Mounika,
Reduction in salary is a punishment. Before awarding any punishment, domestic enquiry must be conducted. If not enquiry, at least show cause notice has to be given. Your company has given short shrift to these principles of natural justice and resorted to autocratic behaviour of instant justice. The incident shows that after 71-years of independence also, essence of democracy has not percolated down to the ordinary citizens of India.
Reduction of the salary is the last step. Before that proper administrative procedure has to be followed.
Employees work for money. Their salary is similar to cash flow of a business organisation. Based on this anticipated cash flow, they plan their investment, expenses and other development activities. If you reduce the salary all of a sudden without telling the employee why it is being done, it is as good as snatching food from someone's mouth.
You have reduced the salary but what fear psychosis that this incident will create in the mind of other employees, have you thought of it? The incident has power to make lose faith of the employees on the administration. This loss of faith could foster employee attrition.
Now to remedy the situation, you need to overhaul the "Policy on Performance Appraisal". At the beginning of the performance cycle, you must handover KRA sheet or goals that employee must meet. At the end of the performance cycle, employee should be given chance to prove whether he has met his goals. Rating should be based on the evidence available at both the sides, Manager as well as employee. Signature of the employee must be taken on the KRA sheet at the end of the performance review. This acknowledgement helps in communicating to the employee where he/she stands as far as performance is concerned. For poor performers, nothing wrong to place them under Performance Improvement Plan (PIP). But it has to be communicated through official letter.
In the policy, you need to define what is a poor performance. Additional definitions are what is average, good, very good and excellent performance. The policy must be communicated well in advance or right during the induction training.
When employee performs poorly, manager is expected to guide or coach the same employee. Has your manager done that? How much time he spends with the poor performer in order to elevate the performance?
Thanks,
Dinesh Divekar