If it costs $30,000 to hire someone and the the employee is making $100,000 a year, it will be quite some time before a 3% annual raise costs the company anything out of pocket.

I would add that if you are in the knowledge industry, the benefits of keeping knowledge from walking out the door can be significant. The benefits of good will from employees and former employees can be especially beneficial when it comes to acquiring staff.

Leadership means going to bat for one's subordinates. It is a quality which distinguishes good management from mediocre.

If you're hired a fresh developer, after 3 years of experience he is worth much more than a fresh developer - that's the market price. He'd be able to get that price elsewhere, and you'd have to pay that raised price to get a qualified replacement instead of another newbie.

It's called "rewarding loyalty". Companies used to do that, then the '80s happened.