HR in Indonesia

The Indonesian economy has certainly been a rollercoaster of highs and lows over the past three decades, with continued political instability and the devastation of the East Asian financial crisis of 1997-98 being just two of the clouds over the country's development.

The situation since the 1997 crash has improved, with a stabilised rupiah and a strong, sustained GDP growth rate. However, there are still significant problems in relation to slow economic reform, and corruption at all levels of government and business.

The strong GDP growth rate has also not been enough to make a significant impact on unemployment, which hovers around the 10% mark. Stagnant wages growth, and increases in fuel and rice prices have worsened poverty levels. As of 2006, an estimated 17.8% of the population lives below the poverty line, and 49% of the population live on less than US$2 per day.

One thing remains constant: Indonesia's labour force has shifted significantly over the past two decades. In 1971, less than 40% of Indonesian labour worked in the industrial and service sectors, while over 60% worked in the agricultural sector. However, as members of the Indonesian workforce moved away from agriculture and towards trade and manufacturing, this distribution changed dramatically. By 1990, only 54.8% were employed in the agricultural sector, showing a decrease in agricultural workers.

The gender composition of the workforce has also changed, as the need to improve family economic conditions has induced an increasing number of women to enter the workforce. Government legislation is currently in catch-up mode to create a suitable legal framework for the new workforce.

Developing and creating adequate employment opportunities has become one of the most pressing priorities facing the Indonesian government. In addition, Indonesia is experiencing shortages of valuable managerial and professional personnel.

A number of companies cope with the shortage by importing staff, although the process can often be an expensive exercise. When a company hires an expatriate, it must consider a variety of costs - housing, schooling for dependent children and health insurance - as well as other benefits, such as a car with driver. In addition, the Indonesian government limits the number of work permits granted to expatriate staff.

Another tactic used by many multinational companies in order to overcome the shortage of skilled managerial employees is the development of qualified local staff through in-house or on-the-job training. However, this process can also be expensive and there is always a possibility that competitors will lure away the trained employees.

For growing local companies, pirating staff from multinational companies offers an easy solution to the skills shortage. Pirating has helped local companies get the level of education they need from their candidates, as many multinational have strong in-house training programs.

Never has the concept of the 'people economy' been so apparent than the Indonesia of 2007. The Indonesian government readily acknowledges that training a sufficient number of skilled workers to meet the growing demands of the rapidly moving economy is one of the greatest challenges facing the country. They also understand that the failure to develop the essential manpower skills to maintain economic growth could result in the loss of economic opportunities and an inability to compete internationally.

Indonesia At A Glance

Talent challenges and strategies
· Human resources development: Aware of the need for human resources development, the Indonesian government has made a concerted effort to improve the quality of human resources. In its Repelita VI five-year development plan, the primary goal of human resource development in Indonesia is "to increase the capabilities of each individual and thus all of Indonesian society as a whole". Furthermore: "This will be reflected in religious beliefs, improvements in physical and mental health, development of knowledge and skills, increased adherence to a productive work ethic, a sense of national responsibility, and increased awareness and understanding of the importance of preserving natural resources and the ecosystem."
· Other government initiatives include the development of leadership and entrepreneurial skills, and an increased number of national development proponents in key industries who have "patriotism, perseverance, initiative, discipline, social awareness, and awareness of their rights and duties".
· Education and skills development: Indonesia's policymakers are now redefining the role of the government from being the sole provider of education to the catalyst for stimulating private-sector training programs, including employer-sponsored schools, vocational centres and polytechnic schools.
· According to the World Bank, the higher education system in Indonesia has grown rapidly during the past 20 years. General education gains, investment in a wide range of training facilities and various forms of on-the-job training have improved the skill level of Indonesia's labour force. Skills training is provided either through senior vocational high schools, which account for 27% of upper secondary enrolments, or through public training centres that offer short specialised courses in targeted disciplines.
· As part of the government's effort to improve the quality of human resources, it implemented the Nine Years Compulsory Education Program in 1994. The program is an extension of the previous six-year compulsory education program that the government originally launched in 1984. In the new program, children aged between seven and 15 years of age are required to attend school for six years of primary education and three years of intermediate education. Despite the existence of this program, 76% of the total workforce in 1994 only possessed a primary education background.
· From 1997, the Indonesian government imposed a US$100 levy on every expatriate in order to establish a skills development fund to help local professionals. In addition, companies in the financial and manufacturing sectors must pay compulsory training levies to equip Indonesians with the skills necessary to do the work currently performed by expatriates.
· Hiring returnees: Indonesia has established a placement program at Northeastern University in Boston called Home Country Placement. More than 400 major US and Indonesian companies send their employment-related requests to this centre daily. Inquiries are then matched with student profiles. This program allows Indonesian students studying in the US to find employment in their home country and also permits firms with operations in Indonesia to choose recently qualified graduates.

Employment laws
· Conditions of employment: Under Indonesian law, the minimum age for employment in Indonesia is 15 years, while the maximum work period is seven hours per day or 40 hours a week. Working hours may be extended to nine hours a day, 54 hours a week with overtime pay.
· Termination of employment: It is standard procedure for employers to have their new permanent employees undergo a three-month probationary period. During this time the employers can, at their discretion, dismiss these new employees. However, after this period, dismissal requires permission from the Committee for Settlement of Labor Disputes of the Department of Manpower. Should permission be granted, the company is required to provide severance payment, merit payment or service payment to the terminated employee.
· In 2003, the new Labour Law 13/2003 was implemented, which features a severance package that includes a severance payment, a service payment and other compensation. Its introduction has been hotly debated by the business community, due to additional costs for companies and the balance sheet liability associated with the severance package.
· Maternity leave: Three months on 100% of wages
· Paid leave and holidays: There are generally 13 paid public holidays each year. Based on Government Regulation No 21 Year 1954, employees are entitled to a maximum of 12 working days of paid annual leave. An employee is entitled to receive sick leave for a period of up to 12 months. Employees are also given paid leave for occasions such as the birth of a child (one day) and a death in the family (two days).
· Fringe benefits: Indonesian workers are generally entitled to fringe benefits from their employers. Some of these are:
- payment of income tax due on salaries and wages
- an annual bonus of one month's pay, usually paid at Lebaran (the annual Moslem festival)
- medical expenses
- travel and meal allowances.

Tax and contributions
The individual taxpayer is legally responsible for ensuring that they have registered with the tax office, and complying with the regulations and payment of the tax due.

Employers have three choices for the personal income tax calculation:

1. Employees' salaries are classified as gross and tax is calculated on this, withheld from employee and paid via the banking system to the tax office.
2. Employees' salaries are classified as net and then grossed up to establish a gross amount from which the tax is calculated to bring the remainder back to the net amount as expressed in the employment letter.
3. The tax is calculated on the net and treated as a fringe benefit.

Tax rates

Corporate tax
The corporate tax rates are as follows:
· 10% for taxable income up to Rp 50m
· 15% for taxable income between Rp 50-100m
· 30% for taxable income in excess of Rp 100m

Minimum wage
Indonesia has competitive wage rates for unskilled workers in Asia but considerable differences exist between industries and geographic locations. For example, wages in the oil sector are higher than those in the agriculture sector, and wages in urban Jakarta are higher than in rural Java and other islands.

Average minimum wage: Rp 710,000 per month (A$98.69); as low as Rp 340,000 per month (A$47.25) in certain areas; set by provincial and district authorities based on proposals by tripartite (workers, employers and government) provincial wage commissions.

The Ministry of Manpower regulates the minimum wage for each province or city.

Largest employers
1. Per. Listrik Negara (PLN) - 55,758
2. Astra International Tbk - 55, 600
3. P.T. Gudang Garam (Perusahaan Rokok Tjap) - 39,142
4. Bank Rakyat Indonesia - 35, 514
5. Telekomunikasi Indonesia Tbk - 29,375
6. Bank Danamon - 26,185
7. Pertamina - 24,000
8. Bank Central Asia Tbk - 21,033
9. Bank Mandiri (Persero) Tbk - 19,693
10. Indah Kiat Pulp & Paper - 15,673

Case study: Pertamina
Pertamina is a state-owned company that controls the oil and natural gas industry in Indonesia. The development of human resources at Pertamina focuses on the creation of proficient, professional, committed and business-oriented employees. To achieve this, Pertamina has determined the following corporate strategies for the development of its human resources:

· Implement an organised and consistent development of employees so that employees have the competency, skills, dedication and productivity to do their jobs.

· Establish and develop a broad and a secure industrial relationship in order to create a harmonious and comfortable atmosphere to support high productivity.

Pertamina is convinced that human resource development is a long-term investment and has therefore committed to focusing on a continuous and systematic development program in anticipation of changing business needs.

The company has implemented transparent selection and recruitment process in recruiting experts and fresh graduates for regeneration. The preliminary selection and recruitment processes are conducted through independent third parties such as University of Indonesia, University of Gadjah Mada, and University of Padjadjaran.

Pertamina has developed a career management program and system based on ability and performance (merit system). The program and system are expected to improve effectiveness and transparency in developing the career of Pertamina's employees in the future.

To create a corporate culture that supports the company's transformation process, it has also established and undertaken a socialisation program on corporate values known as the FIVE-M (Focus, Integrity, Visionary, Excellence and Mutual Respect). For performance measurements, the company uses KPIs and a productivity index.

Source: www.pertamina.com

Facts and trivia
· The unionisation process has been slow due to Indonesian society's lack of familiarity with trade union practices. Although approximately 40% of the labour force is unionised, the Hong Kong and Shanghai Bank estimates that active membership is only around 5-10%.
· Statutory retirement age is 55 for both men and women. At statutory retirement age a person is eligible to receive a state pension.
· The 1997 Asian Currency Crisis devastated Indonesia's economy. The rupiah lost value, companies went bankrupt, prices soared and millions of people lost their jobs. The poverty rate jumped from 11% to 50% of the population.

Sources:
- Pacific Bridge - www.pacificbridge.com
- CIA, The World Factbook - www.cia.gov/cia/publications
- www.expat.or.id/info/individualincometaxes.html
- www.us-asean.org