What does "slowed down his work pace" mean? Is he no longer completing his assigned work on time?

his attitude towards the rest of team has improved from his previous light grumpiness, and he's probably still the best and most productive engineer in the team - It sounds like you don't have an actual problem to solve. "You're working at a level commensurate with your salary and you're doing great work, but we'd like you to give us even more."... is not an approach I would recommend.

"but to me this behavior is kind of immature and a bit unprofessional" — why? If he's still the best and most productive engineer on the team, it sounds like he was previously massively overworked and on a path to burnout. If he's not being rewarded for that, I'm not sure who's benefiting from it in the long run.

Would you rather he quit?

"but to me this behavior is kind of immature and a bit unprofessional." - It actually is illegal. You owe your best effort to the company paying you. A raise of x% resulting in loss of productivity is breach of contract. To anyone saying "oh, that is not how I see it" - READ. The contract details and laws are normally quite clear. You do owe your work and that better is best effort. I do not agree with it - but the law and contracts are what they are.

@TomTom A typical employment contract says: “ The Employee agrees that he will at all times faithfully, industriously, and to the best of his skill, ability, experience and talents, perform all of the duties required of his position.” This means you are required to perform your duties to the best of your ability and effort, not that you are required to perform 2x or 3x your duties. If the employee is still the most productive team member, it would be very hard to argue they are not performing their duties.

"How should I handle this situation?" - if I were the manager, I'd have a long private conversation. I'd indicate that I understood his disappointment, explain how the raises work, and urge caution with slowing down his productivity. And if his overall behavior became a real problem, I'd get rid of him. At the same time, I'd be preparing for his departure anyway.

@TomTom - is it your position that the OP has always done everything in his ability to ensure that management remunerates the employee as they expect? He is after all, a leader. He must lead. If not, the OP may actually have been the first to be acting illegally !

I assume this person is already the highest paid person on the team, since you say he's the most productive. How much more productive is he than the second highest person on the team? And what is their ratio of the productivity? If he's pumping out 50 or 75% more productivity for only 20% more salary, well, can you blame him? Run the numbers on that and see how it plays out.

Have you tried a massive whip? You know, to make your subordinate obey his betters? That is what you're asking, right?

Sounds like you only give average consideration towards a well above average employee. Sometimes exceptions to these rules can be made, if he is hard to replace perhaps you should stress his importance to management.

@enhzflep This is an ignorant position. The employer is under no obligation to ensure the payment is fair - the employee is free to walk away and get employmnt elsewhere. But he DID enter into this contract without duress. You basically tell me people are stupid because they sign contracts they do not want.

@TomTom - I'm not talking about the employer. I'm talking about the employee that posted the question. If that's what you think I'm saying, that's on you. The poster and the person in question are each employees that have signed a contract. One person's poor behaviour doesn't excuse that of others. My point is, that the legal route may see the OP smacked first or at the very least, also.

Send me his resume please, I will solve this for you.

"he was very disappointed and this raise doesn't reflect his hard work and the stress he's under"...do you agree with him on this? Lot of answers are assuming that his statement is correct and his raise is indeed not measure of his work. However, that is HIS assessment. Question is do you (from an organisation perspective), agree with it? If yes, then all the answers are correct. If not, then you would have to handle it differently.

@OP On the contrary, his behaviour is very mature. Why would you ever work without compensation? Because this is basically what you suggest.

@TomTom Words like "the best of your ability and effort" are meaningless from the legal point of view, even if they are written in the contract. Care to cite a court case where someone got sued over this?

You might disagree with him on whether the amount of work he provides actually corresponds to the salary (which you do not even seem to). But not wanting to be exploited/work without compensation is not unprofessional or immature. This mentality should be removed from so many managers out there.

@TomTom would be very hard to explain to a tribunal how you sacked the most productive member of a team for slacking off...

No, because i would not write "slacking off" into the termination. In the US, i.e., you do not ahve to give ANY reason in at will employment states.

@TomTom it's very hard to call it "slacking off" if someone is still working normal hours and delivering a good amount of work. They might just not be "overexerting" now, which is actually a good thing for the employer as it will prevent them from burning out.

Unfortunately this is how negotiating ultimately works - welcome to the real world. All negotiations are only possible because of the threat of not doing something. Now he can say, "well if you want more work, give me more money" (and in return they can say, "no, you're fired" but it sounds like they don't want that). If they could simply not negotiate and get free work anyway, why should they?