Your question actually contains your answer: company policy will not allow the increase, and her position does not warrant it. You can phrase it more delicately, but these are the points your employee needs to understand.
If you ask employees at any job level if they want more money, you will be bombarded with affirmative responses. However, that is not the criterion to be used in determining pay increases.
Rather, you should look at several factors, including performance, equity within the department and company, market rates, and supply and demand for the labor in question. Notice that “employee wants” are not in this listing.
Part of the problem is last year’s raise, especially if it was based on what this employee wanted rather than what she merited. In such a case, perhaps she is merely repeating behaviors that were rewarded in the past, and she is wondering why they are not working now.
When you bestow any kind of large reward on an employee, it is important to consider what you will do for an encore. And you should also consider what the employee will do for an encore.
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