Sears Auto Centers (A)


TABLE OF CONTENTS


Facts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5


Stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8


Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10


Alternative Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12


Prioritization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15


Recommended Action Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16


Epilogue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19


Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21


Appendix A: Excerpts from the 1972 Auto Repair Act; Business & Professions Codes 9884.7, 9884.8, 9884.10


Appendix B: California Department of Consumer Affairs, Bureau of Auto Repair Articles


Appendix C: Excerpts from Sears 1997 Annual Report, Message from the Chairman


Appendix D: Auto Repair Secrets


Appendix E: Business Week, Wall Street Journal 1992 Articles


 


TO: Edward Brennan


FROM: MBA Student


DATE: June 20, 1992


SUBJECT: Sears Auto Centers


______________________________________________________________________________________


This memo details my recommendations for your consideration of resolution to the charges against Sears Auto Centers by the Department of Commerce, Bureau of Auto Repair. I have also detailed for you my thought process, which allowed me to derive these recommendations. Items that have caused me reflection include:


* Should brake calipers be reconditioned at the time brake pads are replaced especially if the pads show significant wear as did the BAR vehicles? There is some industry support for caliper reconditioning to be completed as a matter of course when brake pads are replaced in order to bring the entire system up to original standard. The BAR does not support preventive maintenance. The BAR does not believe that any part should be repaired or replaced unless it failed. BAR regulations recognize accepted trade standards as appropriate conduct. Should caliper reconditioning be an accepted trade standard? BAR does not agree. Excerpts from the California 1972 Auto Repair Act are included in Appendix A.


* Did the new commission system introduced in 1991 for the mechanics, installers, and tire changers drive the employees to the wrong behavior? Were these employees driven to sell quotas or were they just responsible for ambitious goals? .


* Was the test the BAR used to investigate Sears Auto Center indeed fair or did it seek to entrap Sears? They used older cars and installed some new parts, but aged those parts to look as old as the remainder of the parts. Wasn’t it a normal course of behavior for the mechanics to suggest preventive maintenance for other parts they felt would fail in short order? BAR may not support preventive maintenance as an accepted trade standard but does that constitute overselling on the part of Sears?


* Did the BAR use Sears as a means to keep their doors open? Was it a coincidence the DACE Director announced the results of their 18 month undercover investigation within weeks after legislators announced the DACE was targeted for elimination due to a budget shortfall?


* Did the Department of Commerce in New Jersey use fair methods to investigate Sears or did it seek to entrap Sears? Since New Jersey did not authorize the repairs, the mechanics had to rely primarily on their diagnostic test equipment to identify the problem. The diagnostic equipment indicated they had an alternator that did not work which the average mechanic would most likely write up to replace. If Sears mechanics were authorized to do the repairs, wouldn’t they discover the wire had been disconnected and react appropriately?


 


BACKGROUND


Sears Corporation is a Fortune 500 firm who has been in business since 1886. They are infamous for their general catalog of mail order consumer goods and their retail stores. They also own Allstate insurance, Coldwell Baker, a real estate broker and developer, and Dean Witter, a stock brokerage firm. Sears is organized into four divisions which includes the Merchandising group, Allstate, Coldwell Banker, and Dean Witter.


Sears is known throughout the US for “Satisfaction Guaranteed” for its products and services. People trust Sears as it is a place that sells quality goods at reasonable prices. Sears has a reputation as an American institution. It is the place where America shops.


 


FACTS


Business Climate: Although Sears has been known for its everyday low pricing, times had changed and by the 1980′s Sears has found some of its’ locations were not necessarily where the customers liked to shop. Sears has suffered competition from Wal-Mart and Kmart as well as niche stores like The Gap. They have also been under attack from some of their shareholders for their declining performance. In 1990, Sears suffered a 40% drop in earnings. The Merchandise Group (which includes the 875 Auto Centers) dropped 60%.


Sears Auto Centers: The Sears Auto Centers focused on under car services, which consisted of brake repair, replacement of mufflers, shock absorbers, and struts. In 1991, they serviced 20 million vehicles and employed 34,000 people. The Auto Centers accounted for 9% or 2.8 billion of Sears 1991 retailing revenues. The Auto Centers, however, were the least profitable of the Merchandising Division’s three units contributing 5% of the divisions’ profits.


A substantial percentage of brake jobs performed by Sears were the basic one-axle brake job. This included replacing pads, turning the rotors or drums, repacking wheel bearings, and inspection of calipers and other brake parts.


On January 1, 1991 Sears cut the hourly wages of their mechanics, installers, and tire changers at their Auto Centers. The Service Advisors (3500 employees) went from a straight salary to a commission based system. They were required to meet certain product specific sales quotas such as a number of alignments per shift and dollar volume quotas based on the value of goods and services sold per hour. Sears management implemented a fixed dollar amount, or FDA per hour which varied depending on the classification. The net effect of this action was to place these employees on a commission plan whereby the more they contribute to the shop flat rate objective ( per hour), the more they could earn. The employee received .25 per every shop flat rate objective per hour he/she contributed.


The California Department of Consumer Affairs, Bureau of Automotive Repair: The California Department of Consumer Affairs (DACE) handled complaints regarding false or misleading advertising, fraud, and unfair business practices. In the time frame between 1989 and 1992, the Bureau of Automotive Repair (BAR) received 669 complaints against Sears. This represented a little over 1% of the 18,000 complaints received annually.


In response to the complaints, The Bureau of Automotive Repair of the DACE investigated Sears 38 times from December 1990 to December 1991. According to BAR, Sears employees recommended and performed unnecessary service or repairs in 34 of the instances and averaged an overcharge of 3 each. Their focus was on braking system repairs.


The BAR used vehicles needing minor brake repair. The brakes and suspension disassembled the brakes and suspension and inspected, marked and photographed the parts. Most of the cars used were high mileage, older models (1978-1986) with significant repair problems. BAR replaced the failed parts with new parts and then aged the new parts so that they appeared to be original to the vehicle. The calipers, shock absorbers, coil springs, idler arms, usually had less than 20 miles of use on them. The BAR considered recommendations based on preventive maintenance to be inappropriate.


Since the BAR found fraud, false advertising, etc in approximately 90% of the Sears Auto Centers they investigated they felt they had a responsibility to file charges against Sears. In December of 1991, the Department of Consumer Affairs approached Sears discreetly with its’ evidence and asked for a fair settlement. They considered a settlement of – million to be fair. Sears offered a 0,000 settlement and requested six months to investigate the charges.


 


Charges Against Sears: Frustrated due to a lack of a satisfactory resolution on June 11, 1992, The California Department of Consumer Affairs filed an Administrative Action to revoke the auto repair license of all 72 Sears auto centers in California for violations of the states’ Auto Repair Act. The complaint charged Sears with making false or misleading statements, fraud, false advertising, failure to state clearly parts and labor charges on invoices, and willful departure from accepted trade standards. The specific Business and Professions Codes Relating to the Accusations are: 9884.7(1)(a) False or misleading statements, 9884.7(1)(d) Fraud, 9884.8 Failure to clearly state parts and labor on invoice, 9884.10 Failure to return parts (Appendix A) and 3372.1 False advertising.


California Attorney General’s office and the District Attorney for the County of Contra Costa is considering a civil lawsuit, which can lead to fines and other monetary damages.


On June 15, 1992, the New Jersey Consumer Affairs Department charged Sears with giving consumers inflated estimates for unnecessary repairs. They investigated 38 shops by using a late model car and disconnected the alternator wire. Twenty three of the shops recommended unnecessary repairs or misdiagnosed the problem. The work was not performed on the cars.


On June 18, 1992 Florida’s Attorney General also announced that it would launch an investigation into Sears auto centers because of the large number of complaints.


The New York Department of Motor Vehicles found that Sears had overcharged in only one of eight Sears shops investigated. They do not believe they have a problem in NY.


State or Federal Statues: The California Department of Consumer Affairs, Bureau of Auto Repair can only revoke the license of an auto repair shop that is in violation of their Auto Repair Act. They cannot levy fines nor file any legal charges. They can recommend settlements as they have done. The BAR can impact the firm’s business through their charges by disrupting the consumer’s trust in Sears and closing them down. This is also the case in the state of New Jersey and in Florida.


Consumers, however, can file civil charges under the Statue of Fraud under Common Law within the states jurisdiction. (More information on Fraud is addressed under Option 2 of Alternative Actions).


 


STAKEHOLDERS


A review of the Stakeholders involved are listed below including an attempt to address what might be the concerns, reactions, and possible actions of these groups of stakeholders in the days and weeks ahead.


Sears Consumers: As a consumer, one would be leery of doing business with a firm that was charged with false advertising and fraud especially if one was trying to buy something that might require service in the future. If the only items one bought at Sears were clothing, household items such as sheets, towels, and/or small appliances, the charges by the California Department of Consumer Affairs BAR most likely will not affect their buying habits all that much. Those buying appliances, however, or large tools such as riding mowers, etc might be concerned because those items might require repair work at some time and one would wonder about the truthfulness behind Sears repair program. The allegations against Sears will drive some consumers to acquire their acquisitions of large appliances to other firms. The business volumes at the Sears Auto Centers particularly in the state of California will most likely fall for the remainder of 1992. Those individuals that choose to continue to do business with Sears Auto Centers will most likely challenge the mechanic and scrutinize their invoices more closely.


Sears Stockholders:. The charge by the California Department of Commerce and subsequent states of New Jersey and Florida has drawn national attention. The integrity of the management is at state with the implementation of the commission system. Did it drive the mechanics to wrong behavior in fixing things that didn’t need fixing? Sears stock has dropped from 43 2/8 on June 1 to 41 3/8 on June 11 to 38 1/8 on June 19. As a stockholder one would have to ask themselves do they want to be an equity owner in a company charged with fraud, false advertising and willful departure from accepted standards?


Sears Employees: Sears has been charged with a wrong doing. Employees who take pride in their work are most likely very concerned with the ethics surrounding the claims of the BAR. Sears could potentially lose some of these employees and managers who may believe the allegations and decide to work elsewhere.


The Government: Since two states have filed charges against Sears as of today and a third has indicated they are investigating, the National Government is taking notice and may need to determine if a federal investigation needs to occur.


The Suppliers: Sears suppliers of calipers, brakes, etc. are most likely concerned about their potential loss in sales to Sears assuming their volumes decrease as a result of consumers going elsewhere for their brake jobs. They may want to renegotiate their contracts with Sears.


Sears Competitors: Sears competitors have a lot to gain from the negative publicity Sears will undoubtedly receive in the weeks ahead. Loyal Sears customers may switch to other Auto Center establishments causing a loss in revenues to Sears.


The Community or public at large: The public at large believes in Chevrolets, apple pies, and Sears. The allegations charged against Sears has caused the average person to take note and may impact their buying habits and cause them to shop elsewhere.


The Department of Consumer Affairs, Bureau of Auto Repairs: Consideration has been given to terminating the California Department of Consumer Affairs, Bureau of Auto Repairs due to budget restrictions. By bringing the charges against Sears to light, the BAR has emphasized their consumer advocacy support to the average auto driver in the state of California. The charge against Sears has received national attention as they most likely assumed it would. The pursuit of Sears may be just what they needed to keep alive.


Edward Brennan: I have listed Mr. Brennan as a stakeholder as he has come attack recently for the lack of Sears financial performance in recent years. Sears has been accused of being time warped back to the 50′s. Wall Street was disappointed with the Board’s decision to sell the Sears Tower and to use the proceeds to buy back Sears stock. Sears has been under fire for not selling off the financial divisions and for not putting more focus on the retail operations. In February of 1991 Fortune ranked Sears 487th out of their listing of the top 500 companies. It is my opinion the press and the stockholders will be watching closely how the charges by the BAR are handled by Sears top management.


This is not intended to be an exhaustive list but rather it is focus on those most impacted. The charges against Sears are serious and must be reckoned with. Sears runs the risk of alienating their existing and future customers as well as their stockholders. It is my opinion an immediate resolution must be sought. To identify the possible resolution I would like to examine the pertinent values that apply in this situation and then attempt to prioritize them.  


 


VALUES


* Personal


Honesty: Sears has a commitment to all of their stakeholders to be honest in their advertising and promotions both in their written and verbal communications. If one suspects they are not being truthful, then one would be highly concerned about doing business with them or acquiring stock in their firm. One


would also have to question how to attract prospective employees if the firm had a reputation for being dishonest with their customers. As a prospective employee, one would wonder if the firm would be dishonest with oneself as well. Honesty affects Sears on all fronts including the suppliers and the DACE. If a firm is perceived as dishonest, it will take a great deal of public relations to overturn that image.


Integrity: What does Sears stand for? Sears has been a recognized leader in the retail industry for approximately 100 years. What is leadership? Does it mean do anything for the sake of profits? How do the Service Advisors decide when to recommend replacement parts vs. following the code in the Auto Repair Act?


* Institutional


Responsible citizenship: Sears has a respect for the communities in which it operates. They donate money to schools and to social programs. They encourage their employees to get involved in the communities. Would they help them one day and overcharge them for auto repairs the next?


Pursuit of excellence: Sears has a reputation for quality appliances, items, and services. One expects products or services obtained from Sears to be solid and last a reasonable period of time. Sears has a Satisfaction Guaranteed motto which implies the pursuit of excellence is not just a saying but rather a way of doing business.


Accountability: What is Sears responsibility? If indeed the commission system used by the Auto Centers caused the mechanics to perform unethical acts, shouldn’t Sears be accountable for those acts and take the appropriate actions with their customers to resolve?


*Interpersonal


Promise keeping: By accepting the cars in the Auto Center, Sears had a commitment to the customers to service their needs in a cost effective manner. Customers expect Sears to repair their vehicles and make them safe for them to drive.


Loyalty: Sears has maintained a loyal base of customers for years. Many people shop at Sears because their parents and grandparents shopped at Sears. Loyalty takes years to develop and to nurture and only a short amount of time to lose. By not addressing the concerns of the consumers Sears runs the risk of losing customers for a long time to come. There are many statistics to prove that a dissatisfied customer will share their displeasure with many individuals.


Fairness: What is fair? Is providing preventative maintenance to cars to protect consumers fair? One can argue that that is the right thing to do. Is advertising a low price fair when one knows the actual charges may be much higher? Probably not, but isn’t the disclaimer on the printed ad fair?


Caring for others: Is it kind to tell customers that their car will fishtail if they don’t replace a part? Is it right to scare customers to buy parts they may need in the future? Is it compassionate to replace parts that one believes may need to be replaced because they look worn out?


Respect for others: Did Sears show respect by placing an ad in the paper that displays a price that is typically lower than their actual charges? Is this out of line with their competitor’s advertising? Did Sears show respect for their customers by replacing parts that didn’t need to be replaced. Did they show respect when they didn’t itemize an invoice?


 


ALTERNATIVE ACTIONS 


Do Nothing is not an option in this case as the charges have been made. Sears cannot ignore them or will them to go away. Sears runs the risk of having their 72 Auto Centers in the state of California shut down as a result of this investigation. This will affect Sears overall reputation plus sever a revenue stream for the duration of shutdown. Sears either has to fight back or admit wrongdoing or some modified version of both. The options are:


1–Fight back! Question the motivation of the BAR as to the timing of the investigation. Did they do this in an effort to win consumer support and allow themselves to stay afloat? Did they set up Sears? Question the means in which they conducted the investigation. By making the new parts look old, did they entrap the Sears mechanics to make recommendations to replace the parts? Is their policy of not recommending preventive maintenance fair to this investigation? Have the Sears legal team investigate the ethics behind the investigation as well as the legality of it.


2–Accept Responsibility/Admit Wrongdoing. Have Mr. Brennan. make a statement to the press and admit wrongdoing and accept responsibility for the actions of the mechanics. Put a full page ad in selected newspapers and apologize and offer to make restitution to anyone who felt they had been overcharged. This would have to be a national offer and could represent substantial charges to Sears as well as time to redo the inspections. Review the training program and/or hiring standards of mechanics to ensure they know how to identify problems quickly and easily and are capable of offering the appropriate problem resolutions. Conduct a meeting with the community colleges, specialty schools that teach mechanics and specify the training requirements needed in the auto repair service. Perhaps in an effort to restore consumer faith, partner with some of these schools and promote Sears community efforts to the media. Hire an Ethics Officer to oversee all functional areas. Eliminate the commission plan system in the Auto Centers and review any other incentive programs at Sears to ensure they don’t drive anyone to unethical behavior.


The Attorney General has indicated civil action may also be filed against Sears as a result of these allegations. From a legal point of view, we established a bilateral contract with the customers as we established a promise to replace parts in their car for the promise of compensation. The contract between the mechanic and the customer is an Express contract because the terms of the offer and the acceptance are specifically stated, either orally or in writing if an estimate was completed. For now we can assume all parties involved in these transactions had the capacity to form a contract. The subject matter of the contract is legal. It is an enforceable contract because it is valid–the contract has the necessary contractual elements of an offer, an acceptance, consideration, parties with capacity, and a legal purpose. The terms of the offer are reasonably definite and were communicated to the offered either in writing via an estimate or verbally. The offer and the acceptance constitute mutual consent. Once the repair work or brake jobs had been completed we had a fully performed contract.


Because we have a legally enforceable contract, any civil action filed against us could result in damages to the plaintiff should Sears be found guilty or if Sears chooses to admit guilt to the charges. Rescission could be the remedy, which is available when fraud, mistake, duress, or failure of consideration is present.


The charges again are: Sears made false or misleading statements, guilty of fraud, false advertising, failure to state clearly parts and labor charges on invoices, and willful departure from accepted trade standards. Option 2 of the Alternative Actions is an admission of guilt to making false or misleading statements, fraud, etc. Fraud is an intentional tort and is covered by Common Law. The tort of fraud or deceit involves 1) a misrepresentation of material facts, 2) the intent to deceive or the reckless disregard of the fact’s truthfulness, 3) the knowledge that the facts are false, 4) the victim’s justifiable reliance on these facts, and 5) damages. The proof of each element must be clear and convincing.


If Civil Actions are filed, the Prosecutor could argue that the brake jobs advertised by Sears were seldom done for the amount advertised which, shows a misrepresentation or an intent to deceive. (Point 1 and 2) Failure to provide an itemized bill could be an indicator that Sears is unwilling to put in writing the work that they did which the Prosecutor could argue against point 3. The average customer is not too savvy on auto repair and is reliant on the information provided back to them by the mechanic. (Point 4) The damages received by the consumer are the excess charges they allegedly paid for parts they didn’t need. (Point 5)


Since fraud is typically difficult to prove due to establishing wrongful intent, many consumers file for misrepresentation instead which is a lesser charge. The consumers would not need to prove that Sears intended to deceive or had knowledge of falseness. Juries typically yield smaller settlements to charges of misrepresentation than charges of fraud. Regardless, civil litigation may cost considerable time and money which needs to be seriously considered if Sears admits wrongdoing to these charges.


Admission of wrongdoing will not win the public’s trust, however. Valued customers will take their business elsewhere even if Sears redoes everyone’s inspection and refunds all of the alleged overcharges. Stockholders’ confidence in Sears management will be further eroded. Although this may be the “right” approach, I would advise against it.


3–Accept Responsibility/Admit No Wrongdoing. Raise the issue with the media regarding the possible motive of the BAR identified in Action 1. I wouldn’t recommend an outright attack on this issue as it may


look like Sears is trying to excuse the charges, but I would give it to the media and let them run with it. . Also tell the media about the possibility of entrapment identified in Action 1. Aggressively challenge the policy of not accepting preventive maintenance by the BAR. The Auto Repair Act was created in 1972, 20 years ago. Perhaps it is time to be updated. Promote that Sears cares about the safety of their customers and only recommends parts they believe or at or near failure. Challenge the fraud charge on this basis. Also challenge the false advertising charge since Sears’ Ads clearly state additional parts may be required. Accept responsibility without wrongdoing on a national level, redo the inspections, and make restitution to those that felt affected. This will have the affect of making Sears look good to their stakeholders and throw a cast of doubt over the BAR.


 


PRIORITIZATION


In this particular situation, I believe the consumers are the most important stakeholders and their issues/concerns need to be addressed. I came to this conclusion as I identified the values as many of them I described were written from the consumer’s point of view. The charges against Sears are serious. Consumers most likely feel cheated and will most likely take all of their business elsewhere. I believe Sears needs to stop the erosion of retail switching as much as possible and make the customers feel that they get good value for their money when they shop at Sears. Reinforce the “Satisfaction Guaranteed” motto.


I believe the Sears stockholder comes in a close second and need to be reassured their investments are well placed in Sears. If they feel the consumers are not addressed quickly and adequately, the loss in business will further erode the performance of Sears stock. By addressing the consumers concerns quickly, Sears can also address some of the stockholders concerns as well.


I believe Honesty is the value that is the most important in this situation. I came to this conclusion because it impacted several of the stakeholders and permeates the issue at hand. Customers need to know that the service advisors/mechanics are honest and truthful. I think most customers believe or want to believe their mechanic knows something about cars and will take their input as gospel regarding the needed repairs on their car. They may challenge or ask questions but will typically buy into what services they are told they need.


I believe Option 3 identified in the Alternatives section is the course of action that will cause the greatest good and the least harm. This is the option of fighting the false advertising and fraud charges, challenging the Bars’ position on preventive maintenance, and addressing the concerns of any and all consumers who had their cars repaired during the time frame of the investigation.


 


POTENTIAL ACTION


If civil actions are filed against Sears, I believe Sears should probably try to find a way to settle out of court with the complainant’s). To address the ethical issue at hand, we need to evaluate the actions, policies, and decision making processes of Sears’ Auto Centers. There are several different ethical approaches we may try to utilize including Unitarianism, Deontological, or Virtue Ethics approach. I am going to utilize the virtue ethics approach as it focuses on the praiseworthy features of human character to do what is morally commendable. Sears must analyze how they conduct business in the auto center shops at the individual, departmental, and organization level. Sears needs to look at its moral responsibilities in regards to the auto center shops and determine if their behavior is right or wrong. In so doing, I believe the actions and decision making made at Sears (that being moving the mechanics to a commission plan) were made with the stockholders in mind. The intent was to improve the Merchandising Divisions’ financial performance. The intent was good but the execution, the BAR feels, was overzealous. Sears has a policy of Satisfaction Guaranteed and now is the time to showcase it.


The first Action I would recommend is to write a letter to every customer who had their auto repaired at a Sears Auto Center during the time frame of the BARS’ investigation. The letter should state the actions Sears is taking to address the charges filed against them including:


Sears believes they have the duty to notify consumers of preventative maintenance


Describe the methodology of how the tests were conducted


Reiterate the phrase in the advertising that clearly states additional parts may be required


Tell customers Sears has contracted with competitive auto centers (at a negotiated inspection rate)


for them to be able to have their cars inspected there at Sears’ expense. Have them take in your invoice (those that are itemized) to show what work was done. If the inspection validates the parts are not needed have the auto center indicate it on the invoice and send it back to Sears. Pay refunds to customers who had unnecessary repair work.


This may encourage your customers to continue their business at the competitors’ but it may also show them Sears is serious about addressing their problems. Sears could also hire an outside mechanic consultant to do the inspections at Sears but consumers may think he is getting a kickback from Sears if he doesn’t find any problems with the work that was done.


If there was no itemized invoice, offer the customer a coupon valued at 0-0 to be used at any department in Sears for a period up to one year.


Sears also needs to review their incentive program for their mechanics, etc. We know that “compensation contracts serve at least two important functions. First they are used to motivate workers. Second, they are used to share risk more efficiently. Unfortunately there is a tradeoff between these two objectives.” The tradeoff in this situation may have incanted the wrong behavior. Sears management needs to choose the specific compensation contract that maximizes expected profits and motivates the desired behavior in their employees. Unfortunately there is not an ideal compensation plan.


It is my opinion that internally Sears should take the following actions:


Eliminate the commission plan for the mechanics, etc


Put the mechanics, etc on a salary plan and perhaps consider implementing a team bonus based on customer satisfaction, response time, and sales


Review other departments who may be on a commission/quota system and make appropriate changes/modifications as need be.


Sears should also review their training program and incorporate some of the suggestions identified in Option 2.


By taking the above actions I believe we can


Regain the loyalty of Sears’ customers


Regain the trust of Sears’ stockholders and employees


Demonstrate the “Satisfaction Guaranteed” motto


Restore the faith in Sears with the California Department of Consumer Affairs, the people of California and the nation


In summary, Sears should take the above actions in my opinion because it reflects the morally commendable behavior of the praiseworthy features of human character. 


 


EPILOGUE


Department of Consumer Affairs, Bureau of Auto Repair


A phone interview with Mr. Tom Hopkins, Enforcement Officer of the California Department of Consumer Affairs, Bureau of Auto Repair yielded the following information:


As a result of the investigation conducted by the BAR, Sears Auto Centers was shut down for 1 day and placed on probation for 3 years.


On August 31, 1992, Sears agreed to a stipulation which resulted in an out of court settlement of 8 million dollars. Of this amount 3 million dollars was paid to consumers and 1.5 million was paid to 74 community colleges (,000 each) and 11 satellite programs (00 each) who had training programs for mechanics.


The balance went to the State of California and the Contra Costa Attorneys office.


The BAR was able to collect cost recoveries for their out of pocket expenses but they are unable to levy any fines against offenders. The fine against Sears was the largest settlement the BAR had been successful at orchestrating.


The Director of California’s Consumer Affairs, Mr. James Conan appeared on the Today Show and Good Morning America as a result of this investigation and received acclaim for their undercover work.


Mr. Mark Skelton authored a book entitled, “What Auto Mechanics Don’t Want You to Know” as a result of this investigation and highlighted Sears in the book.


Sears


In the 1997 Sears Annual Report the CEO states, “Breadth and depth of customer relationships make Sears different from other retailers….”. They relate pay practices to business strategy. They have a goal sharing program in place and they tie performance bonuses and local and national award programs into compensation. This is designed to motivate employees. They have granted stock options to 19,000 of their managers and introduced a discounted stock purchase program for their regular and part time sales associates. The Chairman believes that employee ownership is key for everyone to become a change agent to help Sears remain competitive.


In 1997 after being charged with inappropriately collecting on bankruptcy reaffirmation agreements, they mailed Sears Freedom & Obligations brochures to their salaried managers and required them to read Sears code of business conduct and to sign an agreement to abide by them. They established a chief compliance officer who has authority to examine every part of their company.


“Sears acknowledges their issues. They take immediate action to correct them; they learn from them and then they move on. Their reputation is built on trust and integrity. They will not sacrifice their reputation with the customer in order to enhance profitability.”


Today Sears still operates a chain of Auto Centers. Their mechanics are paid on a commission system. The managers are paid a salary and a bonus. They have implemented Sales Reps in the Auto Centers who have the responsibility of interfacing to the customer and presenting the estimate to the customer. The Sales Reps are on a commission………


 


BIBLIOGRAPHY


WWW.CA.DCA.GOV, California Department of Consumer Affairs


WWW.CARINFO.COM/REPAIR2.html, Auto Repair Secrets


WWW.SOPADRE.COM/COMPANY/ANNREP97/index.htm, 1997 Sears Annual Report


WWW.SMOGCHECK.CA.GOV/000049.htm, The 1972 Auto Repair Act, California Department of Consumer Affairs


An interview with Mr. Tom Hopkins, Enforcement Officer, California Department of Consumer Affairs, Bureau of Auto Repairs, February 1, 1999.


Bahaman, Herbert M. and Dumas, Mary Jane, The Legal, Ethical and International Environment of Business, West Publishing Co., 1996.


Brinkley, James A., Smith, Jar, Clifford W., Zimmerman, Jerold L., Organizational Architecture: A Managerial Economics Approach, Times Mirror Higher Education Group, 1996.


Skelton, Mark, What Auto Mechanics Don’t Want You to Know.


Monks, Robert A.G. and Minnow, Nell, Corporate Governance, Blackwell Publishers, 1995.


Patterson, Gregory A., “Sears is Dealt a Harsh Lesson by States”, The Wall Street Journal, October 2, 1992.


“Did Sears Take Other Customer For a Ride”, Business Week, August 3, 1992.



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