Korn/Ferry Headhunters Well Compensated

Korn/Ferry International (KFY) released Q3 results and announced that they have lost money. Not surprising given the current market conditions. But read closely. There was an asset impairment charge at a services company who calls itself a Talent Management Solutions Provider. (Head-hunter for those of you who are more old school). The asset that was written down had this explanation attached to it.

“During the quarter, given the severity and duration of the decline in the market value of marketable securities held on behalf of participants in certain long-term compensation programs, management recorded an impairment charge of $15.3 million to interest and other (loss) income. Because the impaired assets mirror liabilities to participants which have previously been adjusted to the market value of the assets, this non-cash charge does not impact the Company's operations, operating income or liquidity.”

This quote sounds like something coming from a financial institution and not a services company. Korn/Ferry neglected to further explain how these assets/liabilities are structured. I understand the concept of deferred compensation. But in this case is the shareholder providing a guarantee by taking the loss. What about the individual who was originally compensated; why does he not accept risk which resulted from a financially engineered structure that was supposed to reward him.

While we are on this point check out the cash value of life insurance policies which appear on Korn/Ferry balance sheet. The cash surrender values net of loans are approximately $62 million at quarter end. The company pays interest on these loans which acts as a tax deduction for the Korn/Ferry Shareholder and a third party actually takes the cash proceeds and continues on with his/her life. The cash value net of loans has dropped by some $19 million which means the beneficiaries are drawing on these policies by the millions.

Everyone is up in arms about CEO compensation and the excesses surrounding it. Korn/Ferry could do a better job at explaining why the shareholder should be OK with all these structures.