there are cases of demotion happen in many organization but those kind of demotion was done because of wrong promotion
for e.g a sales executive was promoted to sales manager position just because he achieved 200% of his sales target
the promotion was just based on targets achieved by this sales exec what was ignored was that sales manager jobs requires many competencies right from leadership, team mentoring, strategy planning & training, coaching and activities as per the industry demands
such kind of demotions are taken sportingly because the employee knows he and she needs to spend more time to work at that level
now coming to your Q
If demotion is done for the sake of some punishment then one needs to find out what was the cause of such demotion if the employee has violated the terms and condition or code of ethics of the company policy then rather than having such person in the system it better to part away from him / her.
Punishment to a defaulter is nothing but one of the means to improve the behaviour of employee. "Demotion" is one such punishment.
However, before awarding such punishment, make sure that the culpability of the employee is established. What efforts management has taken to improve the performance of employee? What efforts his reporting manager has taken to improve the performance of the employee?
You could have given little more details of the case like designation of employee, working since when, what was the under-performance etc. What counselling did you do to improve his performance, how many warning letters did you give to improve his performance etc.
Any demotion comes with reduction with salary. If you demote the employee then make sure that you do not reduce his basic salary. Keep basic salary as it is. Secondly, demote employee by issuing proper letter to him. If you want to see draft of such letter, you can click here. You need to make few amendments in this draft.
On the flip side, motivation level of the demoted employee goes down. He may become butt of ridicule. Possibly he may quit company on his own.
If demotion is enlisted as one punishment, then after conducting enquiry and after the workman was found to be guilty of the misconduct, depending on the nature of misconduct, demotion can be awarded as a punishment
Generally basic pay is not altered but there is no rule which says that basic should not be altered in cases of demotion.
When demotion is used as a punishment
1.In case of charges of fradulent activities,
2.Low levels of production
3.Frequent commission of misconducts
So, and also to the company, it may be one of the internal employee recruitment or adjustment strategy, but doesn't give good opinion in the minds of your employees, and reputation may be at stake when employee avoid your workplace.....