Employee incentives and motivation is not a one-size-fits-all optimization problem. It depends on the company, on the team, on what they're working on, etc.
Trust begets trust. This will beget none. Is it any wonder your employees are being mediocre when you don't trust and empower them to be anything else?
Not every company can afford to hire the very best, but you don't need to. Good management will strive to improve the systems (including the human systems, the learning systems, and the motivational systems) which empower your employees to work better, and for your quality to improve. Traditional (read: negative or carrot-and-stick type) motivational tactics almost all have complex and difficult-to-measure complications which do more harm than good.
See: http://en.wikipedia.org/wiki/W._Edwards_Deming#Key_principle... - and follow them. Designed for factories, but applicable to all management of all work. It's counter to the standard American idea of the employee-employer relationship, so extremely difficult to adapt to, but it is based on behavioral science, psychology, and statistical methods and should be regarded as basic truth. Start there and base your ideas about management on facts.
Even so, you are correct that there's no one size fits all management strategy for every individual and every situation. Holding such a view is a sure fire route to failure, typically. If managing were as easy as consulting a lookup table for the correct policy to apply then we wouldn't need human beings with lots of experience to do it would we?
What if there was something that could motivate them to get better?
So ultimately if you could motivate them to be better, then by definition they would be mediocre performers.
Based on my personal experience, I would not be surprised if you were to show me a study that found a strong correlation between being internally motivated and being considered a star performer.
Besides, by definition, most of your employees will be average. Otherwise the average would shift. Focus on bringing the whole bell curve up by improving your systems and your management, rather than on terms you use for individuals. You're better off optimizing your company and your management to handle this diversity, since it's a natural result of a sample.
For example, the Ivy League colleges suffer rampant grade inflation due to these high-achieving students not being able to cope with getting less-than-perfect grades. This poor coping is a form of 'low achievement' that drives other 'low achievement' behaviors: reduced course load, dropping out, switching to less rigorous majors, etc.