Do you have a valuable employee who is demanding a raise—or else? Does it feel like you’re being held hostage? Many employers are feeling this pressure as the economy improves, especially when employees may have had to forego pay increases in recent years.

What do you do when a valued employee comes to you and demands a pay raise, telling you that she’ll walk if her demands aren’t met? Do you have to give in to her demands? Will she really walk? Does she deserve the raise she’s demanding? And what if you give in to her demands—will more employees demand the same?

Having a process for rewarding employees is important. Too many business owners find themselves in the above position because their compensation systems and processes are lacking or, worse yet, nonexistent.

Have a Process and Stick to It

First, why do employees make such demands? Ask yourself when this employee last received a raise or review. If the most recent raise was back in 2000, then it’s clearly an issue of the company (or you) sleeping on the job and not really doing the right thing.

Do you have clear role descriptions, and have you given proper thought to pay ranges? Every position should have a range that is fair and equitable for the geographical area and responsibilities of the position. This allows you to budget for increases and have a plan that avoids this predicament. Many smaller businesses can’t pay at the top of the range, so the least you can do is give compensation the attention it deserves, when it deserves it.

Not taking care of pay for performance can come back and bite you, and it isn’t always about money. It’s about appropriate feedback that, in turn, sets realistic expectations. Not having a set performance development timeline, one that lets employees know what to expect, will result in the “hostage scenario” described above. And then you’re forced to be reactive instead of proactive.

Get ahead of the curve by setting an annual date when reviews will take place, and then follow through. Having good practices in place doesn’t mean you won’t have employees asking for raises, but you might avoid an ugly hostage situation if you’re more proactive.

Be Candid about Performance

If employees are exceeding or not exceeding your expectations, they need to know. Most importantly, if they are falling short, then candid conversations must happen and plans should be put in place to help them develop or help them out of the company. These conversations often are difficult, but essential if you want to continue to grow your employees and grow your business.

Maybe you can’t afford to give raises right now, but is there something else you could do? Rewards aren’t all about money. Think of all the little things you can do to make your employees feel good. A little thoughtfulness can go a long way.

Once you’re in the scenario above, there isn’t much recourse. Get your pay and performance development practices refined and in place, and you’ll never be held hostage again.