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Understanding the Ins and Outs of State Incentives

When it comes to siting decisions, CEOs will tell you that the most important lures by far are intrinsic things like the location fitting their business model geographically, low taxes, adequate local infrastructure and ample talent that fits their specific needs. However, inducements and incentives can also attract companies to a state or locality.

These days, the most effective hooks are typically built around the jobs and workers themselves, including bounties for reaching certain levels of employment and help with funds and instruction for training workers for certain types of jobs.

When Stephen Kezirian was CEO of the call center company IBEX Global Solutions, for instance, he chose places such as Spring Hill, Tennesee, and Hampton, Virginia, which offered packages
of cash payments and training funds worth several thousand dollars apiece for the hundreds of workers at a call center. “We liked it when states would train people in basic technical skills
and phone etiquette for one to five days, so when they joined our company they would be off to the races a bit,” he explains.

“The compliance requirements that go along with some of these incentives can be brutal. They sound good, but in reality they can’t always be utilized.”

Last year, when Kezirian became CEO of Goji, an online auto-insurance agency based in Boston, his focus shifted from incentives to the most important criterion for a business built on digital-tech specialists: making sure there are enough of them. In that regard, he says, unlikely places such as Tulsa, Oklahoma, and Kansas City can compete with big tech-industry enclaves by offering “a cool lifestyle. Only if you get down to the level of a Tier 3 or Tier 4 city do you need to come up with incentives to lure tech companies.”

The downside of employment-based incentives, of course, is what happens when companies end up not hiring as many workers as specified in the state’s largesse. “The compliance [requirements] that go along with some of these incentives can be brutal,” notes Sharon Welhouse, practice leader for Ryan’s Credits and Incentives consulting firm in Dallas. “They sound good, but in reality they can’t always be utilized.”

CRUSHED BY COMPLIANCE
This is one reason some CEOs steer clear. They “are actually terrible distractions from business,” argues Don Hicks, CEO of Llamasoft, a supply-chain consulting firm that opened offices in
Shanghai, Paris, Cape Town and Sao Paulo but kept its headquarters in Ann Arbor, Michigan because its employees’ roots are there. “State regulators and political incentives are ultimately a con game, and business leaders should stay away from the political gravy train.”

Increasingly, technical talent trumps financial incentives as a factor in location decisions. “Both New York City and California, for instance, perform poorly from a taxation perspective and don’t have incentive programs,” points out David Providenti, a partner at Savills Studley real estate advisors. “But companies go there because millennial talent—the best and brightest engineers, programmers and financial talent… want to live there.

Companies have thrown out the historical variables for comparing locations, such as tax climate, and turned it into a war for talent, because the productivity from getting the best and brightest talent exceeds traditional measurement goals for jurisdictions.”

Review the entire 2016 Best & Worst States for Business results, including individual state rankings, CEO comments, methodology and more at http://chiefexecutive.net/2016-best-and-worst-states-for-business

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About Dale Buss

Dale Buss
Dale Buss is a long-time contributor to Chief Executive, Forbes, The Wall Street Journal and other top-flight business publications. He lives in Michigan.