A Managers Ethical Dilemma

Auto Center Scandal

Introduction

In this paper I will review the Sears, Roebuck and Co. auto center productivity incentive plan program from 1991 and the investigation into allegations of violations of the California Auto Repair Act. The investigation took place in June of 1992 where the State of California sought to revoke licenses from Sears & Roebuck auto centers as part of an undercover examination which began with consumer complaints emanating from customers of Sears being charged for unnecessary repairs. The heart of this case revolves around corporate America’s attempts to improve productivity of employees and the delicate balancing act of simultaneously protecting their customers.

Background

In the early 1990’s Sear’s and Roebuck decided they would change the way it compensated its auto center employees in an effort to boost revenue (Trevino, 2011). Sears CEO at the time, Edward A. Brennan, and his management team concluded a compensation plan based on commission and salary would incentivize the employees of the auto centers to increase company revenue from the auto repair unit. Shortly after the implementation of the new compensation scheme, customers of Sears began filing complaints indicating they were being charged for unnecessary repairs to their vehicles. It was determined by the State of California through an undercover investigation that the compensation and quota plan instituted by Sears, induced company employees to mislead customers. This was in direct violation of the state Auto Repair Act. In response to the allegations, the company denied that fraud had occurred while admitting that isolated errors may have taken place (Trevino, 2011). The CEO further indicated that the company would modify the compensation plan and he outlined details that would remedy the issues at hand.

Ethical Issues

“We have to have some way to measure performance”, according to CEO Brennan (Trevino, 2011). This is the rally cry of virtually any corporate leader in a capitalistic system. Almost all entities attempt to motivate their employees to do more through their compensation. This could be said about the recent housing bubble scandal the country is muddling through today. Bankers and mortgage processors were motivated to pump mortgages because their compensation motivated them to that end. In the case of Sears, Brennan and his team were under pressure by the shareholders to increase revenue and profit and the management team concocted a scheme that would generate results. Is this process any different than an insurance agent getting paid a commission to recommend an insurance product, or an appliance salesperson, getting paid a higher commission to sell one washing machine over another? The answer to this rhetorical question is no. This is what makes the world go around in

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