Will Health Insurers Accept Payments in AOL Stock?
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.)
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