The disconnect between AOL's stock and 'distressed babies'

February 11, 2014: 1:24 PM ET

CEO Tim Armstrong proposed benefit cuts as the online media giant has its most successful year in a decade.

By China Gorman

140210152939-aol-ceo-tim-armstrong-620xaFORTUNE -- As AOL CEO Tim Armstrong has quickly learned, blaming innocent babies for unwelcomed changes to the company's retirement benefits is sure to spawn an uproar.

The executive of the online media giant apologized last weekend and reinstated the benefits after a backlash from employees -- most notably, Deanna Fei, who came forward as the mother of one of the "distressed babies" that Armstrong presumably referred to when he explained why AOL (AOL) had decided to cut benefits. Fei, whose husband is an AOL employee, recounted the absurdity of Armstrong's claim in Slate and countless other media outlets, while gracefully acknowledging that her family's medical expenses had indeed been considerable.

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The reaction is perhaps unusual, but not all that surprising: Cutting benefits is certainly not unheard of in corporate America, but not every employee who is victim to such cuts takes to the Internet and television to lambast their employer.

Why did employees react so strongly?

In a word: dissonance. Not only were Armstrong's remarks insensitive on a personal level, it appeared unjustified on a business level, given the recent performance of AOL's stock. With a one-year return to investors at about 45 % and a two-year upward growth trajectory showing no end (until now), AOL hardly appears to be a company in a state of decline. In fact, in the earnings call that started this debacle, AOL boasted increased year-over-year growth in revenue and adjusted operating income, and a decline in administrative expenses. It's therefore difficult to reconcile "AOL's most successful year in a decade" with a need to cut costs at the expense of employees. So while it was in poor taste to call out particular employees as the reason the rest will suffer reduced benefits, it is in poorer taste to misrepresent realities and intentions.

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Great leaders recognize that every word they publicly utter either builds or breaks trust with their employees. Great CEOs will authentically speak about the state of the business and foster the belief among employees that cuts made at their expense will only be a matter of last resort. Even the vaunted Fortune 100 Best Companies to Work For cut benefits and go through layoffs, but why these decisions are taken, and how they are communicated yield very different results.

AOL's CEO got nailed by employees, and rightfully so. When CEOs make lame excuses for their decisions, they breed a low-trust culture of lameness. Here's hoping that the executive leadership can embrace real transparency and start rebuilding trust with employees again.

China Gorman is chief executive officer of Great Place to Work®, a partner of Fortune. China has served as chief operating officer of the Society for Human Resource Management and president of DBM North America and Lee Hecht Harrison.

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