As far as I know it's a little of both. Raises are not yearly, but everybody gets raises at the same time. Base salaries always put FOs in the upper middle class strata of salaries so it's never an issue.

I believe promotions to Captain are based on flight hours and evaluated on an individual basis. They do hire street Captains as well.

The best part is if a pilot wants to leave his airline for another he won't necessarily take a pay cut. Experience is rewarded and you would never see a situation like the one at Envoy where Senior Captains making six figures go back to $40,000/year after moving UP to AA.