Since there are no responses, I'll take a stab at this: Yes, you can reduce an employee's pay for poor performance, just like you can increase an employee's pay for good performance. Piece work or commissions do this kind of automatically. I'll leave it up to you whether you should do it or not.
You can reduce the pay - suggest you have goals clearly communicated to the employee by which he/she can aim to improve performance by a certain time and thus get pay increases.
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Chari