It doesn't have to be miserable at all. If your profits doubled this year and some employees are the reason for such an increase, then you would be a jerk to play hardball with said employees about salary increases. Now if your company took a negative hit and an employee that doesn't really create a decent amount of value asks for a raise, then he's a jerk for not having the company's best interest in mind (and if his performance is not good enough you should be thinking about letting him go anyways).
Hell the whole point of working is to advance in the world. You as an employer should be making more money with each year that passes in comparison to past years. Employees as people with goals and dreams should be making more money as time passes also. If you're making more money thanks to your employees, your employees should be making more money also. Not just because they're entitled to it, but because there's always the possibility that by letting them go could end up costing you more money than a raise of a couple of thousand dollars.
A great team is something you should strive to maintain and cherish, but is also something that becomes exponentially more expensive as years pass. If they're working like a well oiled machine and creating insane amounts of value for your company, just pay up. If by comparison they're average (or worse) and your company isn't growing one bit because of lack of innovation or performance on their part, then you're correct in playing hardball... while you look for replacements that can actually benefit your company.