I once had a friend who had been married and divorced four times. She started dating a man who had been married and divorced five times. Of course, they got married after a few months of dating. So, would you like to guess if they are still married? Of course not! They divorced within two years.
I tell you this because you need to be a little bit more like them, and they need to be a little bit more like you. Why do you want to salvage the relationship with a so-so performer? Because you are nice and you like the guy, that's why. The guy is attempting to take advantage of you. As my oft-marrying friend would say: "Honey, cut your losses and toss this guy."
I'm actually not going to say you should fire him immediately. If he's getting his current job done then there's no real need to terminate his employment. You just need to make it clear that:
1. There will be no increases in salary without increases in responsibility.
2. In order to be challenged, he will need to accept new responsibilities.
3. New responsibilities will not equal an immediate increase in salary. Rather, that will be determined on a performance basis.
It seems to me that all he really wants is more money. Me too. Lots more money. But, businesses aren't just vast supplies of cash. Therefore, he's going to need to do the work needed to justify an increase. If he's not willing to do that, you can give him the choice of staying at his current job (and maintaining his current performance) or leaving the company. It's OK for a manager to say: "I think you'd probably be happier in another job." It's also OK for you to set performance standards that are above his so-so record and hold him to it. If he can't meet the new standards, you can start a process to terminate him. (Please consult with your HR department before you start any such plan. We get a little upset when people leave us out of these loops.)
But, don't think that just because you hired someone, you must salvage the relationship at all costs. Leave that for your marriage.
Suzanne Lucas has nine years of Human Resources experience, most of which has been in a Fortune 500-company setting. She holds a Professional in Human Resources Certificate from the Society for Human Resource Management. She blogs at Evil HR Lady.