I think your best bet is to part ways with the developer on good terms. The problem you don't seem to see is your company's culture. There have been several goo

I think your best bet is to part ways with the developer on good terms. The problem you don't seem to see is your company's culture. There have been several good suggestions in this thread (20% time, flexible hours, mentoring, etc), but you haven't been receptive to any of them. You want your developer to stay there, but only on your terms. Your developer is saying that they need an interesting challenge, but you don't have any to give, and you've taken away a significant perk for the good of "the company." That's a big problem, and unless I miss my guess you're going to start losing other developers as well. A company is made up of people, and if your people aren't happy then they are going to go elsewhere.