I know I didn't answer your question directly,

as I haven't experienced this myself. In my mind, one has to be severely under-performed for such kind of thing to happen. In which case, he/she should feel fortunated that they have a job. I don't think they have any ground for re-negotiation or sue. Quitting is not a good choice either, unless they can sell themselves to another position for higher pay.

My co-worker did not tell anyone about his misfortune, people found out because his title change on the company's website. It's not something he can hide easily. That poor guy, after people found out, no one sympothized him, since he was too much over-paid.