Sears Roebuck and Co began in the late 1800s as a mailorder

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 that

included retail stores, appliances, and auto service centers. By the early 1990s, the

company was reporting revenues and earnings in the billions of dollars.

Despite its long history of high earnings and its penetration into the U.S. market,

the Sears retail business began to experience serious financial difficulties in the 1980s

Discount retailers such asWal-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, and its merchandising group dropped a whopping 60 percent! Cost-cutting

measures were planned, including the elimination of jobs and a focus on profits at

every level.

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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

(the counter people who take orders, consult with mechanics, and advise customers)

had traditionally been paid a salary. 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.

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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.

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 perform-ance.”

Sears also introduced “shopping audits” of its auto centers, during which

employees would pose as customers, and Brennan published a letter of explanation

to the company’s customers in theWall Street JournalandUSA Todayon June 25,

1992.

Note that the compensation system for mechanics, based on the number of tasks

performed and parts replaced, was maintained. In the summer of 1992, Chuck Fabbri,

a Searsmechanic from California, sent a letter about Sears’s wage policy formechanics

to U.S. Senator Richard Bryan. Fabbri said:

It ismy 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 towhat Sears termed a fixed dollar amount, or FDA

per hour which varied depending on the classification. At present 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

responses 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.

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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.

Also in 1992,Business Weekreported that employees in other areas of

Sears’s business, such as insurance and appliance sales, were feeling the same kinds of

pressures from sales quotas

Case Questions:

Thinkmore generally about Sears management’s response to the firm’s financial

problems. How else could they have increased auto center sales without

providing incentives to employees to sell specific products?

Solution

They may have offered special discounts on certain commodities. Doing a weekend special on auto supplies would in all probabilities draw attention from customers. If customers see that there are worthwhile sales that they can afford they will feel more comfortable coming over and spending money. Having some items on sale is a usual and effective tactic which may increase sales