Need more info... does this employee have any leverage? What region is the individual in, what kind of degrees, certifications, etc. I'm in a hot job market and the trend here is to hop jobs to get a significant pay increase. There's not enough qualified workers for the opportunities available.

A few years ago, I had a discussion with my Project Manager about a 2.5% pay raise over two years. He told me "in this economy, we should just be happy we have jobs." One month later, I was with a different company, with a 10% increase.

12 years is a long time to be at one company these days. This employee is either extremely loyal, or has limited options (at least that he or she is aware of). Employers love to use "this economy" as a reason for small or no raises... even when the business is growing. It is more important than ever to make yourself more marketable through advanced qualifications. Do your research too, you need to know what your skills are worth in your particular market. If you aren't getting what you are worth, it may be in your best interest to take a leap to a new company, even if it is a little scary... if you have any leverage at all, the current company will try to keep you.