Sears Auto Center Scandal

-Determine all the facts
-symptoms of problems

SEARS, ROEBUCK, AND CO.: THE AUTO CENTER SCANDAL
Sears, Roebuck, and Co. began in the late 1800s as a mail-order company that sold
farm supplies and other consumer items. Its first retail store opened in the mid-1920s.
Responding to changes in American society, such as the move from farms to factories
and the presence of the automobile in many homes, hundreds of retail stores
opened over the years. The company expanded rapidly, and eventually it diversified
to include other businesses: insurance (Allstate Insurance), real estate (Coldwell
Banker), securities (Dean Witter Reynolds), and credit cards (Discover). Each of
these other businesses became its own division, in addition to the merchandising
group which included retail stores, appliances, and auto service centers. By the early
1990s, the company was reporting revenues and earnings in the billions of dollars.40
Despite its long history of high earnings and its penetration into the U.S. market,
Sears' retail business began to experience serious financial difficulties in the 1980s.
Discount retailers such as Wal-Mart were pulling ahead in market share, leaving
Sears lagging. Sears responded by adding non-Sears name brands and an "everyday
low price" policy. But despite these efforts, in 1990 Sears reported a 40 percent
decline in earnings, with the merchandising group dropping a whopping 60 percent!
Cost-cutting measures were planned, including the elimination of jobs and a focus on
profits at every level.41
In 1991, Sears unveiled a productivity incentive plan to increase profits in its
auto centers nationwide. Auto mechanics had traditionally been paid an hourly wage
and were expected to meet production quotas. In 1991, the compensation plan was
changed to include a commission component. Mechanics were paid a base salary plus
a fixed dollar amount for meeting hourly production quotas. Auto service advisors
186 PART III ETHICS AND THE MANAGER
(the counter people who take orders, consult with mechanics, and advise customers)
had traditionally been paid a salary. In order to increase sales, however, commissions
and product-specific sales quotas were introduced for them as well. For example, a
service advisor might be given the goal of selling a certain number of front-end alignments
or brake repairs during each shift.42
In June 1992, the California Department of Consumer Affairs accused Sears,
Roebuck, and Co. of violating the state's Auto Repair Act and sought to revoke the
licenses of all Sears auto centers in California. The allegation resulted from an
increasing number of consumer complaints and an undercover investigation of brake
repairs. Other states quickly followed suit. Essentially, the charges alleged that Sears
Auto Centers had been systematically misleading customers and charging them for
unnecessary repairs. The California investigation attributed the problems to Sears
Auto Centers' compensation system.43
In response to the charges, Sears CEO and Chairman Edward A. Brennan
called a news conference to deny that any fraud had occurred, and he defended
Sears' focus on preventive maintenance for older cars. He admitted to isolated
errors, accepted personal responsibility for creating an environment where "mistakes"
had occurred, and outlined the actions the company planned to take to
resolve the issue. These included:
_ Eliminating the incentive compensation program for service advisors
_ Substituting commissions based on customer satisfaction
_ Eliminating sales quotas for specific parts and repairs
_ Substituting sales volume quotas
According to Brennan, "We have to have some way to measure performance."44
Sears also introduced "shopping audits" of its auto centers in which employees
would pose as customers, and Brennan published a letter of explanation to the company's
customers in The Wall Street Journal and USA Today on June 25, 1992.
Note that the compensation system for mechanics, based on number of tasks performed
and parts replaced, was maintained. In the summer of 1992, Chuck Fabbri, a
Sears mechanic from California, sent a letter about Sears' wage policy for mechanics
to U.S. Senator Richard Bryan. Fabbri said:
It is my understanding that Sears is attempting to convince your committee
that all inspections in their auto centers are now performed by
employees who are paid hourly and not on commission. This is not the
case. The truth is that the majority of employees performing inspections
are still on commission....
The Service Advisors ... sell the repair work to the customer.... The
repairs that they sell are not only based on their inspections, but to a
larger degree based on the recommendations of mechanics who are on
commission....
On January 1, 1991, the mechanics, installers and tire changers had
their hourly wages cut to what Sears termed a fixed dollar amount, or
FDA per hour which varied depending on the classification. At present
CHAPTER 7 MANAGING FOR ETHICAL CONDUCT 187
the mechanic's FDA amount is $3.25 which, based on current Sears minimum
production quotas, is 17% of my earnings. What this means is that
for every hour of work, as defined by Sears, that I complete, I receive
$3.25 plus my hourly base pay. If I do two hours worth of work in one
hour I receive an additional $3.25 therefore increasing my earnings.
Sears calls this type of compensation incentive pay or piecework;
however, a rose by any other name is still a rose. This is commission plain
and simple. The faster I get the work done the more money I make, and
as intended, Sears' profits increase. It is therefore obvious to increase his
earnings, a mechanic might cut corners on, or eliminate altogether, procedures
required to complete the repair correction. In addition to this,
since the mechanic often inspects or performs the diagnosis, he has the
ideal opportunity to oversell or recommend more repair work than is
needed. This would be especially tempting if it has been a slow day or
week. In part greed may create this less than ethical situation, but high
pressure to meet quotas by Sears' management also presents a significant
contribution. I have recently been threatened with termination if my production
didn't at least equal Sears' minimum quotas. I might add that
prior to this new wage policy, management had only positive response to
my production, and my record proves this....
There is no doubt in my mind that before their auto center employees
were put on commission Sears enjoyed the trust of its customers.
Today presents a different story. The solution is obvious not only for
Sears, but for the industry.45
Sears agreed to a multimillion-dollar settlement with the state of California and the
41 other states that had filed similar charges. The company was placed on three-year
probation in California. It also settled a number of consumer class-action suits. In
July 1992, the U.S. Congress held hearings on fraud in the auto repair industry.
The long-term impact of the scandal is unclear. Sears has now sold off its securities
firm, the Discover card, most of its real estate and mortgage business, and 20
percent of Allstate Insurance. At the end of 1992, auto center sales lagged behind
prior levels.46 Also in 1992, Business Week reported that employees in other areas of
Sears' business, such as insurance and appliance sales, were feeling the same kinds
of pressures from sales quotas.47