All of what follows is for a university where contributions to scholarship and the arts ("research") matters.
Not only is the current faculty your major asset, no matter what you do it will be your major asset during your term of office. Yes, you can make incremental changes, but if you want to make larger changes, you have to address the faculty you have.
There is much talk about faculty renewal, with "contracts" and deadlines, so that people begin again to make a contribution that is warranted. You could be like Larry Summers who asked Cornel West to get on with his "big" book--I believe West's leaving Harvard since he felt insulted by Summers is the usual sign of people not ready to face the music. If you've been promising a big book, it's fine for the university to ask you to focus on it.
But faculty who have not lived up to expectations, or have become discouraged, or become enmeshed in activities that are not scholarly, ought to be given a chance to get back on track. Is there a medical or family reason? Have they lost touch with the field? Have they discovered they never should have become academics?
Ask: What do you need to get back on track in your scholarly career? Give it to them, and do this at least once more. If faculty indicate that they are unwilling to get back on track, help them find a job where their talents are better matched to the institution.
Most deans and provosts and even department chairs may not be good at this. But some faculty will be good at mentoring their colleagues. Encourage such mentoring, and pay for it. Pair up lost faculty with their productive colleagues in similar areas of interest.
As for sticks vs. carrots, the UC system has decelerated, vs. accelerated, promotion, leading to lowering one's "step" in the salary system. Ideally, what you do is find an attractive position elsewhere, and the person is encouraged to leave.
If faculty are focused on teaching or service, and nothing can be done to redirect them, their contributions here should be as substantial as the faculty focused on research and teaching and service. Raise their expectations of themselves--textbooks, more profound service contributions,...