Sears Auto Center Scandal

LGST001 - Ethics and Social Responsibility

Sears Auto Center Scandal

Managing Business Ethics Text (pp.207 - 210)

Ethical Decision-making Issue:

Should Sears remove its commission-based compensation scheme?

Group Stand:

The majority of the group believes that Ellen should be removed from the team.

Support for Motion:

Rawl's theory/Egalitarianism

The underlying inequality is that car owners are paying for repair services they do not require while Sears benefits by earning higher profits. This is a result of information asymmetry given that the repair advisors are in a more knowledgeable position regarding the available and required services, and clients act upon their advice. Thus, there is an opportunity for advisors attempting to increase their own commission to recommend more than necessary services.

Based on the Consumer Protection (Fair Trading) Act in Singapore, it is unlawful for a trader to "do or say anything, or omit to do or say anything, if as a result a consumer might reasonably be deceived or misled." The incentive pay compensation scheme has resulted in service advisors "systematically misleading customers and charging them for unnecessary repairs", and this is a breach of the Act. By Rawl's theory of equal liberty principle, the consumer's basic rights are compensated and the inequality is unjust. Further, consumer's rights to safety are also sacrificed as mechanics tend to shorten the procedures required for each repair in order to get more work done and increase their own compensation.

Participation model

By the participation model of procedural justice, the group of people at the receiving end of the decision, the repair mechanics and service advisors, should have a say in the outcome of the decision. The letter by Sears mechanic Chuck Fabbri to the Senator is an indication of the opinions of the mechanics. He expressed discontent at the incentive pay system and narrated accounts of eliminated procedures and threats of termination if he were unable to meet the minimum quotas, and this hostile working environment can be attributed to the current compensation system of Sears and its unrelenting profit-seeking objectives. Thus by the participation model, the incentive-pay compensation should be eliminated.

Deontological theory

Using the deontological theory, it is the fiduciary duty of the mechanics to go through the correct procedures in the inspection and the repairs. However, by having the commission-based compensation system, it would be an incentive for the Mechanics to cut corners or eliminate procedures required to complete more repair work in a given time. Moreover, using "Categorical Imperative", the action of overselling and recommending customers more repair work than needed would not be a universal law or principle for everyone to follow. Therefore, the removal of the compensation system would prevent unethical behaviour of the employees.

Virtue Ethics

By using virtue ethics, it also proves that the current compensation system should be removed. First, we look at the community of companies with similar kind of compensation scheme and deduce that if they found that the compensation scheme is misleading, they would also remove it. The companies would strive to maintain good relationship with customers on top of having a duty toward them, and would avoid any misinformation conveyed. Thus, companies of integrity would not continue with the incentive-pay scheme.

Pygmalion Effect

Although rewarding employees by giving compensation based on commission would make the employees put more effort in doing their work,it might also encourage unethical behavior. This is due to the ethical "Pygmalion effect" where people would perform better in response to expectations laid out for them. Therefore, having the current compensation system would encourage them to meet the required number repairs so as to get rewarded. Further, the unethical outcome of the compensation system was not only due to high pressure to meet quotas, but also because mechanics were threatened with termination.

Objections against motion:

Two of our group members believe that Ellen should not be removed from the team.

Objection against inequality

There is no inequality in the case because customers have the rights to refuse any recommended services by the Sears mechanics. Being the paying parties, they are in the position to demand for specific services and not accept any other types of repairs and checks. Even if inequality exists, the inequality is fair since there is no information asymmetry which can render it otherwise. Consumers can always increase their understanding of their cars by researching, seeking advice from other auto repair companies, or learning from peers. Furthermore, the inequality is just if it increases utility in society. Using Utilitarianism theory for Distributive Justice, the compensation plan maximizes profits which in turn affects the economy positively. With the additional profits, Sears is hence able to expand and hire more employees, and this will benefit shareholders in terms of dividend growth and increase share prices. More workers will be employed. This benefits economy and society altogether, thus the inequality is just.

Ethical Egoism

Following the argument for ethical egoism, everyone will do what is to their best interest first. Ultimately, this will achieve utilitarianism since problems regarding