mercer bdb doing_business_in_indonesia_mar_2011

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Breaking Down BordersDoing business in Indonesia

Su-Yen Wong, Senior Partner and ASEAN Managing DirectorAke Ayawongs, ASEAN Head of M&A Consulting Services

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Speakers

Su-Yen Wong Senior Partner and ASEAN Managing Director, Mercer

Ake Ayawongs

ASEAN Head of M&A Consulting Services, Mercer

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Agenda

1. Background and Context

2. Remuneration trends

3. Benefits practices

4. Staffing issues

5. Expatriate issues

6. Acquiring in Indonesia

7. Conclusion

8. Q&A

1. Background and Context 1 Background and Context

2 Remuneration Trends

3 Benefits Practices

4 Staffing Issues

5 Expatriate Issues

6 Acquiring in Indonesia

Conclusion7

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Outlook in the region has improved furtherAsia Pacific regional GDP forecast

-10

-5

0

5

10

15

20

CN IN VN ID AU PH SK NZ SG MY TW TH HK JP US

2009 2010 2011 (forecast)

Source: IMA Asia Pacific Executive Brief, March 2011

Regional: GDP Forecasts, % real growth, 2009-2011

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Inflation is increasing againPotential impact on compensation increases

-3

-1

1

3

5

7

9

11

13

15

IN VN ID PH SK NZ AU HK MY SG CN TW TH JP US

2009 2010 2011 (forecast)

Regional Inflation Forecasts, % CPI

Source: IMA Asia Pacific Executive Brief, March 2011

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Organizations need to plan on the basis of…

Upward inflationary pressures– Potential impact on salary growth– Need to target compensation spending

High fuel prices to continue into the foreseeable future– Review operating models– Renew focus on efficiency gains

2. Remuneration Trends 1 Background and Context



4 Staffing Issues

5 Expatriate Issues


Conclusion7

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Compensation: Basics

Minimum wage– Varied by province, district, and sector– Multinational companies tend to have a higher compensation

standard

Frequency of payments– 13 months; the 13th month is a statutory requirement– Market practice indicates that employees who work less than a year

receive pro-rated amount of the 13th month salary

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Average Industries Salary Increase vs. InflationSalary increases continue to outstrip inflation

7.5%

5.1%

13.1%

4.8%6.4% 9.8%

13.0%8.4%

8.2%9.2%

10.9%10.7%

2006 2007 2008 2009 2010 2011(forecast)

Inflation rate All Industries Base Salary Increase

Current inflation rate is usually considered for budget increase planning in the following year

Source: IMA Asia Pacific Executive Brief, Mercer Total Remuneration Survey

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96

79

72

46

81

26

14

All Industries

Factors Determining Salary Increase

Individual Performance

Company Performance

Inflation

Position in Salary Range

Job Level

Market Competitiveness

Length of Service

Percentage of companies

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Variable Pay Trends (% of Annual Base Salary) Average Overall

22.321.5

22.6 22.2

10.00

12.00

14.00

16.00

18.00

20.00

22.00

24.00

All Industries

(%)

2008 2009 2010 2011 (forecast)

Source: Mercer 2010 Total Remuneration Survey APCBF Report and Preliminary Mercer 2010 Total Remuneration Survey (All Industries)

3. Benefits Practices1 Background and Context



4 Staffing Issues

5 Expatriate Issues


Conclusion7

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Benefits: Social Insurance (1 of 2)

JAMSOSTEK (Jaminan Sosial Tenaga Kerja) is a social security scheme in Indonesia that prescribes the minimum coverage for retirement, accident, death and health benefits

Implemented in 1993 as a replacement for ASTEK, which in turn had been in place since 1978

Membership is compulsory for companies with over 10 employees, or with a monthly payroll of at least IDR 1 million

JAMSOSTEK policies for personal accident, life insurance and old-age security benefits are compulsory– But companies can opt out of JAMSOSTEK’s health benefit as long

as they provide an equal or better program

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Benefits: Social Insurance (2 of 2)

Employers contribute to JAMSOSTEK’s four elements – occupational accident, death, health maintenance and old age. The employer’s contribution rate for occupational accident varies depending on the company’s industrial risk classification

The contribution rates applied to base salary are as follows:– 0.24% to 1.74% of the monthly wage for the occupational accidents

plan (depending on the nature of business);– 5.7% of monthly wage for the old-age saving plan, of which

employees contribute 2.0% and the company contributes 3.7%;– 0.30% of monthly wage for the death benefits plan; and – 3% (single) and 6% (married) for the health benefit plan – optional if

the company provides an equal or better plan

Total JAMSOSTEK contribution is in the range of 9.24% - 13.74% of basic salary

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21%

37%

46%

47%

51%

57%

82%

95%

97%

Company products Discount

Loans

Retirements

Travel Insurance

ADD*

Life Insurance*

Vehicle benefits

Training & Education

Health care*

Typical Benefits

*On top of statutory requirements

% Companies Provide (All Industries)

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Outpatient Benefits - Clinical• Typically outpatient covered clinical and dental. The cap including dependants• If reimbursement is only partially given, then the typical percentage reimbursed is 90%

Inpatient Benefits

• Most of companies provide inpatient benefit for employees and dependants• Typical inpatient clinical is capped at maximum daily room and board rate

Life Insurance Trends• 55% of companies provide Life Insurance benefits• Around 71% of companies who have Life Insurance benefits provide in terms of months’

salaries, on average 23MBS for Executive, Professional Sales, Professional Non-Sales, Para Professional level and 35MBS for Management level

Accidental Death & Disability (AD&D) Trends• 42% of companies provide ADD benefits• Around 69% of companies who have ADD benefits provide in terms of months’ salaries, on

average 34MBS for Executive, Management, Professional Sales level; 33MBS for Professional Non-Sales level and 37MBS for Para Professional level

Health Benefits and Insurance

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Labour Law 13/2003Severance and Gratuity Pay

10924 Y

8921 Y < 24

7918 Y < 21

6915 Y < 18

5912 Y < 15

499 Y < 12

398 Y < 9

387 Y < 8

376 Y < 7

265 Y < 6

254 Y < 5

243 Y < 4

032 Y < 3

021 Y < 2

01Y < 1

Gratuity (months)

Severance (months)

Service Year (Y)

Payable to all employees who have been terminated from the company due to the attainment of retirement age and also pre-retirement age termination

– Severance pay is calculated at a base rate of one month’s wages for each year of service, up to a maximum of nine months pay

– Payment for reward of service consists of adding one month’s pay for every three years of employment, starting with two month’s pay for 3 years, up to a maximum of 10-months wages for 24 years of service

Fully sponsored by Employer

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Employment System: Hiring and FiringIndex: ASEAN Comparison

Country / Region

Difficulty of Hiring Index

Rigidity of Hours index

Difficulty of Firing Index

Rigidity of Employment

Index

Firing Costs (Weeks)

East Asia & Pacific

20 30 22 24 52

Indonesia 61 40 70 57 157

Malaysia 0 0 10 3 74

Singapore 0 0 0 0 4

Philippines 22 60 40 41 90

Thailand 67 40 20 42 47

Source: Doing Business 2004, World Bank

4. Staffing Issues 1 Background and Context



4 Staffing Issues

5 Expatriate Issues


Conclusion7

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Hiring Intention – Next 12 monthsMore companies plan to recruit/add headcount in 2010

4460

4937

8 3

2009 2010

Recruiting/Adding No Change Reducing

Percentage of companies (All Industries)

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Hiring IntentionsAsia Pacific 2010

Source: Mercer 2010 Total Remuneration Survey

Hiring Intentions - Next 12 Months

0

10

20

30

40

50

60

70

80

90

IN CN VN ID KR MY SG TH PH JP TW HK NZ AU

Increase headcount (%) No change (%) Reduce headcount (%)

60%

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8.1%

7.4%

1.3%

5.7%

13.5%

15.0%

8.1%

13.9%

4.8%

3.6%

7.7%

7.3%

4.6%

5.1%

8.7%

6.4%

7.8%

13.9%

13.0%

6.9%

9.1%

3.8%

16.9%

7.4%

7.6%

10.4%

4.0%

5.8%

12.0%

7.5%

8.3%

4.7%

2.6%

6.6%

17.2%

Turnover rate by Industry2007

Mining

Pharmaceutical

2008

Mining Services

Shipping & Logistics

Manufacturing

Life Insurance

Hi-Tech

Chemical

Automotive

Consumer Goods

All Industries

Telecommunication

2009Industry

Source: Mercer Total Remuneration Survey

5. Expatriate Issues 1 Background and Context



4 Staffing Issues

5 Expatriate Issues


Conclusion7

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Cost of Living – Asia Pacific cities

Source: Mercer Cost of Living Calculator, Mar 2010

Cost of Living - Base City Singapore

0

20

40

60

80

100

120

140

Ran

king

100

Sing

apor

e

118

Toky

o

67 67 68

Mum

bai

Man

ila

Dha

ka

98

7076 77 77 78 79

86 8994 96 96

Kual

a Lu

mpu

r

Bang

kok

Wel

lingt

on

Col

ombo

Han

oi

Jaka

rta

Taip

ei

Seou

l

Hon

g K

ong

Syd

ney

Shan

ghai

Bei

jing

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Quality of Living – Asia Pacific cities

Source: Mercer Quality of Living Calculator, Mar 2010

5060

626263

68

7272

79848587

9298100

102103

0 20 40 60 80 100 120

Rank

IslamabadHanoi

MumbaiColombo

JakartaManilaBeijing

BangkokShanghai

TaipeiSeoul

Kuala LumpurHong Kong

TokyoBase City Singapore

WellingtonSydney

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Expatriates: Common issues

When executives are relocated from one country to another, companies need clear, objective information that establishes the quality-of-living differences between cities

The differences in the quality of living are other important factors that affect employees’ willingness to relocate

Cost of living has a direct impact on employees’ living standards

6. Acquiring in Indonesia 1 Background and Context



4 Staffing Issues

5 Expatriate Issues


Conclusion7

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The M&A landscape

A look at some recent examples

What’s driving this activity

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Deals in Indonesia have largely been Out-In and In-In transactions and in the Resource, Financial Services and Consumer Retail sectors

Note: Deal Volume chart includes deals with unannounced deal values, which may not be reflected in the Deal Value chart; Data only for deals with at least 30% stake; Deals denote either target/seller OR bidder (as opposed to target/seller AND bidder) within each specified geography; by announcement date

Source: MergerMarket; Mercer Analysis

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M&A checklist for HRA summary of key things to keep in mind

SEVERANCE and RETENTION

COMPENSATION

RETIREMENT

• Union plans, if any• Retention plans• Restructuring costs

• Incentive plan cash flows • At-risk compensation• High level of benefit costs

• Defined benefit plan liabilities and projected costs• Increasing pension plan governance

• Retiree medical liabilities and projected costs • Cost escalation • Many plans and vendors

HEALTH & BENEFITS

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Indicative characteristics of Indonesian national culture

Source: Hofstede, R. M. (2001). Culture's Consequences: Comparing Values, Behaviours, Institutions and Organizations Across Nations, Thousand Oaks, California: Sage Publications, Mercer Analysis

Collective

Small

Short-term

Collaboration & Consensus

Uncertainty is a given

Individual

Large

Long-term

Competition & Strength

Uncertainty is avoided

Collectivism –Individualism

Power Distance

Time Orientation

Femininity –Masculinity

Uncertainty Avoidance

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Key actions and issues – Culture and communication

Culture– Indonesians tend to obey their leaders without questioning authority– However, they like to be informed well in advance if there is a change– In general, seniority is valued and confrontation, especially to those who are older,

should be avoided

Effective Change Communication in M&As– Communicate culture, history, philosophies, visions, goals, core values, practices

and achievements of the acquiring company to remove uncertainty and give employees a level of comfort, to understand the effectiveness of both formal and informal communication channels and utilize these channels, and to treat those leaving with the same respect and attention as those staying

– English language might be a problem for direct labor level staff. Higher level staff usually have higher educational levels and English language proficiencies

7. Conclusion 1 Background and Context



4 Staffing Issues

5 Expatriate Issues


Conclusion7

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In Summary

Labour costs in Indonesia remain comparatively low– However, higher salary increases estimated in 2011 as compared to 2010, and getting

closer to pre crisis levels– With clear signs of economic recovery and organisations starting to hire again, attrition

rates starting to trend upwards– Inflation could create bigger mismatch between employer/employee expectations

Six in every 10 companies looking to add headcount in the next 12 months– Employers need to keep pace with market practice in order to attract and retain talent– Organisations would need to focus on:

Focused talent management, including segmentationLeadership developmentCompelling employee value proposition

Employers will need holistic human capital approach to drive increased productivity. Expatriate managers can facilitate this process, but employers need to be mindful of cost and quality of living issues to ensure success

Also need to monitor legislative changes to ensure compliance with the law

Indonesia is a hot market for M&A, with a number of recent deals in the Resource, Financial Services and Consumer Retail sectors

Attention to communication and culture is critical for success

Questions?

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For more information on regional strategies, risks and opportunities

Visit our Breaking Down Borderswebsite to access articles, points of view, podcasts and more information on investing in Indonesia.

www.mercer.com/breakingdownborders

Su-Yen Wong Senior Partner and ASEAN Managing Director, [email protected]

Ake AyawongsASEAN Head of M&A Consulting Services, [email protected]

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Next in the Breaking Down Borders webcast series

Doing business in Australia27 April 2011

Access recordings of past webcasts onwww.mercer.com/breakingdownborders- Doing business in India- Doing business in Japan- Doing business in China- Doing business in Korea

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