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Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
HUMAN RESOURCE MANAGEMENT IN STATEOWNED AND PRIVATE ENTERPRISES IN INDONESIA
Wahyu Sutiyono
To cite this article: Wahyu Sutiyono (2007) HUMAN RESOURCE MANAGEMENT IN STATEOWNED AND PRIVATE ENTERPRISES IN INDONESIA, Bulletin of Indonesian Economic Studies,
43:3, 377-394, DOI: 10.1080/00074910701727621
To link to this article: http://dx.doi.org/10.1080/00074910701727621
Published online: 18 Apr 2008.
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Date: 18 January 2016, At: 20:06
Bulletin of Indonesian Economic Studies, Vol. 43, No. 3, 2007: 377–94
HUMAN RESOURCE MANAGEMENT
IN STATE-OWNED AND PRIVATE ENTERPRISES
IN INDONESIA*
Wahyu Sutiyono*
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University of Canberra
This paper compares the management of human resources (HRM) in two large,
modern sector business organisations, one state-owned and the other privately
owned, in the context of the rapidly deregulated Indonesian economy of the mid1990s. The two organisations differed greatly in the extent to which HRM was able
to underpin the efficient management of the organisation. Owing to fundamentally
different approaches to recruitment, training and development, employee performance management and remuneration, the state-owned enterprise had far less effective HRM than its private sector counterpart, and could learn a great deal from
how the privately owned organisation responded to the challenges presented by
deregulation. The findings suggest that firm effectiveness depends significantly on
the HRM function, and that the performance of state-owned enterprises tends to
suffer as a result of interference in HRM processes by their government owners.
INTRODUCTION
Indonesia’s large state enterprise sector has played an important role ever since
independence. The number of state-owned enterprises (SOEs) rose during
Soekarno’s Guided Economy period in the late 1950s as Dutch and other foreign
companies were nationalised. Some were returned to their original owners in
the late 1960s with the advent of the ‘New Order’ under Soeharto. The growth
of some of the remainder was significantly boosted by Indonesia’s oil boom
windfall in the mid to late 1970s. But with the slump in world oil prices in the
mid-1980s, many were restructured as limited liability corporations, and were
(nominally, at least) expected to operate more or less as private firms. SOEs had
to adjust to market deregulation in some sectors (most obviously, banking), and
there was also some talk about privatisation, but little has ever been achieved on
* This paper is drawn from my PhD research. Thanks are due to the human resources man-
agement staff at PT Telekomunikasi Indonesia and PT Astra International for their help
during my field work. I am grateful to Ross McLeod and Chris Manning for their advice,
and to the Indonesia Project at the Australian National University, which provided me
with a visiting fellowship to write this paper.
ISSN 0007-4918 print/ISSN 1472-7234 online/07/030377-18
DOI: 10.1080/00074910701727621
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this front.1 Further liberalisation of the economy in 1994 opened up to private
sector participation (both domestic and foreign) industries previously monopolised by state enterprises in the telecommunications, drinking water and electricity sectors (GOI 1994).
Earlier studies show that SOEs have generally performed poorly (Habir 1990;
Hill 2000), and comparisons of SOE and private firm performance reveal the
former to be inferior (Mardjana 1995; Funkhouser and MacAvoy 1979, cited in
Hill 2000: 106; Hill 1982, cited in Hill 2000: 106). The Ministry of State-owned
Enterprises reported in 2006 that only 74 of 158 SOEs in 2004 generated a profit
and were able to provide a dividend. The size of SOE profits ranged from over
$100 million to below $20,000. About 90% of total SOE profits were contributed by
only 10 SOEs (Ministry of State-owned Enterprises 2006). Between 1992 and 2004,
the return on assets averaged only 2% and the return on equity 8%, reflecting suboptimal management and operation of SOEs (Djajanto and Rosdaniah 2006). Poor
performance of SOE employees has also been documented, and is presumably the
result of past policies emphasising physical investment rather than human capital
as the means to improve shareholder value (Rosdaniah 2006).
The most obvious way to overcome the wastage of resources implied by SOE
performance is to shift ownership of these companies into the private sector,
where they could expect to be managed more professionally (Siregar 2001: 294).
Thus privatisation was given considerable emphasis in the International Monetary Fund (IMF) program of post-crisis assistance between 1997 and 2003, as the
government’s various letters of intent to the IMF show (see, for example, GOI
1997, 2000). In reality, however, post-crisis implementation of privatisation has
been near negligible.
Another way of improving the efficiency of SOEs (and, indeed, public sector
organisations in general) is to encourage them to learn from the private sector
and adopt management practices more like those of private enterprises (Hughes
2003: 45; Pynes 2004: preface), not least in human resource management (HRM)
(Condrey 2005: xv; McLeod 2006a). With that in mind, the present study set out
to compare HRM in two large companies in Indonesia, one state owned, the other
privately owned. It found noticeably more effective HRM practices in the private
company than in its state counterpart.
Brief overview of HRM concepts
‘Human resource management’ refers to the policies, practices and systems
by which a firm recruits and deploys its workforce, and influences employees’
behaviour, attitudes and performance in pursuit of its goals (Stone 2005: 19). It
has been shown that companies that attempt to increase their competitiveness by
investing in new technology and by becoming ‘employers of choice’ also make
best-practice investments in staffing, employee development and pay practices
(De Cieri and Kramar 2005: 39–40). Of course, it is somewhat misleading to think
of ‘companies’ doing these things. It is company employees—managers—who
make the relevant decisions, at various levels and across a wide range of management activities. And it is the HRM function that is responsible for ensuring that
1 There have been several sales of minority shareholdings to private sector investors, but
this has had little impact on management, and therefore on performance.
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individuals with appropriate skills are placed in the right positions and provided
with proper incentives to make sound decisions. Performance of the organisation
is thus crucially dependent on HRM.
The case studies reported here focused on four aspects of HRM—recruitment,
training and development, performance management and remuneration—with
a view to determining the extent to which each supported the effective management of the organisation.
The objective of recruitment is to obtain people with appropriate skill, knowledge and attitudes to support the achievement of organisational goals. Training
and development activities are intended to augment the capability of employees
to carry out existing and likely future jobs,2 and where necessary to modify their
behaviour (Stone 2005: 331–2). Performance management involves processes used
to ensure that employee actions and behaviour are congruent with the organisation’s objectives; its prerequisite is clear communication to employees about
their roles and responsibilities in relation to these objectives (Clark 2005: 318–9).
By appraising employee performance and linking it to remuneration and other
aspects of HRM such as promotion, an employer can provide individuals with
strong incentives to act in the firm’s interests. The remuneration packages offered
need to be competitive with what other employers are offering if the firm is to
recruit and retain the services of individuals with desired combinations of skills
and knowledge; this in turn requires constant attention to conditions in the labour
market (Milkovich and Newman 2005: 187, 358).
Research method
The research involved parallel case studies, conducted in 1995, of PT Astra International, a publicly listed private sector holding company or conglomerate with
numerous subsidiaries, especially in the automotive industry, and PT Telekomunikasi Indonesia, the state-owned telecommunications company. While these
companies were very different in nature, they are comparable in size (both with
several thousand employees), organisational structure (each with a head office
plus a number of divisional or regional offices for Telkom and subsidiaries for
Astra), and reliance on well-established, moderately sophisticated technology
(making similar demands on employees’ skills).3
Qualitative data were obtained from interviews, internal documents (such as
reports and company bulletins), external sources (the print media), and direct
observation of the companies’ operations. Interviews were conducted with both
HRM specialists and managers (as HRM service producers) and with line managers (as users of the services). In total, 32 employees in Telkom and 29 in Astra were
interviewed. Job titles of all interviewees are provided in the appendix.
2 In Indonesia, such training is particularly needed because the education system is often
unable to produce graduates with the right kinds and levels of skills.
3 The mobile phone revolution that has been sweeping Indonesia had hardly begun in
1995.
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THE CASE STUDY COMPANIES
PT Telekomunikasi Indonesia
PT Telekomunikasi Indonesia, commonly known as Telkom, held the sole licence
to provide domestic telecommunications in Indonesia until the early 1990s. In 1994
Telkom had approximately 42,000 employees, located in its head office in Bandung and in 12 operational regions across all provinces. Established by the Dutch
at the beginning of Indonesia’s telecommunications era in the late 19th century,
it evolved from a Dutch-owned company based on Dutch-Indies commercial law
(Indische Bedrijven Wet, IBW) into a government agency (Perusahaan Negara,
PN) based on Government Regulation 240/1961, providing public services during former president Soekarno’s Guided Economy era and beyond. The entity
was reconstituted in 1974 as a Perusahaan Umum (Perum) or public corporation,
based on Government Regulations 44/1969 and 45/1969 (Ramadhan, Sriwibawa
and Yusra 1994: 78), providing public services but also acting as a profit-making
entity (Telkom 1993; 1994). In this partly subsidised public corporation form it
was expected to act as an agen pembangunan (agent of development) (Ramadhan,
Sriwibawa and Yusra 1994). In 1991 its legal status was again changed, under
Government Regulation 25/1991, to that of a limited liability company (Perusahaan Perseroan, or Persero), and it was renamed PT Telekomunikasi Indonesia.
By the early 1990s, businesses wanting to compete effectively in global markets increasingly needed sophisticated telecommunications services, but Indonesia lagged far behind its neighbours in this field.4 With this in mind, and in line
with Indonesia’s obligations under the General Agreement on Trade in Services
(GATS)—encompassing telecommunications services among others (Setiawan
1994; Raiche 1994)—deregulation measures were introduced to encourage the use
of new technologies, and to stimulate the growth of telecommunications services
by tapping the resources of the private sector (World Bank 1995: 3). Two new private sector providers entered the domestic market in 1993, employing both satellite and land-based telecommunication systems. Telkom had lost its monopoly,
and now faced vigorous competition in an environment of rapid technological
change in which mobile phone use was about to explode (Lee and Findlay 2005).
In 1995 Telkom made a significant strategic decision to establish joint operation
schemes (KSO, Kerja Sama Operasi) for the installation and operation of fixedline telephones in five regions (Lee and Findlay 2005: 345–54). Its partners in the
five joint venture companies included highly reputable international telecommunications firms and their domestic partners, and it was hoped that the new
arrangements would help Telkom to enhance the capacity of its human resources
through inward transfer from these partners of sophisticated know-how in both
technology and management (Prasetiantono 2004).5
4 With an average of 1.3 line units per 100 people in 1994, Indonesia’s telephone density
was lower than that of neighbours Malaysia (10 line units), Thailand (2.5 line units) and the
Philippines (1.7 line units) (ITU 1994). The successful call rate was only 44% for automatically dialled local calls, compared with Japan’s 83%, Malaysia’s 50% and Singapore‘s 70%;
for long-distance direct-dialled calls the rate was as low as 36% (World Bank 1995: 20).
5 The KSO scheme was unsuccessful and was prematurely terminated after the study was
completed (see postscript).
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Influences on HRM practices in Telkom
After Indonesian independence in 1945, Telkom inherited from its Dutch predecessor a civil service employment system not well suited to a profit-oriented
firm operating in a competitive, rapidly evolving environment. The granting of
increased autonomy to SOEs in the early 1990s was intended to encourage widespread adoption of more modern management practices. This was reflected in
Telkom’s formulation, for the first time, of a corporate plan, which emphasised
the need to increase productivity and efficiency, particularly by improving the
quality of human resources through modifications to the employment system.
There were changes to a number of personnel practices that had originated in
the civil service, including the system of employment grades and the related salary
structure, and the payment of benefits and allowances in addition to salary. Under
the old system, employment grades comprised four broad groups (golongan), each
divided into four or five levels (tingkat); in parallel with these, each employee also
had a ranking (pangkat), corresponding to the group and level achieved. Higher
rankings (eselon) corresponded to managerial positions. The civil service system
had a heavy emphasis on seniority: salary increases occurred every two years,
and promotion through the levels, groups and ranks occurred fairly automatically at four-year intervals. The new employment grade system was based on a
simplified 25-grade structure. In an attempt to signal the new orientation, Telkom
changed the name of the personnel department from kepegawaian (personnel) to
sumber daya manusia (SDM, human resources), denoting a shift from mere administration of personnel matters to an emphasis on development of the company’s
human resources—now seen as a key determinant of performance.
Despite the rhetoric of the corporate plan, actual changes to the company’s
HRM policies and practices were modest. Although some civil service-style personnel practices were modified, important counter-productive elements were
retained, including seniority-based promotions (notwithstanding stated intentions to the contrary) and de facto lifetime employment.
PT Astra International
What was to become the PT Astra International group, commonly known as Astra,
was founded by William Soeryadjaya (Tjia Kian Liong) in 1957 as a small trading
company. By 1995 it had developed into a huge conglomerate operating in various industries, including automotive assembly and manufacturing, financial services, heavy equipment, forestry and wood products, agribusiness and electronics.
Astra has been listed on the Jakarta and Surabaya Stock Exchanges since 1990. Its
ownership became far more widely dispersed after Soeryadjaya was forced to sell
the majority of his shares in 1992 to cover losses incurred through the collapse of
the family-owned Bank Summa (MacIntyre and Sjahrir 1993: 12–16). Astra’s 1995
financial report included 125 subsidiaries comprising 47 direct and 78 indirect
shareholdings, and approximately 105,000 employees (Astra 1995).
Astra evolved along with the development of the Indonesian economy. From
the late 1950s it built alliances with various foreign firms, including Toyota, Honda,
Yamaha, BMW and Peugeot. This allowed it to become involved in vehicle assembly and manufacturing in the 1970s, when the New Order regime reopened the
economy to foreign investment. Astra expanded into banking and financial services in the late 1980s, following the deregulation of the finance sector. Its business
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strategy at the time was focused on preparing itself to face much stronger competition when the ASEAN Free Trade Area (AFTA) came into being in 2003, and when
Asia Pacific Economic Cooperation (APEC) agreements took effect in 2010 (for
developed economies) and 2020 (for developing economies, including Indonesia).
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Influences on HRM practices in Astra
Strategic alliances with leading foreign companies played an important role in
the development of HRM practices in Astra companies. Although predominantly
influenced by its Japanese partners (especially Toyota, Komatsu and Nissan),
Astra also adopted and adapted HRM practices of other partners from Korea, the
US and Germany (such as Samsung and General Electric Capital Corporation)
in relation to recruitment, remuneration systems, training, performance management and career development. Of particular importance was the concept of total
quality control (TQC), adopted from its Japanese partners. TQC is concerned with
the development and maintenance of high quality not only in products and services but also in management functions such as marketing, finance and human
resources; it became the Astra ‘culture’.
TELKOM AND ASTRA: HRM PRACTICES COMPARED
We now turn to key aspects of both companies’ HRM policies and practices: recruitment; training and development; performance management; and remuneration.
Recruitment
Still following civil service practice, Telkom recruited predominantly high school
and university graduates, who entered the employment hierarchy at base levels.
Selection emphasised applicants’ educational qualifications, and paid little regard
to work experience gained from other organisations. Higher-level positions were
filled entirely by internal transfer and promotion of current employees. Interviewees for the study sought to justify this reliance on the ‘internal labour market’ by
arguing that skill development was carried out within the organisation through
on-the-job training and development programs.
By the early 1990s, however, Telkom’s environment was changing rapidly.
Partial deregulation of the industry meant that it had new competitors, and the
government now expected it to operate much more like a privately owned, profitoriented business—precisely at a time of surging technological change in the telecommunications sector. The technical expertise and skills needed to conduct a
modern business enterprise in an environment of rapidly changing technology
were very different from existing capabilities, which focused on the delivery of
a partially subsidised fixed-line telephone service under monopoly conditions.
The new circumstances demanded that the company quickly acquire an array of
skills not important to it in the past, and therefore in short supply internally—if
they existed at all. The system of hiring only new graduates at base entry levels
precluded an appropriate response, and the speed of change outstripped the company’s acquisition of needed skills.
The evolution of Astra’s business activities influenced its recruitment strategies.
Like Telkom, it recruited new high school and university graduates and provided
training to further their skills. However, this practice was accompanied by recruit-
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ment to senior positions of highly skilled and often very experienced people from
outside Astra when the skills needed were not available within the organisation.
At the time of the study, Astra was very conscious of impending liberalisation
resulting from the new AFTA agreement, under which Indonesia would be rather
more open to international competition. Thus, Astra was one of the few firms that
established English courses for employees to internationalise the outlook of its
workforce. In terms of recruitment, its strategy was to seek people who possessed
not only higher skills but also international experience. Teams were sent abroad
to recruit Indonesian students studying at universities in countries such as the US,
Australia and Germany.
However, when the group sought to take advantage of opportunities resulting from deregulation in the late 1980s (in banking and finance) and the early
1990s (for example, in electricity and telecommunications) by embarking on market expansion and further diversification, it could not acquire the necessary skills
quickly enough by recruiting new graduates and developing their capabilities
from within. Astra therefore more actively recruited highly skilled and experienced people in the external labour market, often hiring them away from its competitors and multinational companies operating in Indonesia by offering highly
competitive employment packages. This kind of labour market competition was
vigorous at the time, frequently relying on the services of external recruitment
agencies or ‘head hunters’. From the reverse perspective, an important aspect of
HRM in these conditions was finding ways to minimise the loss of skilled individuals to other firms; high labour turnover was of considerable concern.
In sharp contrast, external recruitment to high-level positions was almost
entirely absent in Telkom, except for appointments with a political flavour; for
example, at the time of the study the director of human resources was a retired
army officer—presumably a political appointee of the government. Other than
this, the company relied on internal promotions to fill high-level positions.
Training and development
In the early 1990s Astra adopted a strategy known as ‘Astra Vision 2000’, which
seems to have influenced training and development activities. There was a shift
from focusing on disparate management functions such as marketing, finance
and production to fostering an understanding of new business opportunities,
strategies and leadership skills. The new approach was accompanied by a name
change: the Astra Education and Training Centre became the Astra Management
Development Institute.
In Telkom, the managers interviewed were concerned about their inability to
succeed in the new competitive and profit-oriented environment. They felt the
need for new skills and expertise in marketing, in market research and in dealing
with imports and taxation matters. Yet these skills were not included in the company’s training activities. This suggested that Telkom had not undertaken any
proper analysis of training needs.
The early 1990s saw an increase in training and development activities in both
companies in cooperation with their foreign business partners, usually involving
visits by company personnel to their partners’ facilities overseas. Both companies
claimed to have benefited from the knowledge gained in this manner, but Astra’s
practices were better designed to ensure this because the firm made conscious
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efforts to disseminate such knowledge within the workplace. Its ‘best-practice
program’ set out strategies for sharing and applying knowledge acquired from
these visits, and was regarded as critical to the company’s future.
Similar concrete post-training follow-up measures appeared to be lacking in Telkom. Returning employees were often not placed in positions where
they could fully use new knowledge and skills. This was also true of those who
undertook long-term formal education in other countries. Positions vacated by
the latter while overseas were usually filled by others, but suitable new places
for returnees were not made available. Typically this was due to rigidities in
the seniority-based system of promotion, which tended to preclude promotion of employees to more responsible and demanding positions after they had
completed higher degrees and gained extensive international experience. The
usual short-run solution was to create new positions for returnees that involved
temporary tasks, rarely well matched with their new capabilities. Inappropriate
post-training placements thus wasted much of the company’s investment in its
human resources, and tended to weaken morale and diminish employee motivation. Moreover, little attempt was made to disseminate newly acquired skills and
knowledge to other employees.
One particularly revealing aspect of training is that devoted to creating and
strengthening what management regards as an appropriate ‘organisational culture’. Both companies claimed to foster organisational culture through training,
and emphasised this in their training programs. In Astra, the focus of the major
training program was Astra Total Quality Control (ATQC), Astra’s adaptation of
the TQC concept introduced by its Japanese partners. ATQC was seen as synonymous with Astra’s organisational culture. It promoted quality improvement measures both in manufacturing production processes and in management areas such
as marketing, finance and accounting, planning and research and development
(Sato 1998: 327). New employees undertook ATQC training within the induction
program, while other employees were trained in separate groups based on their
level in the workforce and the relevance of ATQC to their work practices. Such
training was considered especially important for many aspects of the workflow at
various management levels.
In regard to training in organisational culture, Telkom bore a much closer resemblance to the civil service, with a large proportion of training activity dedicated to
fostering the culture of the government. Throughout an employee’s career there
was heavy emphasis on imparting an understanding and acceptance of the five
principles of the state ideology, Pancasila, and training of this type was a prerequisite for promotion. The leadership training course (Suspim, or Kursus Pimpinan)
for supervisory and managerial levels placed increasingly heavy emphasis on the
values of the governing regime, culminating in the conduct of Suspim courses for
the highest management levels by the National Defence Institute (Lemhannas,
Lembaga Pertahanan Nasional). ‘Training’ of this kind, along with compulsory
membership of the Korps Pegawai Negri (Korpri, the State Employees Corps) is
widely viewed nowadays as having been intended to cement an attitude of support for the New Order regime, or at least to minimise opposition to it, within the
public sector. At best, this training did not advance the objectives of Telekom as
an enterprise. At worst, it probably helped to institutionalise the corruption, collusion and nepotism that came to characterise the New Order regime as a whole,
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by encouraging employees to place the regime’s interests, and those of its loyal
bureaucrats and SOE employees, above those of the general public (McLeod
2006b: 19–24).
In short, the two companies’ training programs attempted to foster very different
attitudes and values among their employees. While Astra’s organisational culture
training focused on quality of outputs and productivity of inputs, Telkom spent
scarce resources promoting the government’s ideological values, and gave correspondingly less attention to inculcating values and skills essential to the market-oriented business success that was, nominally at least, the company’s primary goal.
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Performance management
In Astra, employee performance was managed within the ATQC framework, which
involved communicating organisational goals to the various levels of the workforce. This approach appeared to help managers translate higher-level goals into
clear tasks for their subordinates, and guidelines on how to carry out these tasks
were provided in a structured manner through ATQC processes. The sequence
of these processes—formulating plans, putting plans into practice, auditing and
assessing outcomes, and taking corrective action, abbreviated as ‘plan, do, check,
action’—appeared effective in allocating tasks among individuals and ensuring
they were carried out. It also facilitated discussion between supervisors and subordinates aimed at achieving common goals. To ensure consistency and program
‘ownership’, both workers and supervisors were trained extensively in ATQC. In
general, the Astra work environment seemed open and conducive to the conduct
of performance review and appraisal.
With the formulation of its corporate plan in the early 1990s, Telkom adopted
an approach to employee performance management known as Satuan Kerja Individu (SKI, individual performance measurement), which was intended to align
employee activity with organisational goals by setting targets and measuring
performance relative to them. In practice, however, dissemination of Telkom’s
employee performance targets was less systematic than that of their counterparts
in the Astra system. Managers were less familiar with these goals in Telkom than in
Astra. Telkom managers’ goals seemed arbitrary, and their tasks were not properly
defined or based on clear guidelines for implementation. This was exacerbated by
the fact that the government made various demands of managers that were unrelated to company objectives, such as attending meetings unconnected with their
work and carrying out projects linked to the government’s political activities.
Performance appraisal was more open in Astra than in Telkom. Astra’s employees were asked to conduct self-evaluation in addition to appraisal by their supervisors, based on the tasks allocated to them. Both evaluations were compared and
discussed with the supervisor. The appraisal process appeared to be taken more
seriously in Astra than in Telkom, with appraisals being used for purposes such
as determining remuneration.
Remuneration and performance
In the early 1990s a new salary structure was introduced at Telkom, based on the
simplified system of 25 employee grades established as part of the company’s corporate plan. Additional benefits and special allowances, many of which had been
paid in kind (for example, rice allowances), were consolidated, and the equivalent
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monetary amounts incorporated into the remuneration package to make the pay
structure more transparent. These changes to the pay system were intended to
allow the company flexibility to link remuneration to employee performance, and
to reduce the emphasis on seniority.
The notion of linking remuneration to performance was still new to Telkom
in 1995, having only recently been introduced as part of the new corporate plan.
Intended to increase productivity, the change extended the restructuring of pay
scales to provide management with the flexibility to vary remuneration in accordance with employee performance at the level of both individuals and groups.
The SKI system for performance appraisal had been intended to measure Telkom
employee performance more effectively than the previous Daftar Penilaian Pelaksanaan Pekerjaan (DP3, literally: Work Implementation Evaluation Register). The
DP3 approach mirrored that found throughout the civil service, and focused (nominally, at least) on intangible employee attributes such as responsibility, loyalty,
honesty, cooperativeness, general attitude and initiative, rather than on output.
The SKI performance evaluation system functioned poorly, however, because
of managers’ reluctance to undertake meaningful appraisals. Those interviewed
argued that these would be perceived as criticism of their subordinates, something considered culturally unacceptable. Thus, although Telkom paid lip-service
to performance appraisal, it was clear from interviews that its approach to it still
reflected the old DP3 system. Furthermore, of the criteria listed above, the DP3
focused most closely on loyalty to the state, as proxied by understanding and
acceptance of the constitution and Pancasila. Except in highly unusual cases where
this acceptance was called into question, DP3 appraisals were almost always
favourable, and there was little differentiation among individuals. As a result,
nearly all employees obtained an automatic salary increase every two years and
an automatic salary grade increase every four years.
Many other Telkom personnel decisions, including those on promotions and
temporary releases for training, were also influenced by these uninformative
DP3 appraisals. Managers interviewed were under no illusion that the DP3
reflected actual performance. Poor performance went unrecorded, and superior
performance went unrewarded; high performance individuals were promoted
at much the same rate as those who achieved little. The company therefore
failed to ensure that it filled its positions with the most capable and hard-working employees available.
In short, Telkom’s attempt to link pay to individual performance met with little success, because the performance appraisal process was rendered ineffective
by managers’ reluctance to differentiate among their subordinates, and by the
continued DP3 focus on ‘loyalty’ as the principal indicator of ‘performance’. In
such circumstances, employees had little incentive to improve productivity by
working harder, and the corporate plan’s commitment to this change in HRM had
limited, if any, impact on company performance. Moreover, the company was still
struggling to find any suitable system for adjusting employee earnings to group
performance.
In Astra, by contrast, the link between pay and employee performance was
facilitated by the performance management system within ATQC. The level of
employee performance—measured against specific business-related criteria—was
directly used to determine the following year’s salary, as well as the individual’s
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annual bonus. It was also used for determining career development needs involving either counselling or training. Employees therefore had strong incentives to
work in the best interests of the firm.
In Telkom, as in most government-owned firms in Indonesia, a significant
component of remuneration was the annual bonus. This was a fixed proportion
of total company profit, called jasa produksi (‘production contribution’), and was
shared equally among all employees in proportion to their basic salaries. Such
an arrangement reflects a spirit of egalitarianism, but is unrelated to individual
productivity. The bonus was typically considered an entitlement, rather than a
reward to be achieved through good performance. Some managers interviewed
for the study said that it was seen as unfair because it deliberately treated high
and low performers alike. Those who worked harder, and thereby contributed
more to company performance, were de-motivated by seeing the fruits of their
labours flowing disproportionately to ‘free riders’.
Remuneration and labour market conditions
Actual and planned deregulation of goods and services markets created a rapidly changing labour market in which highly skilled people at managerial and
professional levels were in short supply. Fierce competition for their services led
Astra to give considerable attention to setting appropriate remuneration levels
through several measures. First, the company obtained information on market
salary levels from periodic surveys, and used this to adjust salaries offered to its
staff. Second, it ensured that the salaries of people newly hired at managerial and
professional levels were competitive—this often in the form of a salary ‘package’.
Third, particularly during the deregulation period, salaries for new entry-level
recruits were increased to attract skilled people. This strategy was successful in
attracting well-qualified graduates, but it often generated discontent among existing employees, whose salaries were not increased to similar levels. As a strategy
to retain existing employees, Astra introduced a ‘cafeteria benefit system’, allowing staff to select from a menu of non-salary benefit schemes, such as financial
assistance towards the purchase of vehicles and spectacles.
In Telkom, the policy of hiring new employees only at base entry levels and
regardless of experience meant that the firm paid little attention to market salaries
for more highly skilled and experienced individuals. Information on market pay
levels was obtained only anecdotally, and the salary structure was rarely modified
in response to changing market conditions. While Telkom did not have an employee
retention strategy equivalent to Astra’s ‘cafeteria benefit system’, it did not seem to
face problems of employee retention, perhaps because of the job security its employees enjoyed at that time as members of the wider government service.
LESSONS LEARNED
This study compared the management of human resources in two large, modern
sector business organisations, one state-owned and the other privately owned, in
the context of the rapidly deregulated Indonesian economy of the mid-1990s. Astra
and Telkom appeared to have similar approaches to recruitment, hiring new graduates and developing them through work and training. Unlike Astra, however,
Telkom lacked the flexibility to obtain highly skilled people, especially at senior
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and managerial levels. This left Telkom at a particular disadvantage because its
training and development systems were not adequate to meet the organisation’s
fast-changing needs. Compared with that of Astra, Telkom’s employee performance management strategy lacked a clear relationship to organisational goals. The
remuneration systems lacked market orientation and provided little incentive to
motivate employees to perform better. Overall, the two firms differed greatly in
the extent to which HRM was able to underpin the achievement of organisational
goals such as efficiency. HRM was far less effective in the state-owned enterprise
than in its private sector counterpart.
There are valuable lessons that Telkom (and other SOEs) can learn from the
way Astra responded to the challenges presented by wide-ranging deregulation
of the economy. Perhaps the most basic lesson is that organisational effectiveness
depends largely on the HRM function, the over-riding objective of which is to
ensure that positions at all levels throughout the firm—including managerial levels—are occupied by individuals who possess skills, knowledge and experience
appropriate to those positions, and who face strong incentives to work hard and
effectively in the best interests of the firm. In a rapidly evolving business environment, firms will lack the flexibility needed to respond to new threats and opportunities if they restrict themselves to recruiting and training new high school and
university graduates, and cannot employ high-performing individuals from outside the organisation to fill senior positions.
In turn, firms that accept this reality and hire from outside whenever the necessary skills are unavailable from within must also pay careful attention to—
and be prepared to match—the level of salaries in the market for individuals
with the skills and experience required for any given position. If the market
is changing quickly, remuneration packages offered to new hires and existing
employees must be adjusted accordingly. Failure to do so will prevent the firm
from recruiting people of sufficient calibre, and make it vulnerable to ‘poaching’
by other firms.
SOEs can also learn from Astra the benefits of meaningful performance management. This involves using performance evaluation to identify employees
worthy of promotion—or needful of counselling or further training. It creates
strong incentives to work hard and effectively, by linking evaluation to decisions about salary increases, annual bonuses and training and development. Of
key importance is that what is evaluated is the actual performance (output) of
employees, and not characteristics such as ‘loyalty’ that are difficult to measure
and interpret, and that may amount to nothing more than a willingness to conform to politically acceptable values of little or no relevance to the firm’s business
objectives.
Finally, the study confirms that the effectiveness of SOEs tends to suffer as a
result of interference by their government owners. Like other SOEs, Telkom’s
resources were misallocated to supporting the then government’s political agenda,
distracting its managers from their more legitimate task of striving to meet the
enterprise’s commercial goals. Unfortunately, however, it was precisely the desire
of politicians and governments to misuse SOEs to their own ends that suggested
that this behaviour was unlikely to change in the near future. It also provided
a clear explanation for why so little progress was achieved with privatisation,
despite years of talk about its desirability.
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The study captured data from various sources. These included interviews with
people at various management levels, both in the HRM area and among the users
of HRM services in line management (see appendix). Other sources of evidence
included internal reports and bulletins, the print media, and direct observation of
company operations. Observation was useful for corroboration purposes and for
revealing actual practices as opposed to stated policies, since the latter were often
not reflective of day-to-day implementation. It is acknowledged that this study
could have been more representative if the sample had included employees other
than managers, since they are directly affected by HRM policies. It is therefore
suggested that further research might address this issue.
POSTSCRIPT
This postscript provides an update on the business environment and the management of human resources in both companies over the period since the data were
collected in 1995. It is based largely on secondary sources that are self-reporting
in nature, such as annual reports and company websites, rather than on data collected from the sources used in the original study, such as interviews and direct
observation within the companies. Nonetheless, it gives some indication of the
subsequent development of HRM in the case study organisations.
Two years after the data for this study were collected, Indonesia suffered serious economic damage from the Asian financial crisis of 1997–98. The corporate
sector collapsed and both Telkom and Astra were severely affected. The economic
crisis and the accompanying fall in the value of the rupiah caused large foreign
exchange losses for Telkom, as well as a significant decline in its business through
cancelled phone subscriptions. Its share price therefore fell rapidly in 1998 (Abeng
2001). The KSO scheme, which had held the promise of transferring much foreign
technological and management know-how to Telkom, was terminated prematurely in 2005. This was the result of significant disputes between the company
and its KSO partners, reportedly due to the latter’s under-performance against
agreed targets in the wake of the economic crisis (Prasetiantono 2004; Lee and
Findlay 2005: 345–54).
The telecommunications business environment Telkom faces has become
increasingly competitive, while transparency requirements imposed by the stock
exchange regulatory authority have intensified (Telkom 2006). Up to 2005, Telkom responded to global competition and changes in telecommunications regulation by widening its business to include not only fixed-line connections but also
CDMA (code division multiple access), cellular and internet provider services,
and interconnection network provision. It now has 10 subsidiaries, running businesses mainly in telecommunications and supporting industries (Telkom 2005).
Corporate governance, seen by some as a major issue in the economic crisis, has
since received a great deal of attention in Telkom, as is the case in the wider community of SOEs in Indonesia.
In the area of recruitment, internal appointment of employees, rather than
external recruitment, still seems to be the norm at Telkom, as was the case in
the 1995 study. However, job vacancies for some managerial positions are advertised internally through ‘job tenders’. While selection is based on criteria such as
a ‘fit and proper’ test, educational qualifications remain an important factor in
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the selection process. The apparent lack of external recruitment appears to reflect
Telkom’s need to reduce over-staffing. Indeed, the number of employees has been
falling. Early retirement, a practice more common in the private sector and rarely
used by SOEs, has been applied. Telkom began reducing its workforce in late 1995
when it made an initial public offering and undertook company restructuring.
The number of employees declined from around 42,000 in 1994 to 37,500 in 1995
(Prasetiantono 2004) and around 34,000 in 2006, with 27,600 in Telkom itself and
6,400 in its subsidiaries (Telkom 2006).
Training and development seem to have become more diversified, with courses
undertaken in international institutions on the rise. In addition to various forms
of technical and management training, an emphasis on raising education levels
through bachelor, master and doctoral degrees remains apparent. However, it is
not clear from company documents how skills acquired through training influence an employee’s deployment or remuneration.
Performance management, particularly the evaluation of employee performance,
is discussed in the section of the Telkom website that deals with transparency as part
of the company’s corporate governance framework. It is reported there that performance evaluation for individual employees is conducted on-line, and involves
both self-evaluation and evaluation by peers, subordinates and supervisors, resulting in a performance grade for promotion purposes.6 This approach should be able
to differentiate performance among employees, provided that everyone involved
in the process is able to provide a frank evaluation, resulting in constructive discussion directed at employee development—a feature that was absent in the 1995
study. It remains unclear whether individual evaluation results are used as an input
to determining remuneration, or training and development needs, however.
Remuneration is now linked to performance at the group or division level:
annual bonuses are allocated on the basis of group performance, which is evaluation in a separate process from that for individuals. Each employee then receives a
share of the bonus based on salary level (Telkom 2006). It might be more beneficial
if the group approach were to be complemented by use of individual performance evaluation results to allocate bonuses within the group. It is hard to understand why an individual’s bonus is calculated on the basis of salary level—which
does not differentiate between low and high performers—when the company has
access to individual performance grades that would allow bonuses within the
group to be allocated on merit.
O
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
HUMAN RESOURCE MANAGEMENT IN STATEOWNED AND PRIVATE ENTERPRISES IN INDONESIA
Wahyu Sutiyono
To cite this article: Wahyu Sutiyono (2007) HUMAN RESOURCE MANAGEMENT IN STATEOWNED AND PRIVATE ENTERPRISES IN INDONESIA, Bulletin of Indonesian Economic Studies,
43:3, 377-394, DOI: 10.1080/00074910701727621
To link to this article: http://dx.doi.org/10.1080/00074910701727621
Published online: 18 Apr 2008.
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Date: 18 January 2016, At: 20:06
Bulletin of Indonesian Economic Studies, Vol. 43, No. 3, 2007: 377–94
HUMAN RESOURCE MANAGEMENT
IN STATE-OWNED AND PRIVATE ENTERPRISES
IN INDONESIA*
Wahyu Sutiyono*
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University of Canberra
This paper compares the management of human resources (HRM) in two large,
modern sector business organisations, one state-owned and the other privately
owned, in the context of the rapidly deregulated Indonesian economy of the mid1990s. The two organisations differed greatly in the extent to which HRM was able
to underpin the efficient management of the organisation. Owing to fundamentally
different approaches to recruitment, training and development, employee performance management and remuneration, the state-owned enterprise had far less effective HRM than its private sector counterpart, and could learn a great deal from
how the privately owned organisation responded to the challenges presented by
deregulation. The findings suggest that firm effectiveness depends significantly on
the HRM function, and that the performance of state-owned enterprises tends to
suffer as a result of interference in HRM processes by their government owners.
INTRODUCTION
Indonesia’s large state enterprise sector has played an important role ever since
independence. The number of state-owned enterprises (SOEs) rose during
Soekarno’s Guided Economy period in the late 1950s as Dutch and other foreign
companies were nationalised. Some were returned to their original owners in
the late 1960s with the advent of the ‘New Order’ under Soeharto. The growth
of some of the remainder was significantly boosted by Indonesia’s oil boom
windfall in the mid to late 1970s. But with the slump in world oil prices in the
mid-1980s, many were restructured as limited liability corporations, and were
(nominally, at least) expected to operate more or less as private firms. SOEs had
to adjust to market deregulation in some sectors (most obviously, banking), and
there was also some talk about privatisation, but little has ever been achieved on
* This paper is drawn from my PhD research. Thanks are due to the human resources man-
agement staff at PT Telekomunikasi Indonesia and PT Astra International for their help
during my field work. I am grateful to Ross McLeod and Chris Manning for their advice,
and to the Indonesia Project at the Australian National University, which provided me
with a visiting fellowship to write this paper.
ISSN 0007-4918 print/ISSN 1472-7234 online/07/030377-18
DOI: 10.1080/00074910701727621
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this front.1 Further liberalisation of the economy in 1994 opened up to private
sector participation (both domestic and foreign) industries previously monopolised by state enterprises in the telecommunications, drinking water and electricity sectors (GOI 1994).
Earlier studies show that SOEs have generally performed poorly (Habir 1990;
Hill 2000), and comparisons of SOE and private firm performance reveal the
former to be inferior (Mardjana 1995; Funkhouser and MacAvoy 1979, cited in
Hill 2000: 106; Hill 1982, cited in Hill 2000: 106). The Ministry of State-owned
Enterprises reported in 2006 that only 74 of 158 SOEs in 2004 generated a profit
and were able to provide a dividend. The size of SOE profits ranged from over
$100 million to below $20,000. About 90% of total SOE profits were contributed by
only 10 SOEs (Ministry of State-owned Enterprises 2006). Between 1992 and 2004,
the return on assets averaged only 2% and the return on equity 8%, reflecting suboptimal management and operation of SOEs (Djajanto and Rosdaniah 2006). Poor
performance of SOE employees has also been documented, and is presumably the
result of past policies emphasising physical investment rather than human capital
as the means to improve shareholder value (Rosdaniah 2006).
The most obvious way to overcome the wastage of resources implied by SOE
performance is to shift ownership of these companies into the private sector,
where they could expect to be managed more professionally (Siregar 2001: 294).
Thus privatisation was given considerable emphasis in the International Monetary Fund (IMF) program of post-crisis assistance between 1997 and 2003, as the
government’s various letters of intent to the IMF show (see, for example, GOI
1997, 2000). In reality, however, post-crisis implementation of privatisation has
been near negligible.
Another way of improving the efficiency of SOEs (and, indeed, public sector
organisations in general) is to encourage them to learn from the private sector
and adopt management practices more like those of private enterprises (Hughes
2003: 45; Pynes 2004: preface), not least in human resource management (HRM)
(Condrey 2005: xv; McLeod 2006a). With that in mind, the present study set out
to compare HRM in two large companies in Indonesia, one state owned, the other
privately owned. It found noticeably more effective HRM practices in the private
company than in its state counterpart.
Brief overview of HRM concepts
‘Human resource management’ refers to the policies, practices and systems
by which a firm recruits and deploys its workforce, and influences employees’
behaviour, attitudes and performance in pursuit of its goals (Stone 2005: 19). It
has been shown that companies that attempt to increase their competitiveness by
investing in new technology and by becoming ‘employers of choice’ also make
best-practice investments in staffing, employee development and pay practices
(De Cieri and Kramar 2005: 39–40). Of course, it is somewhat misleading to think
of ‘companies’ doing these things. It is company employees—managers—who
make the relevant decisions, at various levels and across a wide range of management activities. And it is the HRM function that is responsible for ensuring that
1 There have been several sales of minority shareholdings to private sector investors, but
this has had little impact on management, and therefore on performance.
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individuals with appropriate skills are placed in the right positions and provided
with proper incentives to make sound decisions. Performance of the organisation
is thus crucially dependent on HRM.
The case studies reported here focused on four aspects of HRM—recruitment,
training and development, performance management and remuneration—with
a view to determining the extent to which each supported the effective management of the organisation.
The objective of recruitment is to obtain people with appropriate skill, knowledge and attitudes to support the achievement of organisational goals. Training
and development activities are intended to augment the capability of employees
to carry out existing and likely future jobs,2 and where necessary to modify their
behaviour (Stone 2005: 331–2). Performance management involves processes used
to ensure that employee actions and behaviour are congruent with the organisation’s objectives; its prerequisite is clear communication to employees about
their roles and responsibilities in relation to these objectives (Clark 2005: 318–9).
By appraising employee performance and linking it to remuneration and other
aspects of HRM such as promotion, an employer can provide individuals with
strong incentives to act in the firm’s interests. The remuneration packages offered
need to be competitive with what other employers are offering if the firm is to
recruit and retain the services of individuals with desired combinations of skills
and knowledge; this in turn requires constant attention to conditions in the labour
market (Milkovich and Newman 2005: 187, 358).
Research method
The research involved parallel case studies, conducted in 1995, of PT Astra International, a publicly listed private sector holding company or conglomerate with
numerous subsidiaries, especially in the automotive industry, and PT Telekomunikasi Indonesia, the state-owned telecommunications company. While these
companies were very different in nature, they are comparable in size (both with
several thousand employees), organisational structure (each with a head office
plus a number of divisional or regional offices for Telkom and subsidiaries for
Astra), and reliance on well-established, moderately sophisticated technology
(making similar demands on employees’ skills).3
Qualitative data were obtained from interviews, internal documents (such as
reports and company bulletins), external sources (the print media), and direct
observation of the companies’ operations. Interviews were conducted with both
HRM specialists and managers (as HRM service producers) and with line managers (as users of the services). In total, 32 employees in Telkom and 29 in Astra were
interviewed. Job titles of all interviewees are provided in the appendix.
2 In Indonesia, such training is particularly needed because the education system is often
unable to produce graduates with the right kinds and levels of skills.
3 The mobile phone revolution that has been sweeping Indonesia had hardly begun in
1995.
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THE CASE STUDY COMPANIES
PT Telekomunikasi Indonesia
PT Telekomunikasi Indonesia, commonly known as Telkom, held the sole licence
to provide domestic telecommunications in Indonesia until the early 1990s. In 1994
Telkom had approximately 42,000 employees, located in its head office in Bandung and in 12 operational regions across all provinces. Established by the Dutch
at the beginning of Indonesia’s telecommunications era in the late 19th century,
it evolved from a Dutch-owned company based on Dutch-Indies commercial law
(Indische Bedrijven Wet, IBW) into a government agency (Perusahaan Negara,
PN) based on Government Regulation 240/1961, providing public services during former president Soekarno’s Guided Economy era and beyond. The entity
was reconstituted in 1974 as a Perusahaan Umum (Perum) or public corporation,
based on Government Regulations 44/1969 and 45/1969 (Ramadhan, Sriwibawa
and Yusra 1994: 78), providing public services but also acting as a profit-making
entity (Telkom 1993; 1994). In this partly subsidised public corporation form it
was expected to act as an agen pembangunan (agent of development) (Ramadhan,
Sriwibawa and Yusra 1994). In 1991 its legal status was again changed, under
Government Regulation 25/1991, to that of a limited liability company (Perusahaan Perseroan, or Persero), and it was renamed PT Telekomunikasi Indonesia.
By the early 1990s, businesses wanting to compete effectively in global markets increasingly needed sophisticated telecommunications services, but Indonesia lagged far behind its neighbours in this field.4 With this in mind, and in line
with Indonesia’s obligations under the General Agreement on Trade in Services
(GATS)—encompassing telecommunications services among others (Setiawan
1994; Raiche 1994)—deregulation measures were introduced to encourage the use
of new technologies, and to stimulate the growth of telecommunications services
by tapping the resources of the private sector (World Bank 1995: 3). Two new private sector providers entered the domestic market in 1993, employing both satellite and land-based telecommunication systems. Telkom had lost its monopoly,
and now faced vigorous competition in an environment of rapid technological
change in which mobile phone use was about to explode (Lee and Findlay 2005).
In 1995 Telkom made a significant strategic decision to establish joint operation
schemes (KSO, Kerja Sama Operasi) for the installation and operation of fixedline telephones in five regions (Lee and Findlay 2005: 345–54). Its partners in the
five joint venture companies included highly reputable international telecommunications firms and their domestic partners, and it was hoped that the new
arrangements would help Telkom to enhance the capacity of its human resources
through inward transfer from these partners of sophisticated know-how in both
technology and management (Prasetiantono 2004).5
4 With an average of 1.3 line units per 100 people in 1994, Indonesia’s telephone density
was lower than that of neighbours Malaysia (10 line units), Thailand (2.5 line units) and the
Philippines (1.7 line units) (ITU 1994). The successful call rate was only 44% for automatically dialled local calls, compared with Japan’s 83%, Malaysia’s 50% and Singapore‘s 70%;
for long-distance direct-dialled calls the rate was as low as 36% (World Bank 1995: 20).
5 The KSO scheme was unsuccessful and was prematurely terminated after the study was
completed (see postscript).
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Influences on HRM practices in Telkom
After Indonesian independence in 1945, Telkom inherited from its Dutch predecessor a civil service employment system not well suited to a profit-oriented
firm operating in a competitive, rapidly evolving environment. The granting of
increased autonomy to SOEs in the early 1990s was intended to encourage widespread adoption of more modern management practices. This was reflected in
Telkom’s formulation, for the first time, of a corporate plan, which emphasised
the need to increase productivity and efficiency, particularly by improving the
quality of human resources through modifications to the employment system.
There were changes to a number of personnel practices that had originated in
the civil service, including the system of employment grades and the related salary
structure, and the payment of benefits and allowances in addition to salary. Under
the old system, employment grades comprised four broad groups (golongan), each
divided into four or five levels (tingkat); in parallel with these, each employee also
had a ranking (pangkat), corresponding to the group and level achieved. Higher
rankings (eselon) corresponded to managerial positions. The civil service system
had a heavy emphasis on seniority: salary increases occurred every two years,
and promotion through the levels, groups and ranks occurred fairly automatically at four-year intervals. The new employment grade system was based on a
simplified 25-grade structure. In an attempt to signal the new orientation, Telkom
changed the name of the personnel department from kepegawaian (personnel) to
sumber daya manusia (SDM, human resources), denoting a shift from mere administration of personnel matters to an emphasis on development of the company’s
human resources—now seen as a key determinant of performance.
Despite the rhetoric of the corporate plan, actual changes to the company’s
HRM policies and practices were modest. Although some civil service-style personnel practices were modified, important counter-productive elements were
retained, including seniority-based promotions (notwithstanding stated intentions to the contrary) and de facto lifetime employment.
PT Astra International
What was to become the PT Astra International group, commonly known as Astra,
was founded by William Soeryadjaya (Tjia Kian Liong) in 1957 as a small trading
company. By 1995 it had developed into a huge conglomerate operating in various industries, including automotive assembly and manufacturing, financial services, heavy equipment, forestry and wood products, agribusiness and electronics.
Astra has been listed on the Jakarta and Surabaya Stock Exchanges since 1990. Its
ownership became far more widely dispersed after Soeryadjaya was forced to sell
the majority of his shares in 1992 to cover losses incurred through the collapse of
the family-owned Bank Summa (MacIntyre and Sjahrir 1993: 12–16). Astra’s 1995
financial report included 125 subsidiaries comprising 47 direct and 78 indirect
shareholdings, and approximately 105,000 employees (Astra 1995).
Astra evolved along with the development of the Indonesian economy. From
the late 1950s it built alliances with various foreign firms, including Toyota, Honda,
Yamaha, BMW and Peugeot. This allowed it to become involved in vehicle assembly and manufacturing in the 1970s, when the New Order regime reopened the
economy to foreign investment. Astra expanded into banking and financial services in the late 1980s, following the deregulation of the finance sector. Its business
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strategy at the time was focused on preparing itself to face much stronger competition when the ASEAN Free Trade Area (AFTA) came into being in 2003, and when
Asia Pacific Economic Cooperation (APEC) agreements took effect in 2010 (for
developed economies) and 2020 (for developing economies, including Indonesia).
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Influences on HRM practices in Astra
Strategic alliances with leading foreign companies played an important role in
the development of HRM practices in Astra companies. Although predominantly
influenced by its Japanese partners (especially Toyota, Komatsu and Nissan),
Astra also adopted and adapted HRM practices of other partners from Korea, the
US and Germany (such as Samsung and General Electric Capital Corporation)
in relation to recruitment, remuneration systems, training, performance management and career development. Of particular importance was the concept of total
quality control (TQC), adopted from its Japanese partners. TQC is concerned with
the development and maintenance of high quality not only in products and services but also in management functions such as marketing, finance and human
resources; it became the Astra ‘culture’.
TELKOM AND ASTRA: HRM PRACTICES COMPARED
We now turn to key aspects of both companies’ HRM policies and practices: recruitment; training and development; performance management; and remuneration.
Recruitment
Still following civil service practice, Telkom recruited predominantly high school
and university graduates, who entered the employment hierarchy at base levels.
Selection emphasised applicants’ educational qualifications, and paid little regard
to work experience gained from other organisations. Higher-level positions were
filled entirely by internal transfer and promotion of current employees. Interviewees for the study sought to justify this reliance on the ‘internal labour market’ by
arguing that skill development was carried out within the organisation through
on-the-job training and development programs.
By the early 1990s, however, Telkom’s environment was changing rapidly.
Partial deregulation of the industry meant that it had new competitors, and the
government now expected it to operate much more like a privately owned, profitoriented business—precisely at a time of surging technological change in the telecommunications sector. The technical expertise and skills needed to conduct a
modern business enterprise in an environment of rapidly changing technology
were very different from existing capabilities, which focused on the delivery of
a partially subsidised fixed-line telephone service under monopoly conditions.
The new circumstances demanded that the company quickly acquire an array of
skills not important to it in the past, and therefore in short supply internally—if
they existed at all. The system of hiring only new graduates at base entry levels
precluded an appropriate response, and the speed of change outstripped the company’s acquisition of needed skills.
The evolution of Astra’s business activities influenced its recruitment strategies.
Like Telkom, it recruited new high school and university graduates and provided
training to further their skills. However, this practice was accompanied by recruit-
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ment to senior positions of highly skilled and often very experienced people from
outside Astra when the skills needed were not available within the organisation.
At the time of the study, Astra was very conscious of impending liberalisation
resulting from the new AFTA agreement, under which Indonesia would be rather
more open to international competition. Thus, Astra was one of the few firms that
established English courses for employees to internationalise the outlook of its
workforce. In terms of recruitment, its strategy was to seek people who possessed
not only higher skills but also international experience. Teams were sent abroad
to recruit Indonesian students studying at universities in countries such as the US,
Australia and Germany.
However, when the group sought to take advantage of opportunities resulting from deregulation in the late 1980s (in banking and finance) and the early
1990s (for example, in electricity and telecommunications) by embarking on market expansion and further diversification, it could not acquire the necessary skills
quickly enough by recruiting new graduates and developing their capabilities
from within. Astra therefore more actively recruited highly skilled and experienced people in the external labour market, often hiring them away from its competitors and multinational companies operating in Indonesia by offering highly
competitive employment packages. This kind of labour market competition was
vigorous at the time, frequently relying on the services of external recruitment
agencies or ‘head hunters’. From the reverse perspective, an important aspect of
HRM in these conditions was finding ways to minimise the loss of skilled individuals to other firms; high labour turnover was of considerable concern.
In sharp contrast, external recruitment to high-level positions was almost
entirely absent in Telkom, except for appointments with a political flavour; for
example, at the time of the study the director of human resources was a retired
army officer—presumably a political appointee of the government. Other than
this, the company relied on internal promotions to fill high-level positions.
Training and development
In the early 1990s Astra adopted a strategy known as ‘Astra Vision 2000’, which
seems to have influenced training and development activities. There was a shift
from focusing on disparate management functions such as marketing, finance
and production to fostering an understanding of new business opportunities,
strategies and leadership skills. The new approach was accompanied by a name
change: the Astra Education and Training Centre became the Astra Management
Development Institute.
In Telkom, the managers interviewed were concerned about their inability to
succeed in the new competitive and profit-oriented environment. They felt the
need for new skills and expertise in marketing, in market research and in dealing
with imports and taxation matters. Yet these skills were not included in the company’s training activities. This suggested that Telkom had not undertaken any
proper analysis of training needs.
The early 1990s saw an increase in training and development activities in both
companies in cooperation with their foreign business partners, usually involving
visits by company personnel to their partners’ facilities overseas. Both companies
claimed to have benefited from the knowledge gained in this manner, but Astra’s
practices were better designed to ensure this because the firm made conscious
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efforts to disseminate such knowledge within the workplace. Its ‘best-practice
program’ set out strategies for sharing and applying knowledge acquired from
these visits, and was regarded as critical to the company’s future.
Similar concrete post-training follow-up measures appeared to be lacking in Telkom. Returning employees were often not placed in positions where
they could fully use new knowledge and skills. This was also true of those who
undertook long-term formal education in other countries. Positions vacated by
the latter while overseas were usually filled by others, but suitable new places
for returnees were not made available. Typically this was due to rigidities in
the seniority-based system of promotion, which tended to preclude promotion of employees to more responsible and demanding positions after they had
completed higher degrees and gained extensive international experience. The
usual short-run solution was to create new positions for returnees that involved
temporary tasks, rarely well matched with their new capabilities. Inappropriate
post-training placements thus wasted much of the company’s investment in its
human resources, and tended to weaken morale and diminish employee motivation. Moreover, little attempt was made to disseminate newly acquired skills and
knowledge to other employees.
One particularly revealing aspect of training is that devoted to creating and
strengthening what management regards as an appropriate ‘organisational culture’. Both companies claimed to foster organisational culture through training,
and emphasised this in their training programs. In Astra, the focus of the major
training program was Astra Total Quality Control (ATQC), Astra’s adaptation of
the TQC concept introduced by its Japanese partners. ATQC was seen as synonymous with Astra’s organisational culture. It promoted quality improvement measures both in manufacturing production processes and in management areas such
as marketing, finance and accounting, planning and research and development
(Sato 1998: 327). New employees undertook ATQC training within the induction
program, while other employees were trained in separate groups based on their
level in the workforce and the relevance of ATQC to their work practices. Such
training was considered especially important for many aspects of the workflow at
various management levels.
In regard to training in organisational culture, Telkom bore a much closer resemblance to the civil service, with a large proportion of training activity dedicated to
fostering the culture of the government. Throughout an employee’s career there
was heavy emphasis on imparting an understanding and acceptance of the five
principles of the state ideology, Pancasila, and training of this type was a prerequisite for promotion. The leadership training course (Suspim, or Kursus Pimpinan)
for supervisory and managerial levels placed increasingly heavy emphasis on the
values of the governing regime, culminating in the conduct of Suspim courses for
the highest management levels by the National Defence Institute (Lemhannas,
Lembaga Pertahanan Nasional). ‘Training’ of this kind, along with compulsory
membership of the Korps Pegawai Negri (Korpri, the State Employees Corps) is
widely viewed nowadays as having been intended to cement an attitude of support for the New Order regime, or at least to minimise opposition to it, within the
public sector. At best, this training did not advance the objectives of Telekom as
an enterprise. At worst, it probably helped to institutionalise the corruption, collusion and nepotism that came to characterise the New Order regime as a whole,
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by encouraging employees to place the regime’s interests, and those of its loyal
bureaucrats and SOE employees, above those of the general public (McLeod
2006b: 19–24).
In short, the two companies’ training programs attempted to foster very different
attitudes and values among their employees. While Astra’s organisational culture
training focused on quality of outputs and productivity of inputs, Telkom spent
scarce resources promoting the government’s ideological values, and gave correspondingly less attention to inculcating values and skills essential to the market-oriented business success that was, nominally at least, the company’s primary goal.
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Performance management
In Astra, employee performance was managed within the ATQC framework, which
involved communicating organisational goals to the various levels of the workforce. This approach appeared to help managers translate higher-level goals into
clear tasks for their subordinates, and guidelines on how to carry out these tasks
were provided in a structured manner through ATQC processes. The sequence
of these processes—formulating plans, putting plans into practice, auditing and
assessing outcomes, and taking corrective action, abbreviated as ‘plan, do, check,
action’—appeared effective in allocating tasks among individuals and ensuring
they were carried out. It also facilitated discussion between supervisors and subordinates aimed at achieving common goals. To ensure consistency and program
‘ownership’, both workers and supervisors were trained extensively in ATQC. In
general, the Astra work environment seemed open and conducive to the conduct
of performance review and appraisal.
With the formulation of its corporate plan in the early 1990s, Telkom adopted
an approach to employee performance management known as Satuan Kerja Individu (SKI, individual performance measurement), which was intended to align
employee activity with organisational goals by setting targets and measuring
performance relative to them. In practice, however, dissemination of Telkom’s
employee performance targets was less systematic than that of their counterparts
in the Astra system. Managers were less familiar with these goals in Telkom than in
Astra. Telkom managers’ goals seemed arbitrary, and their tasks were not properly
defined or based on clear guidelines for implementation. This was exacerbated by
the fact that the government made various demands of managers that were unrelated to company objectives, such as attending meetings unconnected with their
work and carrying out projects linked to the government’s political activities.
Performance appraisal was more open in Astra than in Telkom. Astra’s employees were asked to conduct self-evaluation in addition to appraisal by their supervisors, based on the tasks allocated to them. Both evaluations were compared and
discussed with the supervisor. The appraisal process appeared to be taken more
seriously in Astra than in Telkom, with appraisals being used for purposes such
as determining remuneration.
Remuneration and performance
In the early 1990s a new salary structure was introduced at Telkom, based on the
simplified system of 25 employee grades established as part of the company’s corporate plan. Additional benefits and special allowances, many of which had been
paid in kind (for example, rice allowances), were consolidated, and the equivalent
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monetary amounts incorporated into the remuneration package to make the pay
structure more transparent. These changes to the pay system were intended to
allow the company flexibility to link remuneration to employee performance, and
to reduce the emphasis on seniority.
The notion of linking remuneration to performance was still new to Telkom
in 1995, having only recently been introduced as part of the new corporate plan.
Intended to increase productivity, the change extended the restructuring of pay
scales to provide management with the flexibility to vary remuneration in accordance with employee performance at the level of both individuals and groups.
The SKI system for performance appraisal had been intended to measure Telkom
employee performance more effectively than the previous Daftar Penilaian Pelaksanaan Pekerjaan (DP3, literally: Work Implementation Evaluation Register). The
DP3 approach mirrored that found throughout the civil service, and focused (nominally, at least) on intangible employee attributes such as responsibility, loyalty,
honesty, cooperativeness, general attitude and initiative, rather than on output.
The SKI performance evaluation system functioned poorly, however, because
of managers’ reluctance to undertake meaningful appraisals. Those interviewed
argued that these would be perceived as criticism of their subordinates, something considered culturally unacceptable. Thus, although Telkom paid lip-service
to performance appraisal, it was clear from interviews that its approach to it still
reflected the old DP3 system. Furthermore, of the criteria listed above, the DP3
focused most closely on loyalty to the state, as proxied by understanding and
acceptance of the constitution and Pancasila. Except in highly unusual cases where
this acceptance was called into question, DP3 appraisals were almost always
favourable, and there was little differentiation among individuals. As a result,
nearly all employees obtained an automatic salary increase every two years and
an automatic salary grade increase every four years.
Many other Telkom personnel decisions, including those on promotions and
temporary releases for training, were also influenced by these uninformative
DP3 appraisals. Managers interviewed were under no illusion that the DP3
reflected actual performance. Poor performance went unrecorded, and superior
performance went unrewarded; high performance individuals were promoted
at much the same rate as those who achieved little. The company therefore
failed to ensure that it filled its positions with the most capable and hard-working employees available.
In short, Telkom’s attempt to link pay to individual performance met with little success, because the performance appraisal process was rendered ineffective
by managers’ reluctance to differentiate among their subordinates, and by the
continued DP3 focus on ‘loyalty’ as the principal indicator of ‘performance’. In
such circumstances, employees had little incentive to improve productivity by
working harder, and the corporate plan’s commitment to this change in HRM had
limited, if any, impact on company performance. Moreover, the company was still
struggling to find any suitable system for adjusting employee earnings to group
performance.
In Astra, by contrast, the link between pay and employee performance was
facilitated by the performance management system within ATQC. The level of
employee performance—measured against specific business-related criteria—was
directly used to determine the following year’s salary, as well as the individual’s
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annual bonus. It was also used for determining career development needs involving either counselling or training. Employees therefore had strong incentives to
work in the best interests of the firm.
In Telkom, as in most government-owned firms in Indonesia, a significant
component of remuneration was the annual bonus. This was a fixed proportion
of total company profit, called jasa produksi (‘production contribution’), and was
shared equally among all employees in proportion to their basic salaries. Such
an arrangement reflects a spirit of egalitarianism, but is unrelated to individual
productivity. The bonus was typically considered an entitlement, rather than a
reward to be achieved through good performance. Some managers interviewed
for the study said that it was seen as unfair because it deliberately treated high
and low performers alike. Those who worked harder, and thereby contributed
more to company performance, were de-motivated by seeing the fruits of their
labours flowing disproportionately to ‘free riders’.
Remuneration and labour market conditions
Actual and planned deregulation of goods and services markets created a rapidly changing labour market in which highly skilled people at managerial and
professional levels were in short supply. Fierce competition for their services led
Astra to give considerable attention to setting appropriate remuneration levels
through several measures. First, the company obtained information on market
salary levels from periodic surveys, and used this to adjust salaries offered to its
staff. Second, it ensured that the salaries of people newly hired at managerial and
professional levels were competitive—this often in the form of a salary ‘package’.
Third, particularly during the deregulation period, salaries for new entry-level
recruits were increased to attract skilled people. This strategy was successful in
attracting well-qualified graduates, but it often generated discontent among existing employees, whose salaries were not increased to similar levels. As a strategy
to retain existing employees, Astra introduced a ‘cafeteria benefit system’, allowing staff to select from a menu of non-salary benefit schemes, such as financial
assistance towards the purchase of vehicles and spectacles.
In Telkom, the policy of hiring new employees only at base entry levels and
regardless of experience meant that the firm paid little attention to market salaries
for more highly skilled and experienced individuals. Information on market pay
levels was obtained only anecdotally, and the salary structure was rarely modified
in response to changing market conditions. While Telkom did not have an employee
retention strategy equivalent to Astra’s ‘cafeteria benefit system’, it did not seem to
face problems of employee retention, perhaps because of the job security its employees enjoyed at that time as members of the wider government service.
LESSONS LEARNED
This study compared the management of human resources in two large, modern
sector business organisations, one state-owned and the other privately owned, in
the context of the rapidly deregulated Indonesian economy of the mid-1990s. Astra
and Telkom appeared to have similar approaches to recruitment, hiring new graduates and developing them through work and training. Unlike Astra, however,
Telkom lacked the flexibility to obtain highly skilled people, especially at senior
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and managerial levels. This left Telkom at a particular disadvantage because its
training and development systems were not adequate to meet the organisation’s
fast-changing needs. Compared with that of Astra, Telkom’s employee performance management strategy lacked a clear relationship to organisational goals. The
remuneration systems lacked market orientation and provided little incentive to
motivate employees to perform better. Overall, the two firms differed greatly in
the extent to which HRM was able to underpin the achievement of organisational
goals such as efficiency. HRM was far less effective in the state-owned enterprise
than in its private sector counterpart.
There are valuable lessons that Telkom (and other SOEs) can learn from the
way Astra responded to the challenges presented by wide-ranging deregulation
of the economy. Perhaps the most basic lesson is that organisational effectiveness
depends largely on the HRM function, the over-riding objective of which is to
ensure that positions at all levels throughout the firm—including managerial levels—are occupied by individuals who possess skills, knowledge and experience
appropriate to those positions, and who face strong incentives to work hard and
effectively in the best interests of the firm. In a rapidly evolving business environment, firms will lack the flexibility needed to respond to new threats and opportunities if they restrict themselves to recruiting and training new high school and
university graduates, and cannot employ high-performing individuals from outside the organisation to fill senior positions.
In turn, firms that accept this reality and hire from outside whenever the necessary skills are unavailable from within must also pay careful attention to—
and be prepared to match—the level of salaries in the market for individuals
with the skills and experience required for any given position. If the market
is changing quickly, remuneration packages offered to new hires and existing
employees must be adjusted accordingly. Failure to do so will prevent the firm
from recruiting people of sufficient calibre, and make it vulnerable to ‘poaching’
by other firms.
SOEs can also learn from Astra the benefits of meaningful performance management. This involves using performance evaluation to identify employees
worthy of promotion—or needful of counselling or further training. It creates
strong incentives to work hard and effectively, by linking evaluation to decisions about salary increases, annual bonuses and training and development. Of
key importance is that what is evaluated is the actual performance (output) of
employees, and not characteristics such as ‘loyalty’ that are difficult to measure
and interpret, and that may amount to nothing more than a willingness to conform to politically acceptable values of little or no relevance to the firm’s business
objectives.
Finally, the study confirms that the effectiveness of SOEs tends to suffer as a
result of interference by their government owners. Like other SOEs, Telkom’s
resources were misallocated to supporting the then government’s political agenda,
distracting its managers from their more legitimate task of striving to meet the
enterprise’s commercial goals. Unfortunately, however, it was precisely the desire
of politicians and governments to misuse SOEs to their own ends that suggested
that this behaviour was unlikely to change in the near future. It also provided
a clear explanation for why so little progress was achieved with privatisation,
despite years of talk about its desirability.
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The study captured data from various sources. These included interviews with
people at various management levels, both in the HRM area and among the users
of HRM services in line management (see appendix). Other sources of evidence
included internal reports and bulletins, the print media, and direct observation of
company operations. Observation was useful for corroboration purposes and for
revealing actual practices as opposed to stated policies, since the latter were often
not reflective of day-to-day implementation. It is acknowledged that this study
could have been more representative if the sample had included employees other
than managers, since they are directly affected by HRM policies. It is therefore
suggested that further research might address this issue.
POSTSCRIPT
This postscript provides an update on the business environment and the management of human resources in both companies over the period since the data were
collected in 1995. It is based largely on secondary sources that are self-reporting
in nature, such as annual reports and company websites, rather than on data collected from the sources used in the original study, such as interviews and direct
observation within the companies. Nonetheless, it gives some indication of the
subsequent development of HRM in the case study organisations.
Two years after the data for this study were collected, Indonesia suffered serious economic damage from the Asian financial crisis of 1997–98. The corporate
sector collapsed and both Telkom and Astra were severely affected. The economic
crisis and the accompanying fall in the value of the rupiah caused large foreign
exchange losses for Telkom, as well as a significant decline in its business through
cancelled phone subscriptions. Its share price therefore fell rapidly in 1998 (Abeng
2001). The KSO scheme, which had held the promise of transferring much foreign
technological and management know-how to Telkom, was terminated prematurely in 2005. This was the result of significant disputes between the company
and its KSO partners, reportedly due to the latter’s under-performance against
agreed targets in the wake of the economic crisis (Prasetiantono 2004; Lee and
Findlay 2005: 345–54).
The telecommunications business environment Telkom faces has become
increasingly competitive, while transparency requirements imposed by the stock
exchange regulatory authority have intensified (Telkom 2006). Up to 2005, Telkom responded to global competition and changes in telecommunications regulation by widening its business to include not only fixed-line connections but also
CDMA (code division multiple access), cellular and internet provider services,
and interconnection network provision. It now has 10 subsidiaries, running businesses mainly in telecommunications and supporting industries (Telkom 2005).
Corporate governance, seen by some as a major issue in the economic crisis, has
since received a great deal of attention in Telkom, as is the case in the wider community of SOEs in Indonesia.
In the area of recruitment, internal appointment of employees, rather than
external recruitment, still seems to be the norm at Telkom, as was the case in
the 1995 study. However, job vacancies for some managerial positions are advertised internally through ‘job tenders’. While selection is based on criteria such as
a ‘fit and proper’ test, educational qualifications remain an important factor in
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the selection process. The apparent lack of external recruitment appears to reflect
Telkom’s need to reduce over-staffing. Indeed, the number of employees has been
falling. Early retirement, a practice more common in the private sector and rarely
used by SOEs, has been applied. Telkom began reducing its workforce in late 1995
when it made an initial public offering and undertook company restructuring.
The number of employees declined from around 42,000 in 1994 to 37,500 in 1995
(Prasetiantono 2004) and around 34,000 in 2006, with 27,600 in Telkom itself and
6,400 in its subsidiaries (Telkom 2006).
Training and development seem to have become more diversified, with courses
undertaken in international institutions on the rise. In addition to various forms
of technical and management training, an emphasis on raising education levels
through bachelor, master and doctoral degrees remains apparent. However, it is
not clear from company documents how skills acquired through training influence an employee’s deployment or remuneration.
Performance management, particularly the evaluation of employee performance,
is discussed in the section of the Telkom website that deals with transparency as part
of the company’s corporate governance framework. It is reported there that performance evaluation for individual employees is conducted on-line, and involves
both self-evaluation and evaluation by peers, subordinates and supervisors, resulting in a performance grade for promotion purposes.6 This approach should be able
to differentiate performance among employees, provided that everyone involved
in the process is able to provide a frank evaluation, resulting in constructive discussion directed at employee development—a feature that was absent in the 1995
study. It remains unclear whether individual evaluation results are used as an input
to determining remuneration, or training and development needs, however.
Remuneration is now linked to performance at the group or division level:
annual bonuses are allocated on the basis of group performance, which is evaluation in a separate process from that for individuals. Each employee then receives a
share of the bonus based on salary level (Telkom 2006). It might be more beneficial
if the group approach were to be complemented by use of individual performance evaluation results to allocate bonuses within the group. It is hard to understand why an individual’s bonus is calculated on the basis of salary level—which
does not differentiate between low and high performers—when the company has
access to individual performance grades that would allow bonuses within the
group to be allocated on merit.
O