Reference no: EM132259955

Case: Sears Auto Centers Listen to the Audio On June 11, 1992, the CEO of Sears, Roebuck and Company, Edward A. Brennan, learned that the California Department of Consumer Affairs (DCA) was seeking to shut down the 72 Sears Auto Centers in that state.48 A yearlong undercover investigation by the DCA had found numerous instances in which Sears employees had performed unnecessary repairs and services. Officials in New Jersey quickly announced similar charges against six local Sears Auto Centers, and several other states, including Florida, Illinois, and New York, opened their own probes into possible consumer fraud. In the wake of this adverse publicity, revenues from the auto centers fell 15 percent, and the public’s trust in Sears was badly shaken. The Investigation Sears Auto Centers, which were generally connected with a Sears department store, concentrated on basic “undercar” services involving tires, brakes, mufflers, shock absorbers, and steering mechanisms. Investigators from the DCA’s Bureau of Automotive Repair purchased old vehicles in need of minor repairs and disassembled the brakes and suspension systems. After examining and photographing each part, the investigators towed the automobiles to a shop where they requested a brake inspection. In 34 of 38 instances, Sears employees recommended unnecessary repairs and services, and some auto centers charged for parts that were not installed or work that was not performed. The average overcharge was $235, but in two cases the amount overcharged exceeded $500. Brennan had been notified in December 1991 of early results from the investigation, and Sears executives negotiated for six months with California officials. The company objected to the state’s position that no part should be replaced unless it had failed and claimed that many repairs were legitimate preventive maintenance. For example, there is disagreement in the industry on whether brake calipers should be reconditioned whenever the pads are replaced. In addition, some of the automobiles used in the investigation showed signs of damage from worn parts that had already been replaced, thus leading mechanics to believe that repairs were needed. The DCA moved to revoke the licenses of all Sears Auto Centers in the state after the negotiations broke down over details of the financial settlement. A Systemic Problem? California officials charged that the problems at the Sears Auto Centers were not confined to a few isolated events but constituted systemic consumer fraud. According to a deputy attorney general, “There was a deliberate decision by Sears management to set up a structure that made it totally inevitable that the consumer would be oversold.” Until 1991, service advisers, who make recommendations to customers, were paid a flat salary, but subsequently their compensation included a commission incentive. The service advisers were also required to meet quotas for a certain number of parts and services in a fixed period of time. The new incentive system also affected the mechanics who perform the work on the customers’ automobiles. Instead of an hourly wage that was paid regardless of how much work was done, mechanics now received a lower hourly wage that was supplemented by an amount based on the time required to install a part or perform a service. The company determined how long it should take to complete each job, and a mechanic could earn the former hourly wage only by finishing the work in the time specified. Under this system, slow workers would earn less than before, but a mechanic could also earn more by working faster than expected. Commissions and quotas are commonly used in competitive sales environments to motivate and monitor employees. However, critics of Sears charge that there were not enough safeguards to protect the public. One former auto center manager in Sacramento complained that quotas were not based on realistic activity and were constantly escalating. He said that “sales goals had turned into conditions of employment” and that managers were “so busy with charts and graphs” that they could not properly supervise employees. A mechanic in San Bruno, California, alleged that he was fired for not doing 16 oil changes a day and that his manager urged him to save his job by filling the oil in each car only halfway. This illustrated, he said, the “pressure, pressure, pressure to get the dollar.” By requiring that "every employee, from the sales floor to the chairman's suite focus on profits," what message was CEO Brennan sending about the priority of ethical considerations compared to profits? Explain whether you believe that the lack of guidelines to protect Sears' customers was an oversight or a deliberate omission. Review and comment on at least two classmates' responses, including one that opposes your own.