5 Winning Attributes of a Successful Economic Incentive Negotiation

As we embark on the start of another year, we thought it would be useful to review some of the key attributes to a successful economic incentive negotiation.

Listening

Do more listening than talking. A company has chosen to tour a particular community for a variety of reasons, including a multitude of prior research and analysis – at least our clients have. Thus, they have already identified key siting factors and the primary purpose of their visit is to gather responses to unanswered questions. Listening to what a company is asking, and tailoring discussions accordingly is highly recommended. This applies to economic incentive discussions as well. Often a company has identified specific cost gaps that exist between communities by the time they are formally requesting economic incentives. Economic developers should be prepared to listen to those needs and respond with targeted programs and quick, creative thinking. In turn, communities should feel welcome to ask questions to identify a project’s real need and validate project commitments.

Timing

One important consideration is setting expectations upfront regarding timing as it relates to the overall economic incentive process. If a particular program is going to take several months to formally procure prior to being able to commit to a site and/or secure real estate, then it might not be a viable option. Thus, communities should be upfront about the timing involved and not overpromise benefits that cannot be delivered. Too often we have seen companies spend valuable time chasing a program which they will either never qualify for or will not be able to timely secure prior to needing to meet critical operational deadlines. The problem is that at this point, a company has already valued the potential benefits in their operating analysis and will be left having to answer to stakeholders as to why benefits are reduced. This can unnecessarily harm an otherwise positive relationship between the company and the community.

Moreover, state and local communities should do what they can to make their economic incentive process swift. This includes being responsive to questions, quickly turning around a request for incentives, and allowing for a prompt approval process. As part of this overall timeline, if a community requires that all relevant economic development agreements are negotiated and approved prior to public approval, then they need to build enough time into the process to account for this because it generally takes several weeks to come to a consensus on final agreements. After all, key terms and definitions are integral to whether a company will ultimately qualify for benefits.

Clearly identify project parameters

Jurisdictions with which a company is negotiating need to have confidence in the client’s project parameters when they craft an economic incentive proposal. While it is hard to estimate headcount, wages, and capital investment with complete certainty, a company should make their best conservative estimate. Underestimating is better than overestimating because a company will be held to those commitments and risk claw back of benefits. Moreover, significant changes to project commitments after they have been presented to relevant stakeholders is typically unwelcome news and often result in lower benefits and occasionally a distrust of the overall project.

When providing project parameters, it is important to consider the following, if relevant to the project:

• Clearly outline the project timeline, which includes a target date for site decision, headcount, capital investment ramp up, target operational date, etc.
• Full-time vs. part-time employees vs. independent contractors
  • Clearly note the definition of full-time and part-time
• Percentage of workforce which will be remote
• Provide realistic wage rates, exclusive of benefits
• Desire to purchase vs. lease real estate
  • If leasing is preferred, articulate desired lease term
• Bifurcation of the cost of real vs. personal property
• Percentage of machinery and equipment used in the manufacturing process
• Distinguish leased vs. owned assets
• Description of benefits offered, and portion contributed by the company

Comprehensive and realistic project exhibits allow a state and local community to move quickly in identifying relevant economic incentive programs and garnering the necessary political support.

Don’t underestimate compliance

One of the biggest risks to a successful negotiation is letting all the hard work be wasted once compliance hits. We highly recommend incorporating relevant company personnel who will be responsible for assisting with compliance measures into the process of the final review of economic incentives programs.

Most benefits hinge on statutory definitions, so it is imperative that the company fully understands the definitions and has determined they can meet any requirements or thresholds. As an example, if an incentive relates to the creation of new full-time jobs, then it would be beneficial for a company’s human resource department to ensure the necessary hours worked requirement is met since that definition is usually different for company policy versus state and local incentive program requirements.

In addition, how employees will be onboarded may affect benefits as well: will they be temporary employees before becoming permanent; do company HR policies allow new employee screening questionnaires which often request sensitive personal information that may be required? These are all items that may relate to compliance reporting, but they need to be vetted upfront in the negotiation process to prevent any surprises later.

Companies and communities need to establish a very well-defined economic incentive compliance process. Site Selection Group has previously written a blog on Establishing an Effective Economic Incentive Compliance Process which provides detailed steps toward accomplishing this objective. In addition, we developed a proprietary web-based economic incentive management platform, IncenTrak®, which is available to companies and economic development agencies. This investment stemmed from how crucial it is to keep up with incentive compliance.

Finally, identifying the appropriate contacts for all sides of the process is important. This includes company resources, such as representatives from legal, real estate, operations, human resources, tax, etc. Moreover, maintaining relationships with the appropriate contacts from the economic development agencies, as well as Department of Revenue are essential to ensuring compliance is done properly and timely.

Flexibility

The last attribute we touch on in this blog is flexibility. State and local policies and procedures should be drafted in a way that allows for flexibility. Most projects will not fit within a cookie-cutter approach, and there will always be exceptions. Having the flexibility to waive certain thresholds in specific circumstances to win a targeted investment for the community is crucial. More specifically this should be applied in setting project commitments and allowing a cushion for unforeseen circumstances. If we have learned anything through two years of COVID-19, it’s that anything can happen which is out of a company’s control. The last part of being flexible is for the community and the company to be willing to be creative in solving problems. Both parties need to offer suggestions to bridge any cost gaps and address specific needs. More often than not, when parties are willing to collaborate and experiment, a solution can be found.

Conclusion

These are just a few of the characteristics that lead to a successful negotiation of economic incentives. The underlying premise to all of them is transparency and pragmatism on both sides of the table. In the end, what determines success is mutual and meaningful impact on all parties.