Johnny Damon, former left fielder for the New York Yankees, asked for 2 years for $20 million to return to the Yankees when he became a free agent (or, according to some reports, he asked for 3 years and $30 million). The Yankees countered with 2 years and $14 million, and once rebuffed, lowered that offer even more significantly.
Once the Yankees’ offers were rebuffed, the Yankees made trades to replace Damon with talent that was younger, but not necessarily less expensive. Whether the Yankees would have made the moves regardless of Damon’s negotiations is unknown; what is known is that Damon may have misjudged the market for his services.
For those of us outside of baseball, the same approach may cause disastrous results. If you want to stay with your company, despite a pay cut, refusing to settle for a fair amount may result in the offer being pulled completely. Certainly, there are other ways to approach the situation.
Andy Pettitte took a more effective approach that rewarded him handsomely. He waited until before Spring Training 2009 before signing an incentive-laden deal for the 2009 season. This deal ended up paying almost exactly what he made the year before. After 2009, he was rewarded with a guaranteed contract for 2010 for nearly the same amount he made with the incentive-based contract.
A good approach for situations where you may be facing a pay cut like Damon is to take the approach Pettitte did – look at ways you can earn incentives if your base pay has been cut (through sales goals, additional contributions to the company, etc). Looking outside of your organization may result in seeing a market that is not there, or alienate your employer alltogether.