In scrum, there are only 3 roles - product owner, scrum master and developer. The team is expected to be self organized. Incentives and Pay Hikes are left for HR and leadership to decide. They could apply some organization level eligibility criteria and set these as goals:
Example: Minimum # of months worked in a given year (If someone has been out for more than, say, 3 months in a year, then they will not be eligible)
For this to work, the grades and promotion criteria should be consistent. Example: Any new joiner can be 'Junior Developer'. They will be promoted to 'Developer' grade after 3 years if he/she has consistently met all eligibility criteria every year. After another 3 years, the grade can be 'Senior Developer' and so on.
In this setup, there is no appraisal on the 'work done' by individuals within sprints. There are only common criteria or goals which makes someone eligible or otherwise. The incentive % or pay hike % will also be common based on grade/experience plus company's performance and won't tie with rating of any kind.
There are certainly drawbacks in this setup as it could pave way for increased attrition as someone with a niche skill-set might expect higher incentive and quicker promotion. This could be worked around by having different titles: Developer - Database Architect, Developer - Automation Tester. Based on the market supply/demand, the company/HR could classify some as niche and tweak their criteria as needed and could also allow employees to move the ladder horizontally (Database Architect to Automation Tester) once they acquired the skill.
'Focus' is one of the 5 values in scrum which implies that no one works outside of their sprint goal. Hence, we cannot rate someone for 'extra' work they performed beyond their assigned duties. This is in sharp contrast with the traditional appraisal process.
In summary, the system should be in such a way that it doesn't break the concept of 'self organizing' team and also doesn't aid conflict between team members.
Here's what Jeff Sutherland(co-creator of scrum) says about employee review process:
There are a lot of reasons not to do performance appraisals. Google
doesn't do them. Instead each person has a web page with picture, bio,
and three month goals. Each person self-evaluates on the web page. It
is well known that employee performance ratings in all organizations
are inflated. This process is designed to produce realistic, provably
accurate, ratings. Ratings tend to reflect how well the employee sucks
up to the manager, rather than whether or not the employee generated a
great product that led to lots of sales and happy customers. We have
to get away from motivating employees to please the manager, and get
them to please the customer.