I think this is considered bad advice. Nearly every HR article about this subject states that doing this will on average results in being let go after a year.
If you value staying at your existing job more than a raise then you are right, you shouldn't do this. But if you are okay with walking and talking about offer them this can be beneficial. I have even heard managers state that certain raises are not possible without another offer that they can bring to HR/whoever to prove that they need to pay someone more to retain them. Doesn't mean the manager necessarily wants to replace you, but it could be a sign of oddities within a large Corp.
I agree, but for a different reason. Not only would this behaviour annoy your employer, but it shows that your employer doesn't care to pay you market rates or what you're worth.
So why do you keep working for people who don't pay you what you're worth?
Accept the outside offer and move on.
As an employer, it's hard to know how someone's market value fluctuates. The only way to really know is for the employee to do a job search.
There are several ways to figure out the market rate for a position:
1. Post an opening and see what the salary expectations are of applicants
2. Talk to recruiters and see what similar positions are paying
3. Use your network of people at other companies to find out what similar positions pay
4. Look at salary data for your industry and region
I agree you probably won't get a precise answer from any of the above, but it should at least give you an idea which end of the spectrum you fall.
You can also talk to the employee and try to get an idea whether they're happy with the position and compensation. My personal preference is for this to happen multiple times per year, instead of just at an annual review.
Worthiness may be a mater of debate and thus the related pay - a subject for negotiation. If the employers recognize your worth (or just yield under your worth self assertion) and are willing to pay you accordingly, then you may discount malice from their part. If that happens, then there's nothing wrong with continuing working together. Count that former under-appreciation as a little misunderstanding that was addressed in a timely manner. You may choose to stay with them simply because it may be better to work with people that you already have a track record of good report than taking your chance with new/unknown business party. Other than that, elnygren offered a solution where you get both the benefit comparable with job switching without the bad consequence of appearing disloyal.