Designing fair annual bonus formulations for workers: A case study of the state-owned enterprise cement holding in Indonesia

Workers’ compensation in Indonesia includes an annual bonus in addition to wages and salaries. While executive incentive schemes (tantième for BOCs and BODs) are defined in confidential contract management, workers’ bonus formulations are often set unilaterally by management without prior mutual agreement, leading to perceptions of unfairness and industrial disputes. The research question is how to develop a fair, transparent, and governable annual bonus formulation for workers that aligns with performance and peer benchmarks. The case focuses on Semen Indonesia Group (SIG), a large SOE cement holding with ~9359 workers across headquarters and operating subsidiaries. The study aims to design and justify a fair bonus formulation that reduces conflict, aligns incentives, and reflects industry norms, given diverse operations and a challenging competitive environment in Indonesia’s cement industry.

Justification: In Indonesia, annual worker bonuses are viewed as equal-rights counterparts to executives’ tantième and are tied to meeting yearly performance targets. Transparent and fair bonus mechanisms are needed to prevent recurring disputes and to align with governance principles. Given limited literature on worker bonus formulations, the authors develop percentile-based guidance derived from industry peers. Research gap: Prior research has not resolved disputes over perceived unfairness in bonus allocations. There is no widely accepted definition or mechanism for fair worker bonus distribution across industries. This study addresses the gap by proposing empirically grounded, peer-referenced percentile methods. Theoretical background: Management control systems govern policies, strategies, and earnings management; bonuses fall within this scope. Debates exist over cash versus noncash bonus forms and the importance of measurable, objective, and fair KPIs. Traditionally, bonus systems focus on executives; however, wage gaps and fairness concerns have driven interest in worker bonuses as variable, performance-contingent pay. In developing countries, legal protections for worker welfare are limited, complicating bonus claims. Good governance and corporate culture can reduce income gaps. Fairness principles suggest workers expect total income at least around peer medians. Financial indicators (e.g., EAT, revenue) and operational metrics (e.g., production volume, operating expenses) are commonly used for performance measurement. The study positions percentile benchmarking of total remuneration as a practical approach for fair allocation.

Design: Qualitative methodology using mixed methods and multidisciplinary analysis with descriptive analyses. Study period: 2021. Data: Population of 27 cement makers in Indonesia (public and private with online disclosures). Annual reports and official websites were reviewed to extract compensation and performance data. Clustering: Firms were clustered into five groups (new entrants to mature) based on total annual income components using defined equations: (1) Annual base = (12 months × salary base) + religious holiday allowance + leave allowance + official allowance + location allowance; (2) Total cash = annual base + bonuses; (3) Total remuneration = total cash + other benefits (if available). Procedure: Five stages—(i) explore population of 27 cement makers; (ii) analyze annual reports; (iii) determine clusterization; (iv) conduct mathematical analysis to build annual bonus formulation; (v) define percentile (P) model. Tables and figures summarized competitive levels of annual income, total cash, and total remuneration across clusters. Modeling: Developed two bonus formulations tailored to organizational tiers: headquarters (policy/strategy; no production) and subsidiaries/opcos (operational). Introduced two allocation strategies: top-down outcome-based vs. bottom-up target-based; adopted the bottom-up, KPI-driven, target-based approach for fairness and transparency. Proposed percentile-based pool sizing (P-25, P-50, P-75) derived from peer clusters’ bonus-to-EAT relationships. KPI frameworks: - Headquarters KPIs: 0.6 × EAT + 0.4 × Revenue; achievement calculated as realization/planning; example KPI score 104.9%. - Subsidiaries KPIs: 0.6 × COGM + 0.4 × Operating expenses; performance favors cost efficiency; example KPI score 108.8%. Allocation between HQ and subsidiaries: Example weight factors 20% (HQ) and 80% (subsidiaries); final achievements proportionally determine pool split. Percentile scenarios illustrated with SIG’s 2021 EAT (Rp 2,014 billion) to compute pool options (e.g., P-50 = 9.15% of EAT).

- Fairness mechanism: A percentile-based framework (P-25, P-50, P-75) anchored to peer total remuneration and bonus-to-EAT relationships provides transparent guidance for annual bonus pools. Success is measured by how workers’ total remuneration compares to the peer median; exceeding the median indicates higher success. - Cluster outcomes: Workers in Cluster-1 receive the highest compensation; lower clusters progressively provide less. SIG is in Cluster-2 despite being the market leader by volume. - Pay mix insight: SIG’s base income proportion (~55%) is lower than peers (approximately 68–81%), with higher use of nonbase incentives/allowances, reducing mandatory dues/tax burdens while maintaining overall welfare. - Bonus pool benchmarks (2021): Average pool allocation to workers as a percentage of EAT—Cluster-1: 21.29%; SIG: 21.11%; Cluster-3: 7.30%; Cluster-4: 8.93%; Cluster-5: 11.05%. - Strategy comparison: Bottom-up target-based allocation is more transparent and KPI-driven, reducing disputes, versus top-down outcome-based which is unilateral and volatile. - SIG simulation (2021): With EAT Rp 2,014 billion (US$139.86m), P-50 suggests a 9.15% pool (US$12.79m). Example allocation with HQ weight 20% and subsidiaries 80% yields HQ US$2.51m and subsidiaries US$10.28m. KPI scores used: HQ 104.9%; subsidiaries 108.8%. - Operational KPI design: HQ KPIs (EAT, Revenue) suit non-operational roles; opco KPIs (COGM, operating expenses) suit cost-efficiency and production contexts. - Sector context: Indonesia’s cement market faced oversupply and COVID-19 pressures; peer benchmarking and percentile-based pools aid stability and fairness in this competitive environment.

The study addresses the central question of how to design a fair, transparent annual bonus system for workers. By benchmarking peer remuneration and bonus-to-EAT allocations and translating them into percentile options (P-25/50/75), management and worker representatives can negotiate a mutually acceptable pool tied to measurable performance. The bottom-up, KPI-driven approach aligns bonuses with actual achievements, mitigates disputes, and fosters a stable industrial climate. For SIG, despite market leadership, its Cluster-2 position and distinct pay mix indicate the need to calibrate base income for long-term welfare while retaining flexible incentives. The proposed KPI structures differentiate headquarters’ financial stewardship (EAT, Revenue) from subsidiaries’ operational efficiency (COGM, operating expenses). Applying percentile guidance (e.g., P-50 for Cluster-2) provides a fair reference point; moving above the median (toward P-75) reflects stronger performance and supports improved worker welfare. The framework is generalizable with adjustments to other sectors, enabling equitable and performance-linked bonus distributions.

SIG, Indonesia’s largest cement producer, serves as a benchmark yet resides in Cluster-2 for worker total remuneration. A percentile-based method (P-25, P-50, P-75) anchored in peer data offers a fair mechanism to size annual bonus pools, complemented by a bottom-up, KPI-driven allocation to headquarters and subsidiaries. Recommended HQ KPIs are EAT and Revenue; opco KPIs are COGM and operating expenses. For 2021, a P-50 simulation yields a 9.15% of EAT pool, with illustrative allocation of US$2.51m to HQ and US$10.28m to subsidiaries under a 20/80 split. SIG is encouraged to calibrate its base-income proportion upward to support workers’ long-term welfare. Future research should detail KPI frameworks at the individual worker level and refine sectoral portioning between cement and noncement businesses.

- Scope limited to Indonesia’s cement industry and 27 cement makers’ publicly available reports; generalization to other sectors requires adjustments. - Focused on SIG’s headquarters and second-tier subsidiaries; third-tier entities (“business grandsons”) were excluded. - Did not detail the internal portioning between cement and noncement sectors; suggested as a future research extension. - Individual worker-level KPI design and distribution mechanics were out of scope. - Executive tantième formulations under confidential contract management were not analyzed. - Some firms are private; data completeness relies on available disclosures.