Some labor costs in Indonesia can come as a surprise to foreign business leaders – many due to not being familiar with the law, others due to cultural differences. This article will teach you the ABC’s of labor costs and employment culture in Indonesia.
Whether a company hires most of its staff locally or from overseas, there are several personnel considerations when running a company in Indonesia.
Manufacturing companies more than most, find Indonesia an inviting place for their production base. This is because Indonesian base salaries remain among the lowest in Asia and the abundant low-skill labor provides for a great pool of workers.
“Indonesian base salaries remain among the lowest in Asia”
That being said, salaries in Indonesia continue to grow. A 40% increase of the minimum salary for 2013 by the local government in the Jakarta area is indeed a sign of the times. Even though authorities have few means to enforce these jumps beyond multinationals, the pressure on all businesses to increase spending on wages remains high.
It is not all doom and gloom for foreign investors though, by any means. The Indonesian economy has largely been driven by growing domestic demand and continues to do so. It is still a growing country and has a huge, young consumer base.
There are few authorities on recent salary levels by occupation but we consider the biennial review by Kelly Services as a reliable source on the country. The presented numbers in this guide need to be adjusted to different areas of Indonesia but Indosight considers them proportionally correct.
Generally, the highest salaries are naturally in the capital and when reviewing the Salary Guide the levels presented ring true for the capital region. There are of course exceptions to this rule – one of these being the well-paid mining sector.
Despite some foreigner perceptions, costs and salaries are reasonable here in Jakarta. Local workforce is quite abundant and you will find that your labor costs can for example be reduced by not requiring some of your staff to speak a major foreign language, like English.
Keep in mind that average monthly rates predicted by Kelly Services conclude all the payments made to employees during a year. When addressing strictly the monthly salaries, they can be at least 25% lower than estimated in the paper.
General income levels
The income levels in Indonesia are characterized by extremes in contrasts between rural and urban or low-skill and executive.
A relative example of income expectations:
As mentioned before, Indonesia has an abundant low-skill workforce with entry-level salaries for local workforce usually start at around Rp 2’000’000 to 3’000’000 depending on the profession. Mid-level local professionals usually expect to make around Rp 8-20 million.
Experienced senior staff is proportionally very expensive in Indonesia and the level is certainly competitive with world market prices. Depending on the subject field and seniority, the monthly costs start from Rp 15 million and can go through the roof from there.
Seniority and authority are hugely important in Indonesia, thus huge income gaps between junior and senior level jobs are seen as standard.
‘Seniority and authority are hugely important in Indonesia’
As in any country, skills that are hard to come by either pay massively or companies are obliged to bring in expat workers to do the work. This applies for many high level engineering jobs for example.
There are few mandatory costs that companies operating in Indonesia necessarily have to comply with on personnel spending.
1. Income tax
Indonesia has established a relatively low countrywide central progressive tax on income:
According to the law employer is the body responsible for the calculation of any taxes that need to be withheld from salaries, monthly payment of these taxes to the tax authorities, and provision of annual numbers to the employee. The individual employee must then file an annual income tax return for the year in question.
2. Health insurance
There are many extra benefits you can provide local employees to incentivise them to stay with your company. Health insurance is one of these as it is not mandatory for companies to provide it for all employees.
‘There are many extra benefits you can provide local employees to incentivise them to stay with your company’
Despite this, a company nevertheless usually either introduces some form of health insurance immediately upon employment. Coverage for lower skilled jobs can be issued after a new member of staff has passed a trial period of 3-4 months.
Some form of health insurance currently covers around 63% of Indonesians. The government is going to introduce universal healthcare in phases from 2014 to 2019, increasing labor costs incrementally.
The same laws that govern the creation of a universal healthcare system also include regulations on pensions. Defined contribution benefits can be provided from plans managed by financial institutions or from company pension funds.
Normal retirement age in Indonesia is 55. During employment staff pay around 2% from their earnings and employers usually 3,7% of the payroll. Pension is paid in lump sum or payable monthly up to a maximum of five years. If the total benefit exceeds IDR 100 million, at least 80% of the fund must be paid as an annuity.
4. 13th month salary
According to the religion of a given employee, they receive a yearly Religious Day Allowance, or Tunjangan Hari Raya. The employer is obligated to pay the allowance a maximum of 1 week before the D-day of their respective religious holiday.
For Moslem workers, this means before the Eid-al-Fitr, for Christians, before Christmas. For other faiths, either before the respective holiday or they choose to have it before the Eid or Christmas (depends on the company’s policy).
Both the law and your employees will expect this allowance after a year of working for you, not before.
5. Other benefits
Commonly Indonesian companies prefer a stick over carrot method – e.g. resignation notice 2-3 months, blocking job sites etc. This common practice is not what we would endorse – rather use incremental pay rises to incentivise a good worker (10% a year).
Many big companies in Indonesia use short term solutions to motivate their staff. For example paying for the entire staff to go to Taman Safari or other venues.
This is not a strategy that international companies should put a lot of emphasis on however, because in the end it will not able them to hold on to their best people.
There are around 12-15 formal public holidays in Indonesia and each employee is entitled to an additional 12 days of paid vacation after a year of uninterrupted service. During the first 6 months of employment, the employer is not obliged to accommodate any extra days off.
There are of course ways to offset the wish for increased salaries, and we will go into these now.
There are distinct cultural differences to running personnel in Indonesia, some of them can go further than just etiquette and affect labor costs.
Appearances are important in every culture but even more so in Indonesia. Perception of the workplace is extended to employees and it is important to keep in mind that location, reputation and appearance matter.
Regardless of your industry, you are going to compete with multinational companies for top talents. Even if you promise higher salary, they might choose a global brand over you because it is more prestigious.
So work extra hard to show how and why you will make their life awesome.
Getting mediocre staff is easy. Nevertheless, they use the same priorities and mentality of prestige.
Many businessmen for example try to cut costs by combining their place of work with their living quarters as they come to Indonesia and end up having a rotation of short term employees. The workers simply do not find it prestigious to be working at what they perceive as a home.
Therefore, our advice is to extend a piece of the impression of your company you strive to create for your clients to your employees as well. Perception is quite likely a bigger part of holding on to your employees here, than in your home country.