Ok, Gnu so would you punish said child for crying when taken to see Santa Claus or frightened by loud fireworks?
The cat is reacting out of fear, not just being a douchebag. By picking him up I'm trying to calm him, not reward him. In fact, this particular cat does not usually enjoy being picked up (he prefers it to be his idea to sit with anyone) but has reacted very positively when I've picked him up in this situation.

Also, I have several places for the cats to retreat up high; these have always been there - not just since the dog came in.