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AOL's Dilemma: Turn-around or Benefits?

Feb 11 2014, 3:18am CST | by

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AOL's Dilemma: Turn-around or Benefits?

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AOL's Dilemma: Turn-around or Benefits?

For someone who came up through sales, AOL CEO Tim Armstrong sure seems to put his foot in his mouth a lot. He is in a firestorm of controversy over seeming to blame a recent 401(k) (retirement) benefit cut on the health costs associated with two “distressed” babies that AOL employees had. The point he was reportedly trying to make was that despite belt-tightening, AOL would still support its employees, and he used the babies as an example. That’s not how it came out. Armstrong has since apologized.

But this brings up another question about what companies should do about benefits. And not just any companies–companies like AOL.

Because one thing that’s almost never mentioned in these stories about AOL’s benefits is that AOL is in a precarious situation. AOL is a company whose core business–dial-up subscriptions(!)–is shrinking extraordinarily fast and utterly doomed. AOL is a company whose survival is on the line.

AOL is also a company with a turnaround plan–it wants to reinvent itself as a media company for the digital age, with its journalism brands. It’s a very risky turnaround plan–not because its executives are crazy risk-takers, but because any turnaround plan for a company in AOL’s situation has got to be very risky to have a chance at succeeding. It’s a turnaround plan that’s very risky and also very expensive, and demands a lot of resources.

Is that the kind of context within which a company can provide the kinds of benefits that employees at massively profitable companies like Google, Apple and Microsoft get? Is that the kind of context within which it’s simply unthinkable for a company to cut benefits?

A sneaky 401(k) benefit rearrangement is basically a pay cut. But there’s a broader context, here. One reason why economic downturns create so much unemployment is because, in the lingo of economists, wages are “sticky.” In other words, when companies suffer a loss in revenue, they can either cut wages or cut jobs. But, culturally, people have a very hard time accepting even temporary pay cuts, and so companies have to lay off people. Experts agree that one reason why places like Germany and Japan have persistently low unemployment is because of a greater cultural acceptance of temporary pay cuts–and in Germany, this is in large part because unions are intimately involved in the management of companies, and prefer to negotiate temporary pay and/or hours cuts rather than layoffs.

In any case, a company that’s in the midst of an expensive turnaround plan has to make sacrifices. AOL is not exactly a piggy bank.

Is there an alternative?

Why, yes, there is. AOL has many activist investors–hedge funds–who think AOL’s turnaround strategy is a mess. What are they proposing, then? What they’re proposing is asset-stripping the company to milk the company’s existing business for all it’s worth, and then let it die. In other words, extract as much cash, as soon as possible, for the shareholders. Obviously, under such a plan, all costs would be cut drastically, with massive layoffs and benefits pared down to the bone for the remaining employees.

The irony here is that when these activist investors tried to take control of AOL, CEO Tim Armstrong fought tooth and nail to keep control of the company, because he believes in his turnaround plan. Some people say that AOL should use the money it uses for stock buybacks or executive salaries to maintain benefits. But one reason why Armstrong was able to fight off those activist investors is that he bought off his shareholders. If that’s the case, even if the only thing you care about is benefits, he has earned his money, and the money that’s going to stock buybacks is actually protecting employee benefits.

Now, of course, there’s a case to be made that reducing benefits was still the wrong move for AOL because in order to pursue a successful turnaround in technology and media you need highly-skilled people and you need to attract them with generous packages. It’s certainly been a PR nightmare for AOL.

But I wish discussions of this scenario would show just a teensy little bit more awareness that we live in a world of limited resources and that AOL, in particular, is in a particularly precarious situation where it doesn’t just have free money to hand out everywhere. There really is no Santa Claus.

Source: Forbes


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