How to use an objective and effective manner, salary increases, bonuses and promotion to motivate staff and improve performance?

A thorough understanding of internal incentive structures is critical to developing a viable theory of the firm, since these incentives determine to a large extent how individuals inside an organization behave. Many common features of organizational incentive systems are not easily explained by traditional economic theory—including egalitarian pay systems in which compensation is largely independent of performance, the overwhelming use of promotion-based incentive systems, the absence of up-front fees for jobs and effective bonding contracts, and the general reluctance of employers to fire, penalize, or give poor performance evaluations to employees. Typical explanations for these practices offered by behaviorists and practitioners are distinctly uneconomic—focusing on notions such as fairness, equity, morale, trust, social responsibility, and culture. The challenge to economists is to provide viable economic explanations for these practices or to integrate these alternative notions into the traditional economic model.

When employees have goals, they tend to be more motivated if they also receive feedback about their progress. Feedback may occur throughout the workday, but many organizations also have a formal, companywide process of providing feedback to employees, called the performance appraisal. A performance appraisal is a process in which a rater or raters evaluate the performance of an employee.

Good Performance assessment with key scoring rate, each scoring rate with annual increment,

 for example divided the rates into:

1-     Excellence with 5% increment from basic salary

2-     Very good 4%  increment from basic salary

3-     Good   3% increment from basic salary

4-     Adequate2% increment from basic salary

5-     Such way you can create competition among the staff members  

I fully agree with the answers been added by EXPERTS...............Thanks.

when workers achieve the goals should motivate them by some incentives and encourage them