Executive Pay Trends for 2010

Compensation experts Don Delves and head of the North American compensation consulting practice at Hewitt Associates Ken Abosch talk about how companies are dealing with the threat of greater government oversight of executive pay

On many fronts, 2009 is shaping up to be one of the worst years for aligning pay with performance in Corporate America. After bringing the world to the brink of economic disaster, major investment banks are planning to pay their people 30% more than last year in salary plus bonus. "Some [payouts] will be even higher," says Wall Street compensation expert Alan Johnson.

Some CEOs, like Michael Jefferies of Abercrombie & Fitch (ANF), are taking home more pay, despite the fact that their businesses have done so badly that their stocks have tanked and they have laid off many employees. And for the first time, many companies have slashed the salaries of rank-and-file employees. "That's historically been taboo," says Ken Abosch, head of the North American compensation consulting practice at Hewitt Associates.

The impression that Corporate America's pay practices are out of control has become so strong that the government has made the business of paying people its own responsibility. By the middle of October, the government's so-called "pay czar" will rule if the top pay packages for seven firms receiving significant amounts of federal rescue funds—including Citigroup (C) and General Motors—are inappropriate. The Federal Reserve is considering measures to curb pay at all financial firms to rein in risk taking. And members of Congress are asking companies that haven't received federal funds to reveal pay package details.

TALKING TO THE EXPERTS

Some smart companies have started to modify their compensation policies to get ahead of all of the negative attention. Already, "CEO compensation has fallen significantly," notes David Chun, CEO of compensation research firm Equilar. Sixty-four percent of the country's 100 largest companies have also implemented "clawback" provisions, requiring executives to return part of their pay under certain conditions such as malfeasance. This is up from only 17.6% in 2006.

But a lot more could be done. Consider this one telling metric: After the tech meltdown in 2001, CEO pay shrank by 14% in 2002. By contrast, in 2008 CEOs were paid only 8% less than they had been paid in 2007—during the grips of a much more severe and broad-based recession. By contrast, the pay schemes for average professionals have been altered in unprecedented ways. For example, many companies are abandoning base salary increases to rely more on individual bonuses as a cheaper way to encourage performance.

To better understand how the recession has transformed the pay landscape across the nation,BusinessWeek senior writer Emily Thornton recently spoke to two compensation experts: Don Delves, founder and president of executive pay consulting firm the Delves Group, and Ken Abosch, head of the North American compensation consulting practice at Hewitt Associates.

Below are edited excerpts from their conversations:

DONALD DELVES, FOUNDER AND PRESIDENT OF THE DELVES GROUP:

Have we seen any improvements in executive pay?

Corporate governance doesn't change overnight, so I don't want to rush and say that nothing has changed. There are some course corrections happening. Major money center banks and investment banks are at the center of the storm. But that group is very different and separate from the rest of the world. Most of Corporate America has taken the public's concern about executive pay very seriously. Ever since Sarbanes-Oxley, boards have been consistently improving their independence and oversight of executive pay.

Given that, I've been surprised that the rest of Corporate America hasn't been more vocal in its criticism or outrage about what the major money center banks are doing. Recently, Goldman Sachs (GS) CEO Lloyd Blankfein said there should not be guaranteed bonuses. That's like saying you should have indoor plumbing.

There is virtually no such thing as a guaranteed bonus in the vast majority of companies and bonuses in the tens of millions of dollars are unheard of. The last major guaranteed bonus that existed in Corporate America was the bonus Bob Nardelli received for running Home Depot (HD). [For most of] Corporate America, there has been significant change.

What about executive golden parachutes?

Instead of paying three times an executive's annual salary and bonus when there is a change of control, many companies are now paying only two times that amount or one time. There are also a number of companies that are getting rid of excise grossups [which compensate executives for the taxes they must pay on their payouts].

Companies are reducing the number of people covered by change of control agreements and they are reducing or eliminating perquisites, like the personal use of corporate aircraft.

Has the Great Recession had any impact on executive salaries and bonuses?

Salaries for executives are generally flat. But in many companies, like Molex Corp., CEOs have taken a larger salary cut than anyone else.

Bonuses paid in 2009 for 2008 performance were only down by 10%-15% on average. This seems like a small reduction in such bad times, but many companies were not severely affected by the downturn until the last two months of the year, and they still hit their numbers. Keep in mind that bonuses paid in 2008 for 2007 performance were also down. So there is a cumulative reduction of at least 20%.

So where have you seen the biggest change in executive pay?

The values of long-term incentive grants are down anywhere from 15%-25%. That's the most dramatic downward shift in executive pay that I've seen in the past 25 years. That's happened in part because the value of companies' stock is down. But it's also because most companies have not granted a lot more shares of stock to make up for the shortfall. If they grant about the same number of shares and options as in prior years, the value is significantly less. This is a significant downward shift in pay levels that is likely to be permanent, re-setting the bar at a lower level.

There are also movements afoot to develop principles for executive pay. At least two groups—the Independent Directors Executive Compensation Project, which is focused on the role of board members, and the Center for Executive Compensation, which is led by a group of senior human resources executives from major corporations, are proposing sets of principles and suggesting that companies and their boards voluntarily adopt them. This will give companies the opportunity to take the lead in improving governance of executive pay and in defining the game.

The idea is for companies and boards to voluntarily adopt a set of core principles like accountability, alignment, fairness, and transparency. While companies would also agree to some initial best practices under each principle, they would also be encouraged to develop and share new best practices. The result would be a peer-comparison process where companies challenge and lead each other to consistently improving pay practices. The principles and best practices would also be the basis for communicating to shareholders in annual proxy statements.

KEN ABOSCH, HEAD OF THE NORTH AMERICAN COPENSATION CONSULTING PRACTICE AT HEWITT ASSOCIATES:

How has the Great Recession affected salaries?

The base salary part of the equation has probably been the most dramatically impacted for most employees. Prior to the recession, we saw salary increases tracking just under 4%. We saw the number drop below 3% in 2008 for the first time ever. And it went below 2% and landed this year at 1.8%. This is a catastrophic change in approach to increasing salaries.

The outlook for 2010 is a slight recovery to 2.7% increases for the average professional worker. While some organizations may be breathing a sigh of relief to see that, to put it in perspective, if we had not experienced 1.8% this year, 2.7% would be the worst salary increase on record. So we're not out of the woods.

We don't expect any restoration in salary-increase activity back to pre-recession levels. Three percent is the new 4%. Because of the tremendous pressure that companies are under to cut costs and because base salaries are fixed costs, we don't foresee any recovery back to a 4% environment. Salaries represent for many organizations one of the top three expenses beyond equipment.

What about bonuses?

While we're seeing record-low budgeting for base salaries, we're seeing record high budgeting for bonuses. In 2009, organizations are budgeting 12% of their payroll for bonuses on average. That's the highest percentage we've seen in the 33 years that we've been recording this data. For 2010, the projection is close to 12%. Before 2005, companies budgeted between 9% and 10%. So the percentage has been trending up. What's counterintuitive is that the highest level of funding for bonuses is occurring in the heart of the recession.

We know companies this last year slowed the growth of salaries, froze them, and in some cases cut salaries. Regardless of which category a company was in, we found all of them had full funding for their bonus programs this year. That's indicative of a shift from fixed costs to variable costs, since bonuses are not additive costs. You pay them one time and they go away.

It's also indicative of the fact that organizations have turned to variable pay as the new pay for performance today. A lot of organizations are abandoning base salary increases as a way to incent performance.

Are you seeing other trends in this area?

We're seeing two other trends. One is a movement to include more employees in the program and [the other is] a movement to include individual performance. In the past, a lot of bonus programs reflected company performance. How much an employee feels he or she can control their bonus has historically been low. This movement to include individual performance is a sign that organizations want to move away from an entitlement mentality to a greater perceived control over the outcome.

And it's indicative that companies have shifted their focus to variable pay as the pay for performance vehicle of choice.

Have promotions suffered during the Great Recession?

Promotions got hit hard this last year. About 21% of companies reduced the availability of promotions. That number will be lower this year but [there will still be fewer companies offering promotions] than what we would see in a normal year. We wouldn't see any focus on reducing promotions in a normal year. Companies are still doing what they can to keep a lid on costs.

When employees didn't get a salary increase, a lot of managers try to get their employees promoted. It comes out of different money. There are salary budgets and promotion budgets. Since the bottom line for companies was survival, companies drew the line on promotions this year also.

Overall, what are your expectations for pay for employees this year? Will it be any better?

Better is a relative term. It will be better than last year. But if we didn't have last year, it would look like the worst year we ever had.

We saw almost half of companies freezing salaries last year. This year about 13% of companies will freeze salaries. But in a normal year we would see less than 1%. Companies have never been willing to reduce salaries until this year. And this year we saw 20% reducing salaries for some part of the workforce. It's one thing to slow the growth of someone's pay or to freeze someone's pay. But companies have never been willing to ask them to give back some of their pay, and yet they did that this year.

The good news here is that we don't see any companies planning on reducing salaries in 2010. That's a clear indication that things are getting better.

A Modern B-School—in Tehran

Most Saturday mornings a small group of Iranian professionals and entrepreneurs gathers either in a small office on London's New Bond Street or in a Tehran villa to talk about a school that doesn't exist yet. This fall, though, after two years of planning, they hope to open Iran's first modern business school, an event they hope will boost their country's development.

The Iranian Business School Project has hired a dean (who for personal reasons asked not to be identified) and, despite Iran's turmoil, intends to offer executive education courses starting in October. A full-fledged master's program would follow in two to four years. Iran has a dozen other B-schools, but this one will be designed to meet the standards of the world's best management programs. "If Iran is going to have any role in the global economy, it needs people who can manage companies," says Rouzbeh Pirouz, a London and Tehran-based entrepreneur and the project's chairman.

Pirouz, 37, is one of the few Iranians to run successful firms in his country despite the red tape and isolation that burden businesses there. Born in Tehran, Pirouz left with his family at the time of the 1979 revolution. He grew up in Vancouver, British Columbia, earned a college degree at Stanford, and went on to Oxford as a Rhodes Scholar—where, in 1999, he co-founded Mondus, a Web procurement company for small business, which he later sold to Telecom Italia (TI) for $350 million.

Looking for his next act, Pirouz found himself drawn back home despite the warnings of friends that Iran was a bad place for business. In 2005 he started Turquoise Partners, which manages a stock fund as well as a private equity unit. Turquoise, with more than $100 million under management, offers outsiders a rare chance to invest in the Iranian stock market. In the 12 months through Dec. 31, Turquoise's Portfolio One fund returned 18% in dollar terms. In setting up the funds, Pirouz showed deftness in handling the regime while keeping his employees and colleagues fired up for the venture. "Rouzbeh," says Katy Palizban, a member of the project's board and a former Goldman Sachs (GS) banker, "has an incredible ability to inspire loyalty."

Much of the Iranian economy remains in the hands of the state. But Pirouz believes that over time the country's pragmatic side will assert itself. He points to the stock listings of state businesses, including Telecommunications Co. of Iran and the giant Mobarekeh Steel Complex. As for President Mahmoud Ahmadinejad, the school has obtained a letter of support from a presidential aide. Pirouz also lured some top names in Iranian business to the school's board, including Parviz Aghilli, founder of one of Iran's few private banks.

Iran's existing business schools can't meet all the country's needs. They have room for only 500 students, which means too many top applicants get turned away. Many of those who do get MBAs end up leaving the country, contributing to Iran's brain drain. The curriculum of the existing B-schools doesn't offer the latest thinking in such subjects as strategy, finance, career development, and succession planning.

The new school will greatly expand Iran's pool of business graduates by offering places for 250 students in each class. It plans to hire faculty from the West and in some subjects will employ the Harvard case-study system. One model, according to Michael Hay, a London Business School professor and special adviser to the project, is the decade-old Indian School of Business in Hyderabad, which taps the wealth of overseas Indians and recruits faculty from the many Indian B-school professors working abroad.

The project has been a tough slog. A year ago the founders thought the school might end up in a small town on the Caspian Sea after learning that no new licenses were available for schools in Tehran. Eventually the Tehran license came through. Crisis averted. There are sure to be others, though, before class is in session.

Fight for Jobs Easing at Career Offices

Lisa Bridgett acknowledges she's one of the lucky ones. Since graduating from Switzerland's IMD business school in December, she has landed a job as senior director of e-commerce for Ralph Lauren (RL). The 35-year-old even turned down a second offer from another luxury goods outfit. But her achievement is due to more than just luck. "I had more than 60 interviews," says the law graduate, whose previous career included management consulting at Accenture (ACN) and a stint as a music industry marketer. "Where companies would normally have three or four interviewers, it would go to seven or even eight people having to vet you. My job search was an extremely busy time."

Across Europe, scores of MBA graduates like Bridgett are finding risk-averse companies will hold up to 10 interviews with each candidate before signing new recruits. But the hard slog eventually pays off. Some 93% of Bridgett's IMD classmates have received job offers as of February, vs. 89% at the same time last year. "We're pretty happy," says Katty Ooms-Suter, Lausanne-based IMD's director of MBA admissions and career services. "We got the feeling that the market was picking up, carefully."

While figures aren't definitive—especially because recruiting now drags on for months after graduation—job offers for the December 2009 class at Fontainebleau (France)-based INSEAD rose 7% compared with July 2009. At London's Cass Business School, both financial services and consulting have rebounded, helped by students being less fussy about the roles they're willing to take. And for schools with two-year programs, like Barcelona-based IESE, banking and consulting are providing more summer internship opportunities than last year.

ENCOURAGING SIGNS

There are encouraging signs in other industries, too, particularly health care and pharmaceuticals. "Some sectors are aggressively recruiting and they're back to paying high sign-on bonuses," says Sandra Schwarzer, director of the careers department at INSEAD. She picks out biotech, renewable energy, public administration, and nonprofits among other positive sectors, and says she is confident recruiting will pick up in consulting, as well.

Some of the career changes achieved by graduates this year have been a pleasant surprise. "I've seen switches I wouldn't have thought possible in an economy like this," says Schwarzer. She cites a former member of the military taking a retail sales marketing position, and a financial-services consultant going into health-care marketing. "We've seen it all," she says.

That said, the job market remains tough overall. While banks are back on campus, they're still making fewer offers than before the downturn. "We haven't recovered the number of positions," says Gloria Batllori, MBA director at Barcelona-based ESADE. At London Business School, fewer students are expected to get jobs in finance again this year, below boom-time levels of up to 40% of graduates. That's despite recruitment drives at Barclays Capital (BCS), which is expanding in the U.S., and Nomura (NMR), which acquired the European assets of failed Lehman Brothers.

CAREER SERVICES IN OVERDRIVE

To help students find work, career services departments have gone into overdrive, bolstering their staff counts and directing additional resources at nontraditional MBA sectors outside of banking and consulting. Oxford's Saïd Business School has invited representatives to campus from potential employers as diverse as Louis Vuitton (LVMUY) and the U.N. to participate in informal career panels.

"We're bringing in organizations that haven't been to the school before," says Director of Careers Derek Walker, noting that Saïd held 14 careers events for MBAs in February alone, or one every other day. Meanwhile, since December 2008, INSEAD has offered its students a year of additional career services if they graduate without a job.

Crucially, schools are maintaining their relationships even with companies that aren't recruiting. One new strategy has been to invite them on campus anyway for "no strings attached" networking events. "We're not asking them to come as recruiters—it's risk-free," says Karen Siegfried, MBA executive director at University of Cambridge Judge Business School.

The approach looks to be paying off now that the economy is better. As the market began to pick up in the fall, says IMD's Ooms-Suter, the groundwork had already been laid. "Companies who had said they weren't recruiting started calling back saying, 'Actually we can take one or two,' " she says. Another novel tactic, employed by London Business School: When Accenture said it wasn't hiring, the school asked the firm to send student résumés to its nonprofit clients—a relatively new sector for MBAs. Four graduates got hired by Accenture clients this way.

European schools also are joining forces to boost employment opportunities for students. After several of its local school partners pulled out of its national MBA fair, GISMA business school in Hannover, Germany, united with five other European programs, including Britain's Warwick Business School, for what is billed to be the first European MBA fair. About 25 companies, including BASF (BASFY),Barilla, and the original fair's long-term partner Johnson & Johnson (JNJ), will meet 290 students in April. Others are taking a more singular approach. London's dean, Andrew Likierman, used the World Economic Forum at Davos as a platform to promote students—a first for the school.

STAYING IN B-SCHOOL LONGER

In a further sign of just how tough the market is, students are opting to stay in school longer. Among the first class to undertake the new flexible MBA at ESADE—where students can opt for a 12-, 15-, or 18-month course of study—only 10 chose the 12-month option and 50 chose to stay for 15 months. The vast majority of students, some 120, plumped for 18 months, preferring to enter the labor market as late as possible. Meanwhile, for the first time starting this year, students at Judge will be able to take on internships, giving them additional opportunities to impress potential employers.

Forget the "triple jump," where ambitious MBAs once changed their location, business sector, and role after graduation. These days, switching countries post-MBA is becoming more and more difficult. Visa regulations, notably in the U.S. and U.K., are getting tougher. "It's protectionism," says ESADE's Batllori, who says that recruiting foreign employees has become too difficult for some companies to manage. "They can hire someone local with equal talent and fewer obstacles," she says. Further complicating matters, recruiters from nontraditional MBA sectors, such as nonprofits, tend to be less well-versed in navigating onerous work permit and visa applications.

But ultimately, in tough times, some firms simply prefer local people with an international background. "Companies don't want to take risks so they hire Germans in Germany or French in France," says Alex Herrera, career services director at Spain's IESE. Students at London Business School, meanwhile, are leveraging their school breaks to go home to make contacts in a way they haven't in previous years, says Director of Career Services Diane Morgan, noting however that two-thirds of its graduates manage to stay in Europe. The London school this month hired former HSBC (HBC) recruiter Dina Khudairi as a senior business development manager in Dubai, the first time it has created a post devoted to career development in another region. "We're very cautious but it just makes you work harder," says Morgan. "Overall it's been really promising. Companies still want good people."

IMF urges stimulus to help "dire" job market

OSLO (Reuters) – The world's rich countries need to extend fiscal stimulus and job growth initiatives to fix a "dire" labor market that could threaten entire societies, the International Monetary Fund said on Monday.

At a conference co-hosted by the IMF and the International LaborOrganization, visiting Spanish Prime Minister Jose Luis Rodriquez Zapatero said high unemployment may trigger a "crisis of confidence" in Europe.

The IMF said more and more workers worldwide were unable to find jobs for longer periods, weakening social cohesion and raising risks of unrest and even undermining democracy.

"The labor market is in dire straits," IMF Managing Director Dominique Strauss-Kahn told the one-day meeting, adding that the Great Recession had left a "wasteland of joblessness." "We must acknowledge that the crisis will not be over until unemployment declines significantly," he said, calling growth and jobs the "most urgent problems."

Zapatero said longer periods of high unemployment could set off a confidence crisis in the European Union, which has been rocked by high debt and financing fears from Greece to Portugal.

"The worst crisis would be a crisis of pessimism, of a lack of confidence, of resignation. Europe must not fall into that," he said, adding that job training would be the top priority for Spain, where 20 percent of the workforce is without a job.

"We have to bring new oxygen into our democratic institutions," Greek Prime Minister George Papandreousaid.

European Commissioner for Employment and Social Affairs Laszlo Andor said 2010 had been an "annus horribilis" for unemployment. "If we fail to act ... 2011 may still turn out to be the annus horriblis for social cohesion."

JOBS OVER DEBT

The IMF said that extended fiscal stimulus was worth the additional debt if it helped cut long-term unemployment, which poses an even costlier burden on society as workers get discouraged, lose lifetime earnings or leave the labor market.

The IMF said that due to the deep crisis, it now backs schemes to extend unemployment benefits to help maintain demand and morale, and to give short-term incentives to companies to retain more workers but at reduced hours and wages.

Strauss-Kahn defended the IMF's focus on jobs and concerns over the impact of long-term unemployment, saying it was a "misleading caricature" to think that the fund cared only about the austerity cuts usually associated with its programmes. He said unemployment was "about far more than just a pay check."

In developed countries, jobless people had worse health problems and their children performed worse at school, while in poor states unemployment was often a matter of life and death. It could lead to violent conflict, "even war," he said.

The leader of the International Labor Organization called on governments to extend measures to foster a still "fragile" global economic recovery and job creation.

But Iain Duncan Smith, Britain's Secretary of State for Work and Pensions, disagreed, telling Reuters: "We're at the stage where everyone is throwing out a lot of stimulus, but to lesser and lesser effect."

"We think it's time to start pulling that back," he said. "If it goes on, we will start to squeeze out the private economy so it won't have room to grow."

Global Viewpoint: Recovery in Trade Finance — Proceeding with Caution

While it lasted, it was quite a boom. The level of global trade activity began climbing to unprecedented levels in 2006. In the first half of 2008, international merchandise trade was still increasing rapidly, although there were signs of crisis by midyear. By the fourth quarter, trade volume had fallen more than 12 percent globally, and by the end of 2008, the boom was over and the deepest recession since World War II was setting in.

Trade within the North American region fell 10 percent. North American exports to other regions (i.e., outside Canada and Mexico) fell 7 percent, a drop not nearly as bad as those seen in other major trade countries, but still the first significant decline in over 30 years. The falling dollar bolstered this exceptionally weak performance, making U.S. goods less expensive overseas. Imports shrank 4.5 percent in the same period.

Signs of Life

After this very steep downturn, we began to see real signs of recovery in the global economy in the first quarter of 2010. Many of those signs were indications of increased trade activity and a related increase in the demand for trade finance. In the International Chamber of Commerce's recently published study, "Rethinking Trade Finance 2010," the global financial institutions that participated reported improved volume of trade financing, but within a continued challenging economic environment. In March the World Trade Organization's economists announced that world trade is set to rebound in 2010 by 9.5 percent, but that is a long way from restoring trade to pre-crisis levels. Though today's signs are encouraging, we still see rough seas ahead.

As we near the end of the second quarter, the projected outlook for trade import/export finance is an increase of up to 50 percent over the dismal levels of 2009. Much of this revival has been thanks to injections of liquidity from the International Finance Corporation (the lending arm of the World Bank) and similar government and multilateral programs. We are now seeing the banking community's primary lending and secondary liquidity markets come back from the virtual standstill in the first half of 2009, but we have yet to see trade activity or trade finance return to pre-crisis levels.

Unlike previous trade slumps, our most recent crisis does not seem to have been an epidemic. While many markets remain sluggish, some regions have remained relatively healthy, with intra-Asia markets showing the least wear, and similar bounce-back on view in Latin America and in some Eastern Mediterranean countries like Turkey. Pre-export and post-shipment finance in Latin America and intra-Asia are being used to keep working capital at levels sufficient to support future sales. This year, commodity flows have increased as the global economy's "elephants," like India and China, continue to require a steady diet of raw materials from countries like Brazil and Australia. In addition, Latin America's appetite for consumer goods from Asia continues to increase — another stimulus for trade and trade financing.

"Time Will Still Tell"

The mix in trade loans seems to be changing. At J.P. Morgan, we've seen an increase in financing of finished goods — aircraft and high-tech equipment being two categories that are picking up thanks to increased liquidity in the markets. We've also seen export credit agencies such as the U.S. Ex-Im Bank function as a safety net for trade; as demand for financing increases, the ECAs stand ready to fill the gaps when primary and secondary markets may not be able to step up and government intervention in the form of stimulus slows or stops.

One risk for trade finance is the possibility that measures taken to limit excesses in the world's banking system — new capital adequacy requirements, for example — could have a negative impact on the cost and availability of credit. The ICC has clearly expressed its concern regarding Basel's latest capital adequacy recommendations, seeing further limits on bank leverage as contrary to the G20's promotion of trade as an engine of global growth. Another risk is that concerns about credit and counterparties may slow the trade banking community's progress towards simplified, harmonized, streamlined and paperless trade financing processes.

We are still in a "time will tell" scenario in terms of this recovery, since employment, production and housing figures continue to be causes for concern. We have yet to see to a sustained job growth pattern, and although inventories are being replenished, demand across most sectors remains low. These statistics, which have been drags on the U.S. economy, are now having an impact in Europe, with similar ripple effects passing through trade and banking sectors. Such challenges will be further compounded by the evolving euro crisis, which may cause constriction in the global credit markets and reduce the availability of import and export financing.

Now that the recession has been seemingly broken by the liquidity and stimulus pumped into the U.S. economy, what we are looking for is sustained growth over the second half of 2010. Challenges still abound, and the risk of a second "dip" is real but, at least from a US trade finance perspective we see improvement through 2010 and into 2011.

Global Trade Management Market Does Surprisingly Well Despite the Decline in Global Trade

Global trade management (GTM) solutions automate trade processes, and when trade is down, the GTM market will be adversely affected. It is not surprising; therefore, that the global economic downturn has led this market to contract.

However, the market did not shrink as much as one might expect. Between 2007 and 2009 the market only declined by a compound annual growth rate (CAGR) of -0.8 percent, according to a new report from industry analyst firm ARC Advisory Group.

"As trade recovers, the GTM market will recover as well, although we don't expect strong growth until 2011," said Steve Banker, service director for supply chain management and the primary author of ARC's "Global Trade Management Worldwide Outlook Study." Banker said that ARC's five-year forecast through 2014, however, reflects very robust growth for the GTM market.

Changing Trade Content

One challenge in global trade is that much of the content involved can change on a daily basis. This can include:

• Global Product Classification — Harmonized Schedule (HS) numbers that allow companies to determine how their products should be classified so that the correct duties can be applied.
• Tax Classification — Different types of taxes might be applied to different products depending upon which nations the goods travel between. These include no taxes — free trade zones might apply, regular duties, preferential duty rates, countervailing duties, VAT taxes, etc. Tax classification also affects when and how the taxes are paid.
• Regulatory Controls — Import and export regulations including licenses and visas, permits, inspection requirements, quota status (only a certain number of T-shirts can be imported into the US from Pakistan, for example), safety controls (toys from China were banned for a while because they contained lead paint), and other restrictions. These controls are applied not just by customs agencies around the world but by a variety of other agencies in the individual nations as well (Food & Drug, Transportation Security, Defense Departments, etc.).
• Restricted Party Screening (RPS) Lists — These lists are used to determine whether individuals, companies or organizations are sanctioned by a government or restricted from conducting trade.
• Documentation — Requirements for all trade lanes based on origin and destination, including those documents necessary to support the transportation of goods across borders, as well as the number of copies required, appropriate business rules, language requirements and authorities for each document identified. There is a global trend towards mandating sending certain types of documents electronically prior to shipment.

And content is just one of the challenges associated with automating global trade processes, Banker notes. There are also challenges associated with advanced electronic notification, calculating total landed costs, integrating GTM into a holistic governance, risk, and compliance solution, and other hurdles as well.

In short, managing the flow of goods, information and money across borders is a highly complex, regulated and dynamic process — and becoming more so every day. Companies can no longer rely on manual processes to manage their global trade operations. This is why the global trade management systems market will be one of the fastest growing segments of the enterprise software industry, Banker said.

Marketing on a Leash

Senior marketing executives, emerging from a prolonged downturn that forced them to do more with less, are now focused on growth, according to a recent global survey conducted by Accenture. Most respondents said their companies experienced flat or negative growth in the past year, and that cost remains a concern—yet cautious planning for growth has begun. The question is whether growth initiatives will match customers’ changed purchase behavior—and, at a more basic level, what these customers now want from providers of their goods and services.

To maximize results with still-limited budgets, marketing executives must invest in truly key areas—the growth engines. They must develop innovative offerings, enter new markets or segments, build brand image, improve pricing, and enhance systems for customer data management. But customers’ purchasing behavior has significantly changed. The areas of heightened customer expectations most often cited by survey respondents suggest that customers now expect: more value for their money (cited by 72 percent of respondents); higher product quality (71 percent); better pricing (69 percent); better customer service (68 percent); and that marketers show more respect for their time (66 percent). What’s more, marketing executives see these as lasting changes. Consumers may become less price sensitive, but expectations for value and quality seem to be here to stay.

Once investment areas are identified, their ongoing management can be more dynamic than before, thanks to a new competitive discipline, predictive analytics. Marketers can use quantitative methods to derive actionable insights from the wealth of data now available. These insights can be acted upon instantly, allowing a fluid approach to match today’s unprecedented volatility.

Clearly, marketing executives face a difficult challenge. They must adapt—quickly—to major changes in customer behavior; they must find ways to resume profitable growth; and they must do so within tightly constrained budgets. Accomplishing all this will require major transformations in the structure, methods, and strategies of corporate marketing functions.

If experience is any lesson, the survey provided some indications of what companies must do to grow amid today’s market realities. Companies that grew revenue in the past year described themselves as having stronger abilities than their peers in four key areas. [See box.] Strength in all of these areas is essential to consistently deliver highly relevant customer experiences across multiple channels. That is the very definition of customer centricity, and another characteristic of companies that grew revenue in the past year. Growth companies worried less about declining customer loyalty, and reported greater success than their counterparts in creating customer advocates. 

These growth companies were also less likely to reduce their investment in the customer experience in order to offer more competitive pricing, and they reported a higher degree of satisfaction in their use of marketing channels, including digital marketing and online communities. Although only 41 percent of growth companies reported effective use of digital channels, this was substantially more than the 25 percent reported by companies that experienced lower revenues.

While the transition to the post-recession economy may deliver stronger sales and reduced pressure on margins, the new environment demands different skills, resources, and strategies. Marketers must reinvent operations, adopt robust customer analytics capabilities, and translate those insights into compelling offerings and customer experiences. They also must use those insights to make better use of communication, sales, and service channels to improve customer engagement and foster sales in pursuit of growth.