If the answers to most of the above questions are, “No,” you may not know whether you are paying appropriately or not, which makes your response to the employee demanding more money rather tenuous. This is one reason why employment experts recommend having a well planned compensation system that can stand up to scrutiny by employees.
If the answers to most of the above questions are “yes” and the employee is valuable to the company, use the system and market data on the employee’s job to determine if the employee is due consideration at this time. If so, give him/her that consideration and put together a plan to put and keep him/her on track regarding his/her pay package. For some employees, market adjustments make sense and in other cases performance bonuses might be in order.
If the employee is either not all that valuable or has essentially issued an ultimatum to you (i.e., “If I don’t get a raise right now, I will leave,”) tell him/her that you do not respond to ultimatums and be prepared to lose that employee.
People talk and you may have ramifications regardless of what you decide to do regarding the employee making the demand. That is, if you give a compensation increase, others in similar or same jobs may expect or demand the same. If you do not give a compensation increase,
others may see this as a sign of stinginess that means that they should seek jobs elsewhere.
My best advice:Install a well-designed compensation system, communicate it to employees so that they understand and appreciate it, then use that system to forestall this kind of dilemma in the future.