AOL reverses 401(k) change

In one of the biggest public relations gaffes so far this year, AOL Inc. Chief Executive Officer Tim Armstrong blamed rising benefits costs on health care and two babies. As the criticism mounted about the policy change, Armstrong reversed course and reinstated the benefits policy.

William Launder had this story in the Wall Street Journal.:

AOL Inc. AOL +0.28% ‘s Chief Executive Tim Armstrong said Saturday the company would reverse a recent change to its employee 401(k) policy and he apologized for remarks used to explain the rationale for the initial change in the benefits policy.

The company had recently moved to a policy in which employees get an annual lump sum 401(k) contribution from AOL at the end of the year, rather than matching contributions each pay period.

Mr. Armstrong said in an email to staff on Saturday that AOL will reinstitute matching contributions from AOL for each pay period. “As we discussed the matter over several days, with management and employees, we have decided to change the policy back to a per-pay-period matching contribution.”

On Thursday, Mr. Armstrong had caused a stir with employees and on social media when he said that care for two staffers’ “distressed babies” in 2012 cost the company about $1 million each. He used that example to help explain the rationale for changing the 401(k) policy.

Mr. Armstrong was accused of using the infants as cover for the unpopular policy change and was criticized for singling out the two mothers.

Slate published a story by Deanna Fei, the mother of one of the babies Armstrong mentioned:

“Two things that happened in 2012,” Armstrong said. “We had two AOL-ers that had distressed babies that were born that we paid a million dollars each to make sure those babies were OK in general. And those are the things that add up into our benefits cost. So when we had the final decision about what benefits to cut because of the increased healthcare costs, we made the decision, and I made the decision, to basically change the 401(k) plan.”

Within hours, that quote was all over the Internet. On Friday, Armstrong’s logic was the subject of lengthy discussions on CNN, MSNBC, and other outlets. Mothers’ advocates scolded him for gross insensitivity. Lawyers debated whether he had violated his employees’ privacy. Health care experts noted that his accounting of these “million-dollar babies” seemed, at best, fuzzy.

—-

I take issue with how he reduced my daughter to a “distressed baby” who cost the company too much money. How he blamed the saving of her life for his decision to scale back employee benefits. How he exposed the most searing experience of our lives, one that my husband and I still struggle to discuss with anyone but each other, for no other purpose than an absurd justification for corporate cost-cutting.

The New York Times story by Leslie Kaufman mentioned an incident earlier this year where Armstrong apologized after firing an employee for taking pictures of him:

But the commotion surrounding AOL’s benefits program was the second time in the last year that Mr. Armstrong has been forced to apologize for his actions or comments during internal meetings.

During a tense meeting in August with employees at AOL’s troubled Patch unit, a collection of local news sites, he fired an employee who was taking photographs of him during the meeting. He apologized four days later. AOL recently sold a majority stake in Patch to Hale Global, a turnaround firm.

In the current incident, Mr. Armstrong came under criticism for what numerous AOL employees thought were insensitive remarks while discussing the company’s increased medical costs. To make his point, he cited specific health care examples.

As Bloomberg pointed out in a story by Edmund Lee and Michelle Yun, the gaffe detracted from AOL’s earnings and outlook:

The latest incident overshadowed AOL’s fourth-quarter earnings, which were released Feb. 6. While the New York-based company exceeded analysts’ sales and profit estimates, the 401(k) uproar made it harder for Armstrong to tout the results. In his memo, he said the performance “validated our strategy and the work we have done on it.”

The Motley Fool’s Alex Planes says Armstrong “may be the worst CEO of the decade”:

Revenue has fallen almost 30%. Earnings per share have been cut in half. Free cash flow is two-thirds lower today than it was when Armstrong took the company public again.

What has AOL done under Armstrong’s leadership? Its three major moves were acquisitions. AOL bought Patch in 2009, TechCrunch in 2010, and Huffington Post in 2011.

—

When Tim Armstrong took the reins at AOL in 2009, it was a company largely dependent on subscriber revenue for its profitability. Tim Armstrong’s AOL today is still a company dependent on subscriber revenue for its profitability. Nothing Armstrong himself has done has changed that equation in the slightest, and it’s clear from the results over the duration of his tenure that this is a losing equation over the long run. Instead of blaming employees who get handed a bad medical break, maybe he should be taking a long, hard look in the mirror instead.

Armstrong’s apology may be too little too late. Instead of focusing on AOL’s better-than-expected performance, investors were treated to a public relations nightmare. Fei’s story in Slate is shockingly personal and the ordeal of her daughter’s birth is in stark contrast to AOL’s need to cut costs. The way the company handled this story is terrible. Reinstating the benefits might be the right thing to do, but somehow it feels like an afterthought.