bad teams poor performance

As far as my worklife is concerned the one thing that annoys me the most is a bad attitude. Now you add incompetence and nonchalance to it and you have made the perfect recipe to irritate the hell out of me. as an HR manager i am of the opinion people are to be groomed and trained to reach their potential but still i don't know what to do with those who are incompetent and just don't care about it. they are the ones who miss deadlines habitually and don't even regards them as important, they interfering every one's work and bring the overall productivity down.. they bring bad work culture to the organisation and end up corrupting the efficient order. what is to be done with these people? counselling, warning, penalty and then layoff. i think most people will go for this order. now the twist. suppose they don't report to you and u have no authority on them. then after the initial cajoling, counselling etc what do u do ? how the hell do u deal with the free rider? one group i know has solved this problem in a simple way- let the free rider ride and move on. is this the best way to handle this? why are we so scared of a small one on one session in which open dialogue and honest feedback are used? my friend says - its not worth the trouble yaar..move on . what do u think?