When a demotion results in an employee’s movement to a job having a lower pay range, current best practice favors setting pay based on both the nature of the demotion and its relationship to performance. Voluntary demotions are carried out with the consent of—or even at the initiation of—the employee. Employers or employees may initiate performance-related demotion, but demotions used to facilitate a transfer or more favorable working hours are generally not considered performance-related. The chart below gives the recommended pay impact for the four types of demotion.

Some organizations do not decrease pay for demotions in any circumstances. Employers who allow the demoted employee’s pay to be set by the pay in a previous job should be careful to treat it as an exception. If not treated as an exception, these legacy situations can cause internal equity problems between the demoted employee and his/her new peer group. Employers sometimes compound their difficulties by forgetting the circumstances of the demotion and dwelling only on the pay differences, or by overpaying the new peer group in an attempt to remedy the internal equity problem.