In this case, the company was being held hostage out of fear of losing employees. Allowing an employee to hold a business hostage for whatever reason is unhealthy and should not be allowed. An employee should be expected to perform, period. If there are other pending issues with an employee, those should be dealt with separately. Retaining employees is an important element of success.
Employee retention is a function of a number of variables.
Perhaps the most important variable in retaining employees is the quality of an employee's direct supervision. A manager has a dramatic impact on employee satisfaction. It is important to keep a close eye on managers and supervisors in terms of the level of employee satsfaction. But it is rare when a business can sustain such a position. And most businesses do not enjoy the luxury of being able to charge premium prices.