaining employees in a recession is merely to ensure that talent stays with you so that it is loyal when good times return.