Sears, Roebuck, and Co. began in the late 19th century as a mail-order company that sold farm supplies and other consumer items. Its first retail store opened in the mid-1920s. In response to changes in American society, such as the shift from farms to factories and the presence of the automobile in many homes, hundreds of retail stores opened throughout of the years. The company expanded rapidly and eventually 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 that included retail stores, appliance and automotive service centers. By the early 1990s, the company was reporting billions of dollars in revenue and profits. 

Despite its long history of high profits and penetration of the American market, Sears' retail business began to experience serious financial difficulties in the 1980s. Discount retailers such as Wal-Mart were advancing in market share, leaving behind to Sears. Sears responded by adding non-Sears brands and an "everyday low prices" policy. But despite these efforts, in 1990 Sears reported a 40 percent decline in profits, and the merchandising group fell a whopping 60 percent!

Cost-cutting measures were planned, including job cuts and a focus on profits at all levels.

In 1991, Sears unveiled a productivity incentive plan to increase profits at its auto centers across the country. Traditionally, auto mechanics were paid an hourly wage and were expected to meet production quotas. In 1991, the compensation plan was modified to include a commission component. Mechanics were paid a base salary plus a fixed dollar amount to meet hourly production quotas. Auto service advisors (the counter people who take orders, consult with mechanics, and advise customers) were traditionally paid a salary. However, to increase sales, product-specific commissions and sales quotas were also introduced. For example, a service advisor may be assigned the goal of selling a certain number of front-end alignments or brake repairs during each shift.

In June 1992, the California Department of Consumer Affairs accused Sears, Roebuck and company of violating the state's Auto Repair Law and sought to revoke the licenses of all Sears auto centers in California. The indictment was the result of a growing number of consumer complaints and an undercover brake repair investigation. Other states quickly followed suit. Essentially, the charges alleged that Sears Auto Centers had been systematically deceiving customers and charging them for unnecessary repairs. The California investigation attributed the problems to Sears Auto Centers' compensation system.

In response to the charges, Sears CEO and Chairman Edward A. Brennan called a press conference to deny that any fraud had occurred and defended Sears' focus on preventative maintenance on older cars. He admitted to isolated mistakes, accepted personal responsibility for creating an environment in which "mistakes" had occurred, and outlined actions the company planned to take to resolve the problem. These included:

_ Elimination of incentive compensation program for service advisors 
_ Replacement commissions based on customer satisfaction 
_ Elimination of sales quotas for specific parts and repairs 
_ Replacement of sales volume quotas

According to Brennan, "we must have some way of measuring performance."

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. It 
should be noted that the compensation system for mechanics was maintained, based on the number of tasks performed and spare parts. In the summer of 1992, Chuck Fabbri, a Sears mechanic from California, sent a letter about Sears' pay policy for mechanics to U.S. Senator Richard Bryan. fabri said:

I understand that Sears is trying to convince its committee that all inspections at its 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 who carry out inspections are still on commission...

Service advisors... sell the repair work to the customer... The repairs they sell are not only based on their inspections, but to a greater extent on the recommendations of the mechanics who are on commission...

On January 1, 1991, hourly wages for mechanics, installers and tire changers were reduced to what Sears called a fixed dollar amount, or FDA per hour, which varied by classification. Currently, the mechanic's FDA amount is $3.25, which, based on Sears' current minimum production quotas, is 17% of my profits. What this means is that for every hour of work, as defined by Sears, that I complete, I receive $3.25 plus my base hourly wage. If I do two hours of work in one hour, I receive an additional $3.25, which increases 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 a commission plain and simple. The faster I finish the job, the more money I make and, as expected, Sears' profits increase. Therefore, it is obvious that to increase his income, a mechanic could reduce or completely eliminate the procedures necessary to complete the repair correction. In addition to this, since the mechanic often inspects or diagnoses, he has the ideal opportunity to oversell or recommend more repair work than necessary. This would be especially tempting if it's been a slow day or week. In part, greed may create this unethical situation, but high pressure from Sears management to meet quotas also presents a significant contribution. I have recently been threatened with dismissal if my production did not at least equal Sears' minimum quotas. I might add that before this new salary policy, management only had a positive response to my production and my track record proves it...

I have no doubt that before its auto center employees were hired, Sears enjoyed the trust of its customers. Today presents a different story. The solution is obvious not only to Sears, but also to the industry.

Sears agreed to a multimillion-dollar settlement with the state of California and the 41 other states that had brought similar charges. The company was piloted for three years in California. It also settled a number of consumer class action lawsuits. In July 1992, the United States Congress held hearings on fraud in the auto repair industry. The long-term impact of the scandal is unclear. Sears has now sold its securities firm, the Discover card, most of its real estate and mortgage business, and 20 percent of Allstate Insurance. By the end of 1992, auto center sales were below previous levels.

Also in 1992, Business Week reported that employees in other areas of Sears' business, such as insurance and appliance sales, were feeling the same kind of pressures over sales quotas.

Help me with the following questions:

1. Describe the factors that contributed to the alleged unethical conduct by service advisors and mechanics.

2. What ethical approach (consequentialist, deontological, or virtue perspective) do you think Sears adopted and why?

3. Based on your analysis, do you think Sears' response to the allegations and the changes it made were appropriate? Why or why not?