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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

STATE-OWNED AND PRIVATE ENTERPRISES IN INDONESIA

Wahyu Sutiyono

To cite this article: Wahyu Sutiyono (2007) HUMAN RESOURCE MANAGEMENT IN STATE-OWNED 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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HUMAN RESOURCE MANAGEMENT

IN STATE-OWNED AND PRIVATE ENTERPRISES

IN INDONESIA

*

Wahyu Sutiyono*

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 mid-1990s. The two organisations differed greatly in the extent to which HRM was able to underpin the efﬁ_{cient management of the organisation. Owing to fundamentally}

different approaches to recruitment, training and development, employee perform-ance management and remuneration, the state-owned enterprise had far less ef-fective 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 fi_{ndings suggest that}fi_{rm effectiveness depends signi}fi_{cantly 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 signiﬁ_{cantly 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 ﬁ_{rms. 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 ﬁ_{eld 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.

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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 monopo-lised by state enterprises in the telecommunications, drinking water and elec-tricity sectors (GOI 1994).

Earlier studies show that SOEs have generally performed poorly (Habir 1990; Hill 2000), and comparisons of SOE and private fi_{rm 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 profi_t and were able to provide a dividend. The size of SOE profi_{ts ranged from over} $100 million to below $20,000. About 90% of total SOE profi_{ts 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%, refl_ecting sub-optimal 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 Mon-etary 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 efﬁ_{ciency 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 fi_{rm recruits and deploys its workforce, and in}fl_{uences 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 staffi_{ng, 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 manage-ment 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 manage-ment of the organisation.

The objective of recruitment is to obtain people with appropriate skill, knowl-edge 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 organi-sation’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 ﬁ_{rm’s interests. The remuneration packages offered} need to be competitive with what other employers are offering if the ﬁ_{rm 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 Inter-national, a publicly listed private sector holding company or conglomerate with numerous subsidiaries, especially in the automotive industry, and PT Telekomu-nikasi 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 ofﬁ_ce plus a number of divisional or regional ofﬁ_{ces 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 manag-ers (as usmanag-ers 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 ofﬁ_{ce in} Band-ung 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 dur-ing 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 proﬁ_t-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 (Perusa-haan Perseroan, or Persero), and it was renamed PT Telekomunikasi Indonesia.

By the early 1990s, businesses wanting to compete effectively in global mar-kets increasingly needed sophisticated telecommunications services, but Indo-nesia lagged far behind its neighbours in this ﬁ_eld.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 pri-vate sector providers entered the domestic market in 1993, employing both satel-lite 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 signifi_{cant strategic decision to establish joint operation} schemes (KSO, Kerja Sama Operasi) for the installation and operation of fi xed-line telephones in fi_{ve regions (Lee and Findlay 2005: 345–54). Its partners in the} fi_{ve joint venture companies included highly reputable international} telecom-munications fi_{rms 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 automati-cally 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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Inﬂ uences on HRM practices in Telkom

After Indonesian independence in 1945, Telkom inherited from its Dutch pred-ecessor a civil service employment system not well suited to a profi_t-oriented fi_{rm operating in a competitive, rapidly evolving environment. The granting of} increased autonomy to SOEs in the early 1990s was intended to encourage wide-spread adoption of more modern management practices. This was refl_{ected in} Telkom’s formulation, for the fi_{rst time, of a corporate plan, which emphasised} the need to increase productivity and effi_{ciency, particularly by improving the} quality of human resources through modifi_{cations 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 benefi_{ts and allowances in addition to salary. Under} the old system, employment grades comprised four broad groups (golongan), each divided into four or fi_{ve 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 automati-cally at four-year intervals. The new employment grade system was based on a simplifi_{ed 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 admin-istration 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 per-sonnel practices were modiﬁ_{ed, important counter-productive elements were} retained, including seniority-based promotions (notwithstanding stated inten-tions 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 vari-ous industries, including automotive assembly and manufacturing, ﬁ_nancial serv-ices, 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 ﬁ_{nancial 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 fi_{rms, including Toyota, Honda,} Yamaha, BMW and Peugeot. This allowed it to become involved in vehicle assem-bly and manufacturing in the 1970s, when the New Order regime reopened the economy to foreign investment. Astra expanded into banking and fi_nancial serv-ices in the late 1980s, following the deregulation of the fi_{nance sector. Its business}

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strategy at the time was focused on preparing itself to face much stronger competi-tion when the ASEAN Free Trade Area (AFTA) came into being in 2003, and when Asia Paciﬁ_{c Economic Cooperation (APEC) agreements took effect in 2010 (for} developed economies) and 2020 (for developing economies, including Indonesia).

Inﬂ uences 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 inﬂ_{uenced 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 manage-ment and career developmanage-ment. 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 serv-ices but also in management functions such as marketing, ﬁ_{nance 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: recruit-ment; training and developrecruit-ment; performance managerecruit-ment; 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 qualiﬁ_{cations, and paid little regard} to work experience gained from other organisations. Higher-level positions were ﬁ_{lled entirely by internal transfer and promotion of current employees.} Interview-ees 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, proﬁ t-oriented business—precisely at a time of surging technological change in the tele-communications 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 ﬁ_{xed-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 com-pany’s acquisition of needed skills.

The evolution of Astra’s business activities inﬂ_{uenced 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

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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 ﬁ_{rms 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 result-ing from deregulation in the late 1980s (in bankresult-ing and fi_{nance) and the early} 1990s (for example, in electricity and telecommunications) by embarking on mar-ket expansion and further diversifi_{cation, 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 experi-enced people in the external labour market, often hiring them away from its com-petitors 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 fi_{nding ways to minimise the loss of skilled} indi-viduals to other fi_{rms; 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 fl_{avour; for} example, at the time of the study the director of human resources was a retired army offi_{cer—presumably a political appointee of the government. Other than} this, the company relied on internal promotions to fi_{ll high-level positions.}

Training and development

In the early 1990s Astra adopted a strategy known as ‘Astra Vision 2000’, which seems to have inﬂ_{uenced training and development activities. There was a shift} from focusing on disparate management functions such as marketing, ﬁ_nance 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 proﬁ_{t-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 com-pany’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 beneﬁ_{ted from the knowledge gained in this manner, but Astra’s} practices were better designed to ensure this because the ﬁ_{rm 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 lack-ing in Telkom. Returnlack-ing 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 ﬁ_{lled 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 promo-tion of employees to more responsible and demanding posipromo-tions 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 motiva-tion. 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 cul-ture’. 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 synony-mous with Astra’s organisational culture. It promoted quality improvement meas-ures both in manufacturing production processes and in management areas such as marketing, ﬁ_{nance 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 workﬂ_{ow at} various management levels.

In regard to training in organisational culture, Telkom bore a much closer resem-blance 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 ﬁ_ve principles of the state ideology, Pancasila, and training of this type was a prerequi-site 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 sup-port 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, col-lusion 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 corre-spondingly less attention to inculcating values and skills essential to the market-ori-ented business success that was, nominally at least, the company’s primary goal.

Performance management

In Astra, employee performance was managed within the ATQC framework, which involved communicating organisational goals to the various levels of the work-force. 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 sub-ordinates 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 Indi-vidu (SKI, indiIndi-vidual 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 deﬁ_{ned or based on clear guidelines for implementation. This was exacerbated by} the fact that the government made various demands of managers that were unre-lated 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 employ-ees were asked to conduct self-evaluation in addition to appraisal by their super-visors, 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 simpliﬁ_{ed system of 25 employee grades established as part of the company’s} cor-porate plan. Additional beneﬁ_{ts 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 ﬂ_{exibility 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 ﬂ_{exibility to vary remuneration in} accord-ance with employee performaccord-ance 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 Pelak-sanaan Pekerjaan (DP3, literally: Work Implementation Evaluation Register). The DP3 approach mirrored that found throughout the civil service, and focused (nom-inally, 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, some-thing considered culturally unacceptable. Thus, although Telkom paid lip- service to performance appraisal, it was clear from interviews that its approach to it still reﬂ_{ected 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 infl_{uenced by these uninformative} DP3 appraisals. Managers interviewed were under no illusion that the DP3 refl_{ected 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 fi_{lled its positions with the most capable and} hard-work-ing employees available.

In short, Telkom’s attempt to link pay to individual performance met with lit-tle 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 ﬁ_{nd 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 speciﬁ_{c 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 involv-ing either counsellinvolv-ing or traininvolv-ing. Employees therefore had strong incentives to work in the best interests of the ﬁ_rm.

In Telkom, as in most government-owned fi_{rms in Indonesia, a signi}fi_cant component of remuneration was the annual bonus. This was a fi_{xed proportion} of total company profi_{t, called}_{jasa produksi}_{(‘production contribution’), and was} shared equally among all employees in proportion to their basic salaries. Such an arrangement refl_{ects 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 fl_{owing disproportionately to ‘free riders’.}

Remuneration and labour market conditions

Actual and planned deregulation of goods and services markets created a rap-idly 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-qualifi_{ed graduates, but it often generated discontent among} exist-ing employees, whose salaries were not increased to similar levels. As a strategy to retain existing employees, Astra introduced a ‘cafeteria benefi_{t system’,} allow-ing staff to select from a menu of non-salary benefi_{t schemes, such as}fi_nancial 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 fi_{rm 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 modifi_ed in response to changing market conditions. While Telkom did not have an employee retention strategy equivalent to Astra’s ‘cafeteria benefi_{t system’, it did not seem to} face problems of employee retention, perhaps because of the job security its employ-ees 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 grad-uates and developing them through work and training. Unlike Astra, however, Telkom lacked the ﬂ_{exibility 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 perform-ance 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 ﬁ_{rms differed greatly in} the extent to which HRM was able to underpin the achievement of organisational goals such as efﬁ_{ciency. 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 fi_{rm—including managerial} lev-els—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 fi_{rm. In a rapidly evolving business} environ-ment, fi_{rms will lack the}fl_{exibility needed to respond to new threats and} oppor-tunities if they restrict themselves to recruiting and training new high school and university graduates, and cannot employ high-performing individuals from out-side the organisation to fi_{ll senior positions.}

In turn, fi_{rms that accept this reality and hire from outside whenever the} nec-essary 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 fi_rm from recruiting people of suffi_{cient calibre, and make it vulnerable to ‘poaching’} by other fi_rms.

SOEs can also learn from Astra the benefi_{ts of meaningful performance} man-agement. 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 deci-sions 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 diffi_{cult to measure} and interpret, and that may amount to nothing more than a willingness to con-form to politically acceptable values of little or no relevance to the fi_{rm’s business} objectives.

Finally, the study conﬁ_{rms 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 reﬂ_{ective 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 manage-ment 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 col-lected 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 seri-ous economic damage from the Asian fi_{nancial 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 signifi_{cant 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 prema-turely in 2005. This was the result of signifi_{cant 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 intensiﬁ_{ed (Telkom 2006). Up to 2005,} Tel-kom responded to global competition and changes in telecommunications regula-tion by widening its business to include not only ﬁ_{xed-line connections but also} CDMA (code division multiple access), cellular and internet provider services, and interconnection network provision. It now has 10 subsidiaries, running busi-nesses 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 com-munity 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 adver-tised internally through ‘job tenders’. While selection is based on criteria such as a ‘ﬁ_{t and proper’ test, educational quali}ﬁ_{cations remain an important factor in}

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the selection process. The apparent lack of external recruitment appears to reﬂ_ect Telkom’s need to reduce over-stafﬁ_{ng. 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 diversiﬁ_{ed, 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 inﬂ u-ence 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 per-formance evaluation for individual employees is conducted on-line, and involves both self-evaluation and evaluation by peers, subordinates and supervisors, result-ing 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 dis-cussion 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 evalua-tion 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 beneﬁ_cial if the group approach were to be complemented by use of individual perform-ance evaluation results to allocate bonuses within the group. It is hard to under-stand 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.

One other development seems to signal reduced control by government of Tel-kom’s HRM. This is the formation of two worker unions for Telkom employees (Telkom 2006) and the apparent disappearance of compulsory membership of Korpri, presumably the result of increasing democratisation in Indonesia.

Astra’s main business, vehicle sales, contracted as a result of the economic cri-sis. In addition, a new tariff structure introduced in 1999 greatly reduced the pro-tection Astra enjoyed against vehicle components from countries within AFTA (Shari 1999). As a result, parts of the business, such as motor cycles, were restruc-tured to improve efﬁ_{ciency. Nearly 40% of Astra was taken over by the Indonesian} Bank Restructuring Agency (IBRA) (Richardson 2000), and acquisition by foreign

6 Telkom website, <http://www.telkom.co.id/investor-relation/corporate-governance/ index.html?lid=en>, accessed 5 August 2007.

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investors occurred as part of subsequent asset sales by IBRA (Bird 2004). Experi-encing a net loss since the crisis, it was not until 2001 that the company achieved a net proﬁ_{t (Astra 2001). Nonetheless, Astra was one of the few large businesses to} bounce back relatively quickly, thanks to its relatively well-established business systems, including HRM.

In response to the crisis Astra had laid off 25,000 workers by the end of 1999— approximately 25% of its pre-crisis workforce (Shari 1999). As its business contin-ues to recover, an additional effort to recruit people with skills and knowledge suited to the company’s needs is being made, through a scheme linking the indus-tries in which Astra is operating with the higher education sector. The company’s direct recruitment approach to universities includes programs such as internships, short courses allowing students to learn about company operations, and a career day event providing students with information about the company (Astra 2006).

Promotion of product and service quality seems to have been institutionalised into the company’s day-to-day operations. ATQC, widely advocated as the com-pany culture during the mid-1990s, has been renamed the Astra Management Sys-tem (AMS) (Astra 2005).7_{In the area of training and development, the notion of}

quality has been widened to encompass the development of capacity to innovate, facilitated by the sharing of knowledge among employees across levels through various formal and informal development forums (Astra 2006; see also footnote 7). In summary, the economic crisis, increasing competition and globalisation appear to have had an impact on the development of human resource manage-ment at Telkom and Astra since the study was conducted in the mid-1990s. Astra’s better established HRM system has helped the company to move from a focus on quality to an emphasis on being able to innovate to achieve business sustainabil-ity. Telkom, on the other hand, still essentially refl_{ects the way SOEs in Indonesia} approach the development of human capital. It appears that some of the problems highlighted in the 1995 study were dealt with by both organisations after data were collected, and Telkom’s HRM approach shows some signs of moving closer to the practices of the private sector. Developments in HRM that are likely to have improved organisational effi_{ciency further include reduced political in}fl_{uence in} the workplace as a result of democratisation, greater emphasis on good govern-ance, moves to tackle over-staffi_{ng, and limited measures to link bonus} remunera-tion to performance, if only at the group level. However, the two companies are still far apart in terms of fl_{exibility to recruit externally to senior positions, and} hence in their capacity to perform effectively in a competitive market.

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APPENDIX1 Job Titles of Interviewees

Manager, Human Resources System and Procedure Manager, Organisational Development

Manager, Human Resources Management Information System Manager, Recruitment

Manager, Human Resources Administration Manager, Reward and Punishment

Manager, Occupational Health and Safety, and Welfare General Manager, Centre for Education and Training Manager, Assessment Centre

Manager, Human Resources Regional Ofﬁ_ces

Human resources specialists

Deputy Chief of Corporate Human Resources and Head, Human Resource Division

Head, Efﬁ_{ciency Division}

Director, Astra Management Development Institute Manager, Executive Management

Manager, Recruitment Centre Manager, Remuneration

Manager, Organisational Development

Manager, Personnel Administration and Employee Relations (former manager and present manager)

Manager, Human Resources Strategic Alignment Line general managers

Consultants

Instructors at the Astra Management Development Institute Human resources specialists