A demotion is a reduction in rank, often accompanied with a lower pay status. There are many situations in which a demotion might occur; any kind of ranked system like a police department or military, for example, uses demotions as a disciplinary tool, while some employees are at risk of demotion due to reorganization or substandard work. Most people view a demotion as a punishment, since it implies that the individual was incapable of performing at a higher rank, and the opposite of a demotion is a promotion, an elevation in rank or status.

Most commonly, a demotion occurs when someone fails to perform as expected. This failure may not be severe enough to be punished with employment termination, but it does require a rethinking of the employee's job responsibilities and functions. When someone is demoted, he or she may be demoted within a department or outside it, depending on company needs. Being demoted in a department can be awkward, as the employee's coworkers will be well aware of his or her fall from grace.

In other cases, the victim of a demotion is purely innocent. Some companies are forced to demote employees when they downsize or reorganize. This is common with mergers, when staff suddenly become redundant due to the nature of the merger. In this case, the company may want to retain the employee because he or she is valuable, but the company must move the employee to another department. In most cases, the company tries to keep the move temporary, and it will often endeavor to keep the rate of pay the same as well.

Employees who are at risk of demotion due to poor performance usually have ample warning. Poor performance may be indicated in employment reviews, for example, with employers clearly enumerating the employee's faults and the ways in which he or she may improve. Numerous reprimands and warnings are issued, and employees are often reminded that enforcement of workplace policy may include demotion, in cases where it is warranted.

Sometimes, an employee may work his or her way back up after a demotion. This is more common when a employee demonstrates an ability and desire to improve, especially if he or she is willing to work on major issues. In other instances, the demotion is considered permanent, and it may in some cases be used to force an employee who cannot be legally fired into quitting. This tactic is common with lackluster employees who do not violate workplace policy outright, but they rather skirt the line of mediocrity, weighing down the productivity of their employers.