How to Negotiate Discretionary Economic Incentives: A Guide for CFOs

To negotiate discretionary economic incentives effectively, engage stakeholders early and build strong relationships with local and state representatives. Clearly define project parameters like headcount and investment, and present flexible high and low estimates. Leverage data to support your proposals and align incentives with your organizational goals. Don’t forget to address compliance requirements and key contractual terms. By mastering these strategies, you can greatly enhance your incentive outcomes and reduce operating costs. There’s more to uncover about this process ahead.

Key Takeaways

• Engage stakeholders early to build relationships and gather insights essential for crafting a compelling incentive request.

• Clearly define project parameters like headcount, wages, and capital investment to manage expectations and inform negotiations.

• Utilize data-driven arguments and historical insights to strengthen your negotiation position and forecast potential savings from incentives.

• Identify and prioritize discretionary benefits that align with organizational goals to maximize the overall incentive package.

• Document all agreements and transparently calculate incentives to ensure accountability and assess their long-term impact on operations.

Importance of Economic Development Incentives

Economic development incentives play an essential role in attracting businesses and fostering job growth, especially when you consider their ability to provide significant advantages like grants and tax abatements.

These incentives stimulate investment and act as a catalyst for job creation. For example, Newark, N.J. offered $7 billion in incentives during Amazon’s search for a second headquarters.

As a CFO, you should evaluate existing incentive agreements — especially in mergers and acquisitions — to understand their impact on return on investment.

Assessing Project Parameters for Incentives

Negotiating effective economic incentives hinges on clearly evaluating project parameters upfront. Define commit-able headcount, wages, and capital investment to create a strong negotiation foundation.

Provide both high and low estimates to show flexibility. Understand jurisdictional analysis requirements to stay compliant and manage expectations effectively.

Engaging Stakeholders Early in the Process

Engaging stakeholders early is essential for securing economic incentives. Reach out to state and local representatives during site selection to build relationships and support negotiations.

Use NDAs when necessary, but be aware of open records laws. Early engagement often provides valuable insights that shape stronger incentive requests.

Crafting a Compelling Incentive Request

Start by outlining projected taxable revenues and how your project benefits the local economy. Include a clear company overview to build credibility.

Specify the discretionary incentives you're seeking (e.g., tax abatements, grants). Provide high- and low-investment scenarios to demonstrate flexibility.

Allow stakeholders at least two weeks to respond.

Understanding Discretionary vs. Statutory Benefits

Discretionary benefits are offered at government discretion, while statutory benefits are mandated by law.

Examples:

• Discretionary: tax abatements, customized training programs

• Statutory: minimum wage laws, workers' compensation

Knowing the difference helps maximize your incentive package.

Validating Assumptions for Incentive Negotiations

Use data-driven projections for taxable revenues. Analyze historical company performance and similar businesses.

Engage economic development authorities early to know what data they need. Review outcomes of past incentive agreements. Use sensitivity analyses to test different scenarios and strengthen negotiation credibility.

Key Contractual Terms to Consider

Important terms include:

• Recapture provisions: when incentives can be revoked

• Baseline employment: minimum jobs required

• Duration of benefits: how long incentives last

• Discretionary vs. statutory benefits

• Performance metrics: clearly defined deliverables

Compliance Requirements for Maximizing Incentives

Project baseline employment accurately. Understand local/state regulations.

Fulfill all commitments (capital investment, job creation) to avoid penalties. Conduct regular audits and performance reviews. Work with legal and financial advisors early to avoid compliance issues.

Strategies for Minimizing Operating Costs

To reduce operating costs while maximizing incentives:

• Analyze all discretionary benefits

• Validate jurisdiction assumptions to avoid inflated savings

• Identify clawback risks

• Engage representatives early for favorable terms

• Shift values strategically during negotiations