How does salary indexation work for employees in Indonesia?

Factors influencing wage increases:

1. Government regulations

To ensure a decent life for the country's citizens, the Indonesian Government announces an increase in the minimum wage for employees every year. Private and public companies can calculate the percentage of salary increases for their employees based on this data. 

The minimum wage is the smallest salary set by the Government for employees in the lowest positions with less than one year of work experience.

For example, in Badung District in 2023, the minimum wage was 3,163,837 Indonesian rupees. In 2024, after the government's indexation, it increased by 4.89% and amounted to 3,318,628.06 Indonesian rupees.

2. The inflation rate

The problem of inflation also affects the annual increase in wages for employees. If inflation occurs according to the type of current fuel increase, then the benchmark for calculating the percentage of wage increases should follow the calculation of the minimum wage.

It is assumed that in the future, employee salary growth may reach 7-10 percent. But not all business sectors will be able to make salary adjustments, especially those that are still in the financial recovery stage after the Covid-19 pandemic.

3. Improving employee welfare

Given that the prices of basic goods rise over time, employees' salaries should also be adjusted accordingly with periodic wage increases.

One way is to consider the requirements for a decent living (KHL) as the standard living needs of an employee for one month.

KHL= Kebutuhan Hidup Layak (necessary for a decent life). The KHL indicator itself is determined by the results of a survey conducted by the National Salary Council. This figure is then periodically reviewed at least once every five years.

In 2020, the KHL consists of 64 components, which are then divided into 7 basic needs of the community. Among them are food and drinks, clothing, housing, education, health, transport, recreation and savings. Previously, the KHL was used by the Indonesian government as the basis for calculating the minimum wage. However, the new law and regulations no longer define the KHL as the main factor in determining and reviewing the minimum wage. At the same time, the new regulation of the Ministry of Labor of Indonesia takes into account inflation and the pace of local economic growth as one of the main factors for raising wages.

4. Financial capabilities of the company

In addition to government policy, another important factor that affects the calculation of the percentage increase in employee salaries is the financial ability of the company to pay wages.

Of course, not all companies always have good financial conditions. In addition, the Covid-19 pandemic has had a serious impact on some companies.

There are still companies that cannot even afford to pay full salaries to employees, so an annual salary increase is not a reasonable solution.

The Jakarta government itself has increased the percentage of the minimum wage in the province, while continuing to take into account the impact of the Covid-19 pandemic.

Sectors that are experiencing growth, such as healthcare, or sectors that have not been affected by the pandemic, should follow a 3.27 percent increase in the minimum wage. Industries experiencing a recession, in turn, are not obliged to raise salaries for employees.

5. The average salary in the industry

This means the average salary that certain companies pay for the same type of work. For example, the average salary of a copywriter in Jakarta is seven million Indonesian rupees per month. This average salary standard is then used by companies to determine the salaries of their employees.

6. Career path and position of the employee

The higher the position and responsibility of the employee, the higher the salary they receive. This is a key aspect of a fair employment system..

Therefore, when employees of the department are promoted, the company must also calculate the percentage of the employee's salary in accordance with his new responsibilities.

In addition to the main salary increase factors listed above, there are, of course, others that should be considered to determine whether employees deserve higher pay. These factors include employee loyalty, work experience, as well as their productivity and contribution to the company.

Now let's look at how the calculation of workers' wages, including the minimum wage, takes place. Usually, towards the end of the year, the governor announces the new nominal minimum wage of the province (UMP- upah minimum provincial) and the minimum wage of the city/district (UMK- upah minimum kota/kabupaten). After that, it becomes clear by what percentage the salaries of employees will increase.

It is necessary to know how to calculate the percentage of salary increase. This calculation is also useful as a guideline for determining how much a company should increase employee salaries. It takes place according to the formula for calculating the percentage of salary increase in three simple steps:

1. Find the difference between the new and old salaries.

   For example, if the Jakarta provincial government increases the minimum wage from 3,600,000 Indonesian rupees to 3,900,000 Indonesian rupees, the wage difference will be the result of deducting the old salary from the new one.

   Salary difference = new salary – old salary: 3 900 000 – 3 600 000 = 300 000 Indonesian rupees

2. Divide the received salary difference by the old salary.

   Coefficient = salary difference ÷old salary:

   300,000÷3,600,000 = 0.083

3. Multiply the resulting coefficient by 100.

   The last step is to multiply the decimal number by 100. The result will be a percentage increase in wages.

   So, the percentage of wage increase = 0.083 x 100 = 8.3%.

   As a result, the wage increase from 3,600,000 Indonesian rupees to 3,900,000 Indonesian rupees is 8.3 percent. The same method can also be used to calculate wage increases for hourly workers. 

In the example above, where the local government sets a minimum wage increase of 8.3 percent, it can be used as the basis for the lowest wage increase in the company. For example, the lowest salary in the company is currently 3,700,000 Indonesian rupees, then this salary should increase to at least 3,900,000 Indonesian rupees in accordance with the latest nominal minimum wage.

Or the company can raise the salaries of its employees in accordance with the percentage from the government, namely by 8.3 percent. Then the new salary will be 4,007,100 Indonesian rupees (old salary +8.3%).

If the company wants to pay more because employee productivity is quite high and the company's financial condition is very good (for example, the company's profit trend continues to grow above expectations), then the company can increase wages above 8.3 percent, for example, by 10 percent or more.

Despite this, the salary increase of employees should still be determined by the structure and scale of the company's salary. Salary increases should be carried out in a measurable way so that salary levels between groups of positions remain proportional and there are no gaps.