It is important to know what to keep (and not keep) in your staff's personnel files because they have a legal right to see what is in the file. You do NOT want to be the defendant in a lawsuit because they found something in their file that they consider unflattering or even untrue!
The things to keep in a personnel file are:
Signed compensation forms
Record of promotions and transfers
Signed forms allowing deductions
Signed forms with emergency contacts
Things NOT to keep in a personnel file:
Medical records (keep in separate locked cabinet with limited access)