NOTE: There is a lot of downvotes to this answer because apparently many are of the opinion that such "ill-advised" questions that attempt to "suppress" the legitimate rights of an employee shouldn't be encouraged. And thus answers, like mine, that don't question the motives of the questioner shouldn't be encouraged. To put it very plainly, I am answering this question purely from a managerial perspective. Anyone in management will recognize that OP's question is common, fair and legitimate, which can be basically summed up as:
An employee wants a promotion or raise or incentive. Management cannot
immediately give it (for whatever reasons - and often there are many
legitimate reasons). Management needs to ensure that rejection of such
requests doesn't affect the morale of the employee.
OP's question is the same. Part of the misunderstanding against my answer also stems from an ignorance too - asking for a raise or incentive (like everything else at work) is a negotiation too. If you don't accept that, and approach it with a sense of entitlement or black and white thinking of "my way or the highway", you will just be setting yourself up for a lot of disappointment. Second, it is also a fact that some employees measure their productivity with a different yardstick, then how management does it, and thus have wrong expectations (this is however more of management's fault) - OP highlights this when she says the employee is "good but not excellent", meaning that she has a good potential for improvement. The prospect of getting a raise or incentive if you meet well defined goals in a time bound manner is an excellent way to motivate and ensure a worker improves. (In that, from a management perspective, I'd say OP is quite right to consider delaying the raise. Also, some of you need to know that sometimes such requests are denied temporarily to see how you react and evaluate your future potential - again, it may not seem fair, but this is the way the real world works).
Lastly, please also note that the success of the process I have described depends on the relationship between the boss and the employee and how the boss delivers this message. Due to the lack of non-verbal cues in the medium we are communicating through, many are reading what is written in an impersonal and cynical tone, and thus *feel cynical about my answer (there's obviously not much I can do about that).
This is how I would roughly communicate it to her (after 2 - 7 days):
Appreciate and acknowledge her request (it is important that people know their requests have been thoughtfully considered)
"I appreciate that you were upfront and direct in bringing attention to the fact that you are due for a raise. I do understand that apart from job satisfaction, the money that you earn is also a strong motivator in any profession. And it is obviously my role, and in the company's best interest, to keep you happy and motivated."
Seek self-affirmation from her (Sometimes people do need a reminder that job satisfaction is also an important factor to consider; for the cynical this may seem like emotional blackmail, but tapping someones passion, and reminding them of it, is a great motivational method)
"So I'd like some feedback from you - are you happy with your job and the work you do here?"
(Listen genuinely to her answer - her most obvious response will be just "Yes" or something equally short, in which case you can proceed further. Or patiently listen if she adds more to that and then proceed.)
If she answered positively but didn't clarify with details, seek it out - "What part of your job, and working here, gives you the most personal satisfaction?"
(Listen patiently. If she is not able to express herself well, add more details to what she says and ask her to re-affirm it - "do you mean you enjoy it because you can complete that faster and thus feel more productive?". Both of you have to be positive and genuine about the points being raised. If the employee can't come up with anything or doesn't seem enthused about it, that's a red flag that you need to keep an eye for as a boss - it's hard to motivate someone without some passion or interest in what they do.)
"Thanks you for sharing that. As a boss, it makes me happy to see your passion as that means I too am doing part of my job well." :)
Share your concerns (most employees are ignorant on why a raise is not so easily forthcoming)
"Ok, let me be direct and honest with you too - as a boss I have to think hard before giving a raise to anyone, not only keeping the bottom-line of the company in mind, but also considering the morale of others in giving you alone a raise."
(Don't wait for any response or encourage any interruptions and proceed further).
Seek introspection (make the employee realize that any incentive is linked to productivity and performance)
"That said, the good news is that I am quite receptive to giving you a raise. However, I have some concerns regarding your work that I would like you to address first.
"I am sure you know what these are, right? I am sure you have honestly self-introspected on your strength and weakness and your performance over the past xx years before approaching me. Can you share with me the areas where you think you have lacked or not performed adequately?
(Here, it is important to make her introspect and make her spell out her weak points. This maybe uncomfortable for some people, in which case you may have to patiently and reassuringly coax it out of her. Some inexperienced individuals will be genuinely ignorant. In either case, after she speaks about it or if she says she really thinks she has given her best performance, clarify and add to what she has said and share further details on where her work can improve by giving her specific examples. Convey it in a manner that it doesn't sound like a dressing down / criticism but rather an open discussion. It is a red flag if they genuinely can't point out areas of improvements or don't believe or accept your suggestion about their job performance - entitled employees are a lot harder to train than self-aware ones).
Convey your honest action plans
"This has been a very constructive and productive discussion for me regarding your work and future here. Now, as I said before, I am quite open and receptive to the idea of giving you a raise. And I am genuine about it. But I cannot give it to you immediately for the exact reasons we discussed.
I'd like you to first address the shortcomings that you shared with me and the ones I highlighted.
This does not mean that I am asking you tick all the check-boxes to 100% perfection before you can expect a raise. But I'd like to see genuine commitment and progress from you in say, just 6 months."
"I understand waiting for a few more months may feel like a slight disappointment, but again, I am being honest when I say I am not leading you. I like your work so far, and I have confidence that you will be ready for more responsibilities with a little more effort. And that you will get a raise within 6 months if you show us actionable results to the mini-goals we discussed and set for you."
Obviously, change the tone and language as suited to what is appropriate in your culture.
(There is nothing manipulative here when done with good intentions - it is just basic common courtesy of listening, empathising, and sharing genuine concerns. As OP expressed, sometimes, some employees do over estimate their proficiency and worth, and some honest self-introspection and feedback can correct this perception and provide scope for improvement. However, this process will not work successfully if the boss is not genuinely interested in listening to the employee or in actually supporting her. This process is also quite helpful to gauge the intentions and state of mind of an employee - it may turn out that the person isn't committed and / or interested only in money, in which case the choice becomes clearer, one way or the other.)