CEOs

Why Exactly Did Tim Armstrong Need to Make Cuts, Anyway?


Tim Armstrong in 2013

Photograph by Press Association via AP Photo

Tim Armstrong in 2013

Tim Armstrong said the wrong thing. Twice.

Last Friday, in a companywide phone call, Armstrong, the chief executive of AOL (AOL), casually mentioned that two employees had babies that had cost the company more than $1 million in health-care costs each. He wanted to continue to provide health benefits with that kind of generosity but believed that the Affordable Care Act would cost the company $7.1 million. So, he reasoned, he would have to make some cuts to the company’s 401(k) plan.

He kind of apologized on Monday. AOL will leave the way it matches employee 401(k) contributions untouched. Armstrong said something ill-advised about someone else’s kid’s medical problems.

But he also said something stupid right after that: A new cost to the company left him with no choice but to reduce compensation for employees. Armstrong hasn’t yet apologized for that one. He lives in a world where that logic makes perfect sense, and it seems like a reasonable thing to say in public.

Armstrong began his very bad day with an earnings call. AOL had finished the fourth quarter of 2013 with better results than it had seen in a decade. “In summary,” he said on the call, “revenue grew, profitability grew, traffic grew, costs came down, operations improved, and we hired bar-raising talent.”

AOL had a great quarter. Good for Armstrong. Seriously: good for Tim Armstrong. But it makes it harder for him to imply that events have forced him to save money by changing the way the company makes 401(k) contributions. He’s within his rights to do so, of course. You can have a good quarter and still cut employee pay. But Armstrong presented a scenario in which he had no choice. If the Affordable Care Act was going to cost the company money, he was going to have to get it back somewhere.

He doesn’t have to. The world is full of choices for Armstrong. The cost of employee 401(k) contributions and the potential costs of the Affordable Care Act don’t have anything to do with each other. A CEO worried about Obamacare losses can cut costs in any number of places. He could give up half his own salary, for example, which would cover them completely. I’m not saying he has to do this, just that it’s an equally plausible choice.

Or he could simply do what he ultimately did: Accept lower profits. No law binds him to do whatever he can to maximize shareholder value. Armstrong, like every other human, is just balancing two imperatives. Do what you have to to get ahead. Don’t be a bad person. That he is a CEO does not make him special.

It’s good that he wants to build a successful company. He had a good quarter; he should keep at it. But after last week, he should take his punishment in two doses. One for talking about someone else’s kid. And one for pretending that a basic moral decision he made was simply out of his hands.

Greeley-brendan-190
Greeley is a staff writer for Bloomberg Businessweek in New York.

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  • AOL
    (AOL Inc)
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