St Bede’s Hospital is a medium-sized, 400-bed hospital in a regional Australian city. It was established
in 1908 by the Sisters of Mercy, an order of Catholic sisters. The facility has grown gradually over the
years and is now the third largest hospital in the city. It is entirely non-union and has never experienced
an employee layoff since its inception.

Sister Mary Josephine has been the Chief Executive Officer on the hospital for 11 years. Eight years
ago, she hired Ms Sharon Osgood as Director of Personnel. Osgood has an M.A. in Human Resource
Management and has been instrumental in formalising the institution’s human resources’ policies and
Hospital occupancy rates had run between 76 and 82 percent from 1970 to 1982. However, since then,
occupancy had gradually fallen to 57 percent. Such declines have not been unusual for this industry
during this time period as a result of changing reimbursement policies, emphasis on outpatient services,
and increasing competition. However, the declining occupancy rate has affected this hospital’s revenues
to such an extent that it ran a deficit for the first time last year. The only response to these changes thus
far has been a tightening of requirements for equipment or supply purchases.
At the most recent quarterly meeting of the Board of Governors, Sister Mary Josephine presented the
rather bleak financial picture. The projected deficit for the coming year was $3,865,000 unless some
additional revenue sources were identified or some additional savings were found. The Board’s
recommendation, based on the immediate crisis and need to generate short-term savings, was that
employee layoffs were the only realistic alternative. They recommended that Sister Mary Josephine
consider laying off up to 10 percent of the hospital’s employees with an emphasis on those in the
“nonessential” areas.
Sister Mary Josephine responded that the hospital’s employees had never been laid off in the history of
the institution. Moreover, she viewed the employees as part of the “family” and would have great
difficulty in implementing such a layoff. Nevertheless, since she had no realistic short-term alternative
for closing the “revenue gap”, she reluctantly agreed to implement a layoff policy which would be as
fair as possible to all employees, with a guarantee of reemployment for those laid off, and to find
additional revenue sources so that layoffs would be unnecessary in the future.
Sister Mary Josephine called Sharon Osgood into her office the next morning, shared her concerns, and
asked her to prepare both a short-term plan to save $3 million over the next year through employee
layoffs as well as a long-term plan to avoid layoffs in the future. Her concerns were that the layoffs
themselves might be costly in terms of lost investment in some of the laid-off employees, lost
efficiency, potential lawsuits, and lower morale. She was concerned that the criteria for the layoffs not
only be equitable, but also appear to be equitable to the employees. She also wanted to make sure that
those being laid off received “adequate” notice so they could make alternative plans or so that the
hospital could assist them with finding alternative employment. Since the hospital had no previous
experience with employee layoffs, and no union contract constraints, her feeling was that both seniority
and job performance should be considered in determining who would be laid off.
Sharon knew the hospital’s performance appraisal system was inadequate, and needed to be revamped.
While this task was high on her “to do” list, she also knew she had to move ahead with her
recommendations on layoffs immediately. The present performance appraisal system uses a traditional
checklist rating scale with a summary rating. Since there is no forced distribution, the average ratings of
employees in different departments vary widely.