How Salary Indexation Works for Employees in Indonesia

Factors Influencing Salary Increases:

1. Government Regulations To ensure a decent standard of living for its citizens, the Indonesian government announces annual increases in the minimum wage for workers. Both private and public companies can calculate the percentage increase in salaries for their employees based on this information.The minimum wage is the lowest salary set by the government for workers in the lowest positions with less than one year of service. For example, in Badung district, the minimum wage in 2023 was 3,163,837 Indonesian rupiah. After government indexation in 2024, it increased by 4.89% to 3,318,628.06 Indonesian rupiah.
2. Inflation Rate The issue of inflation also impacts the annual increase in workers’ wages. If inflation occurs, as in the case of current fuel price hikes, the reference for calculating the salary increase percentage should follow the calculation of the minimum wage.It is anticipated that in the future, employee salary growth could reach 7-10 percent. However, not all business sectors will be able to adjust salaries, especially those still recovering financially from the Covid-19 pandemic.
3. Improvement of Employee Welfare As the prices of essential goods rise over time, employee wages should also be periodically adjusted accordingly. One approach is to consider the Living Wage Requirements (KHL) as the standard living needs of a worker for one month.KHL (Kebutuhan Hidup Layak) is determined based on a survey conducted by the National Wage Council. This figure is periodically reviewed at least once every five years. In 2020, KHL consisted of 64 components divided into seven basic community needs, including food and beverages, clothing, housing, education, health, transportation, leisure, and savings. Previously, KHL was used by the Indonesian government as the basis for calculating the minimum wage. However, new regulations now consider inflation and local economic growth rates as key factors for wage increases.
4. Company Financial Capabilities Besides government policy, another critical factor influencing the calculation of salary increases is the financial capability of the company to pay salaries. Not all companies have strong financial conditions, and many were significantly impacted by the Covid-19 pandemic. Some companies still cannot afford to pay full salaries, making annual salary increases impractical.Jakarta’s government itself increased the minimum wage percentage in the province while considering the impact of the Covid-19 pandemic. Growing sectors, such as healthcare, or those unaffected by the pandemic, should follow the 3.27 percent minimum wage increase. In contrast, declining sectors are not obligated to raise employee wages.
5. Industry Average Salary This refers to the average salary paid by certain companies for the same type of job. For example, the average salary for a copywriter in Jakarta is seven million Indonesian rupiah per month. This industry standard is then used by companies to determine their employees’ salaries.
6. Career Path and Employee Position The higher the position and responsibility of an employee, the higher the salary they receive. This is part of a fair employment system. Therefore, when employees are promoted, the company should also calculate the percentage increase in their salary based on their new responsibilities.

Calculating Salary Increases:

To calculate the salary increase percentage, you can follow these simple steps:

1. Find the difference between the new and old salaries. For example, if Jakarta’s provincial government increases the minimum wage from 3,600,000 Indonesian rupiah to 3,900,000 Indonesian rupiah, the difference is calculated by subtracting the old salary from the new salary:Salary Difference=New Salary−Old Salary=3,900,000−3,600,000=300,000 Indonesian rupiah\text{Salary Difference} = \text{New Salary} – \text{Old Salary} = 3,900,000 – 3,600,000 = 300,000 \text{ Indonesian rupiah}Salary Difference=New Salary−Old Salary=3,900,000−3,600,000=300,000 Indonesian rupiah
2. Divide the salary difference by the old salary.Ratio=Salary DifferenceOld Salary=300,0003,600,000=0.083\text{Ratio} = \frac{\text{Salary Difference}}{\text{Old Salary}} = \frac{300,000}{3,600,000} = 0.083Ratio=Old SalarySalary Difference​=3,600,000300,000​=0.083
3. Multiply the ratio by 100 to get the percentage.Salary Increase Percentage=0.083×100=8.3%\text{Salary Increase Percentage} = 0.083 \times 100 = 8.3\%Salary Increase Percentage=0.083×100=8.3%

Thus, the increase from 3,600,000 Indonesian rupiah to 3,900,000 Indonesian rupiah is 8.3 percent. The same method can be used to calculate hourly wage increases. For instance, if the local government sets an 8.3 percent minimum wage increase, this can be the baseline for the lowest wage increase in a company. If a company’s lowest salary is currently 3,700,000 Indonesian rupiah, it should increase at least to 3,900,000 Indonesian rupiah. Alternatively, the company can raise wages by 8.3 percent, resulting in a new salary of 4,007,100 Indonesian rupiah.

If the company wants to pay more due to high employee productivity and good financial conditions, it can increase wages by 10 percent or more. Nonetheless, salary increases should adhere to the company’s wage structure and scale, ensuring that salary levels between job groups remain proportional and without disparities.