Health-care providers probably don't want Tim Armstrong's AOL stock. Photographer: Jonathan Fickies/Bloomberg

Will Health Insurers Accept Payments in AOL Stock?

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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Question: Could Chief Executive Officer Tim Armstrong have paid for AOL Inc.'s excess health expenses by taking a salary cut instead of trimming the company's 401(k) match?

Answer: Not unless the insurers who administer the program would be willing to take payment in AOL stock and options.

Armstrong's Kinsley gaffe about the high costs of extraordinary health-care services continues to have legs. I saw some quite lively discussion on Facebook and elsewhere asking why Armstrong didn't just take the money out of his reported $12 million in compensation.

I had taken Armstrong's list of expenses -- $7.1 million for Patient Protection and Affordable Care Act compliance, as well as the care of two "distressed babies," which cost more than $1 million apiece -- as examples of factors driving a broader trend in AOL's health costs, rather than an exhaustive list. But assume that this is, actually, the whole list. Could AOL have made up its health-care expenses by cutting Armstrong's compensation?

The problem with this theory is that only about a third of Armstrong's salary is paid in cash. The rest is mostly equity compensation -- stock and stock options, which the company issues as needed from a pool of shares authorized for this and similar purposes. Insurers probably want to be paid in cash, not AOL stock.

Equity-based compensation is recorded as an expense for the same reason that restaurants giving employees free food is technically an expense: Theoretically, you could have sold that food to someone else. Issuing stock to employees adds more shares to the market, which makes each shareholder's existing holdings worth a tiny bit less.

But that is not the same thing as having sold the shares on the open market, because if AOL had done that, it would have $8 million in cash that it could use to do things like pay insurers. Instead, they just have Tim Armstrong. And I really doubt that Cigna Corp. wants to take him in payment.

(Megan McArdle writes about economics, business and public policy for Bloomberg View. Follow her on Twitter at @asymmetricinfo.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net