1. What is the current legal landscape for your practice area (Employee Incentives) in your jurisdiction?

Current Legal Landscape

Indonesia does not yet have a single, consolidated statute dedicated exclusively to employee incentives. Instead, the legal landscape has matured into a multi-layered framework shaped by employment law, corporate law, and specific capital market regulatory guidance on equity-based incentives.

In this context, companies regulary seek advise and/or assistance from our employment law practice to navigate and apply this framework in practice. Employee incentive programs should be structured to align with commercial objectives while ensuring compliance with applicable legal and regulatory requirements across multiple regimes. Effective program design integrates employment, corporate, regulatory, and practical considerations to address both legal risk and operational feasibility.

Key Regulatory

From Discretion to Enforceability: Incentives Under Employment Law

At a foundational level, Indonesian employment law adopts a protective and mandatory approach to wages and employee rights, while still allowing employers to introduce discretionary and performance-based incentives, as regulated under Employment Law No. 13 of 2003, as amended by subsequent laws, including the Job Creation Law No. 4 of 2023 and its implementing government regulations. This framework defines the broader rights and obligations between employers and employees, including compensation, benefits, bonus entitlements, and social security contributions. However, cash bonuses, performance incentives, and retention awards are not statutorily mandated unless expressly agreed. Once incorporated into employment contracts, company regulations, or collective labour agreements, such incentives become legally enforceable entitlements. Failure to honour promised incentives may result in employee claims, including through industrial relations dispute mechanisms.

Our employment law practice regularly advises clients on aligning incentive policies with Indonesian employment law principles, ensuring that bonuses and incentive schemes preserve managerial discretion while remaining compliant with wage protection rules and dispute-resolution frameworks.

Equity Incentives, Corporate Law, and Capital Markets Regulation: Permission with Caution

On the equity side, Company Law No. 40 of 2007 as amended by subsequent laws, including the Job Creation Law No. 4 of 2023, expressly recognise Employee Stock Option Plans (“ESOP”) by exempting employee share issuances from pre-emptive rights requirements. This statutory recognition enables both private and public companies to adopt equity-based incentives as a long-term alignment tool between the company and its employees. For listed companies, this corporate law foundation is supplemented by capital market regulations and stock exchange rules governing ESOP, while private companies rely primarily on corporate law, internal governance documents, and shareholder approvals.

Public companies implementing ESOP, whether listed on the Indonesia Stock Exchange or on an overseas exchange, must also be assessed against Indonesia’s capital markets framework on securities offerings. Under POJK No. 29/POJK.04/2021 on Non-Public Offerings, as further clarified by SEOJK No. 33/SEOJK.04/2022, an offering of securities may be categorised as a public offering if it is made to more than 100 parties, or results in securities being held by more than 50 parties, and the aggregate value of the offering exceeds IDR 5 billion within a 12-month period.

While ESOP are fundamentally compensation mechanisms rather than capital-raising exercises, their legal characterisation depends heavily on how they are structured and implemented. Large-scale ESOP involving broad employee participation, particularly where shares are offered through intermediaries or special-purpose vehicles, may attract regulatory scrutiny if they meet the statutory thresholds. In such circumstances, the Otoritas Jasa Keuangan or the Financial Services Authority (“OJK”) may require the ESOP to be treated as a non-public offering, triggering prior review by OJK to ensure compliance with capital markets regulations.

These considerations become even more complex in cross-border ESOP structures, particularly where a special purpose vehicles is established to hold and distribute shares on behalf of employees. While such structures are commonly used internationally to centralise administration and promote equitable distribution, Indonesian regulators may examine whether the arrangement constitutes indirect share ownership or nominee-like structures, or whether the special purpose vehicles’s activities could be viewed as offering shares to the public. If the special purpose vehicles is seen as the offering party, the ESOP may risk being recharacterised as a securities offering by shareholders rather than an internal employee incentive program.

In the context of multinational ESOP, OJK may also request formal confirmation or legal opinions or memorandums from local counsel in the foreign jurisdiction regarding the permissibility of nominee arrangements or cross-ownership structures. Our employment practice is able to provide an integrated solution for clients in this situation by leveraging the our global law network. Through this network, we can coordinate with trusted local jurisdiction lawyers to obtain the necessary confirmations or legal advice, so that clients do not need to independently source foreign legal counsel, streamlining the process and reducing regulatory uncertainty.

In practice, equity incentives requires careful legal assessment at the design stage. Public companies implementing ESOP for Indonesian employees must balance corporate law flexibility with capital market compliance, ensuring that participation thresholds, offering values, and distribution mechanisms are structured to avoid unintended regulatory consequences. Early engagement with these issues is critical to preserving the integrity of the ESOP as a genuine employee incentive, rather than exposing the company to allegations of an unauthorised public offering or violations of shareholding restrictions.

Our employment pratice assists clients in assessing these regulatory intersections, supporting the design and implementation of equity incentive arrangements through appropriate corporate approvals, alignment with corporate documents, and careful evaluation of capital market implications, to ensure that ESOPs function as employee incentive mechanisms rather than unintended securities offerings. We also regularly assist clients in obtaining OJK non-public offering prior review when the ESOP meets the criteria for a public offering.

Foreign Exchange Considerations for Multinational ESOP

For multinational companies, equity-based incentives may also trigger foreign exchange reporting obligations. Where an ESOP is implemented by a multinational group such that the local Indonesian subsidiary acts as an intermediary in a foreign exchange transaction related to the ESOP, for example, coordinating payments from employees to the foreign parent company in foreign currency or involving foreign participation, the flow of funds or financial benefits across borders may be considered a foreign exchange traffic activity that must be reported. Consequently, the Indonesian subsidiary may be required to submit a monthly foreign exchange report on such ESOP-related transactions in accordance with Bank Indonesia Regulation No. 21/2/PBI/2019.

Early integration of foreign exchange considerations into ESOP design helps ensure that the stakeholders involved in the ESOP remain fully compliant with applicable regulations, while preserving the smooth operation of the incentive program.

2. What three essential pieces of advice would you give to clients involved in your practice area (Employee Incentives) matters?

Embed Legal Compliance into Incentive Design from the Outset

Employee incentives should not be treated as a purely HR initiative. Incentive programs, particularly equity-based plans, sit at the intersection of employment, corporate, tax, and capital market law. For public companies, capital market considerations are equally critical as ESOP and other equity-based incentives may trigger public offering requirements if the number of participants or the value of the shares exceeds the prescribed thresholds. Our employment practice advises clients to map all legal touchpoints early, including wage protection rules, corporate approvals, and potential regulatory classification risks, as well as capital market compliance obligations such as prior OJK prior review, reporting, and disclosure requirements.

By tailoring these considerations into the incentive design from the outset, companies can avoid regulatory risk, ensure compliance with multiple oversight regimes, and prevent costly restructuring or disputes. Early legal structuring also helps safeguard the program’s intended purpose, as a tool to retain, motivate, and align employees, without inadvertently creating capital-raising or securities offering risks.

Prioritise Clarity, Documentation, and Exit Scenarios

Disputes most often arise not at grant, but upon termination, resignation, or corporate events such as mergers or restructurings. We typically advise clients to clearly document vesting schedules, good-leaver and bad-leaver provisions, clawbacks, treatment upon termination, and dispute resolution mechanisms.

Clear documentation protects both employer and employee expectations and significantly reduces litigation risk.

Manage Payroll and Tax Implications Conservatively

Incentives funded through payroll deductions, particularly under ESOP models, must be handled with extreme care. Indonesian law places strong protections on employee wages, and excessive deductions may expose employers to sanctions and disputes.

Our employment practice works closely with tax and payroll teams to ensure incentive contributions are voluntary, consent-based, and do not infringe statutory wage protections.

3. What are the greatest theats and opportunities in your practice area law (Employee Incentives) in the next 12 months?

Threats:

Regulatory Recharacterisation of ESOP Structures

One of the most significant risks in the design and implementation of ESOP, particularly those established via special purpose vehicles, is the potential for regulatory recharacterisation. Authorities may view such arrangements as prohibited cross-ownership, nominee structures, or indirect public offerings by shareholders. This risk is heightened where a special purpose vehicles is established, controlled, or economically dependent on the issuing company, as regulators could argue that the company is indirectly holding its own shares, or that the special purpose vehicles is effectively offering shares to the public.

In practice, our employment law teams regularly assist clients in navigating these risks, stress-testing ESOP structures to ensure they remain within the bounds of corporate and capital market regulations, and engaging proactively with regulators where necessary to clarify the legal treatment of such arrangements.

Payroll Deduction Disputes

Payroll-funded incentive models, particularly those that are structured or involve significant deductions from employees’ salaries, carry the risk of legal and regulatory exposure. Salary deductions may not be limited to incentive programs or statutory contributions but could also include employee debts or other obligations, especially where employers have a diverse workforce with multiple employment types, not just permanent and non-permanent employees. Such arrangements may inadvertently violate minimum wage protections, attract administrative sanctions from manpower authorities, or give rise to industrial relations disputes.

This risk is expected to grow as more companies explore employee-funded equity participation models, including ESOP with payroll deductions to fund share purchases. Careful structuring, clear communication with employees, and alignment with applicable labor regulations are essential to mitigate potential disputes and ensure that incentive programs achieve their intended purpose without triggering compliance issues.

Opportunities:

Growth of Alternative Incentive Instruments

There is growing interest in phantom shares, cash-settled long-term incentive plans that reward employees for achieving long-term business goals, and hybrid incentive models, which provide economic alignment without triggering share ownership or regulatory complexity, while not being prohibited under the law.

We have seen increasing demand for these alternatives, particularly from multinational groups seeking flexibility and regulatory certainty.

Alignment with Regional and Global Talent Strategies

Well-structured incentive programs position Indonesian employers to compete regionally for talent. Companies that successfully localise global incentive frameworks for Indonesia gain a strategic advantage in retention and engagement.

4. How do you ensure high client satisfaction levels are maintained by your practice?

Our employment practice maintains high client satisfaction through a deeply integrated, solution-oriented approach. The Firm prioritises early identification of legal and regulatory risks, clear and practical advice, and close coordination with HR, tax, payroll, and other relevant internal teams.

A distinctive feature of our employment law practice is its ability to leverage the EY Law global network, allowing clients to benefit from cross-border legal expertise and best practices. This enables us to provide integrated advice on multinational incentive programs, including complex ESOP structures, cross-border equity transfers, and foreign regulatory considerations, without clients having to independently source counsel in other jurisdictions. By combining local regulatory knowledge with insights from trusted global partners, we ensure that incentive programs are not only legally compliant but also practically implementable across multiple jurisdictions.

Clients value our ability to translate complex regulatory considerations into actionable, business-aligned solutions. Our responsiveness, continuity, and holistic understanding across multi-year incentive programs ensure that advice is not limited to one-off opinions. Instead, we act as a long-term strategic partner, supporting clients through program design, implementation, regulatory engagement, and dispute prevention, while optimising both commercial and legal outcomes in cross-border contexts.

5. What technological advancements are reshaping your practice area law (Employee Incentives) and how can clients benefit from them?

Digital Equity Plan Management Platforms

Technology now enables real-time tracking of grants, vesting schedules, and employee eligibility, even across multinational operations. These platforms enhance transparency, reduce administrative errors, and support audit readiness, while also helping companies integrate local and cross-border legal requirements.

Critically, when third-party platforms are used, it is essential to ensure robust data privacy and security measures are in place. Employee information, including personal identifiers, compensation, and equity holdings, must be stored and processed in a manner compliant with Indonesian Data Protection Law No. 27 of 2022, as well as applicable cross-border standards. We guide clients in assessing vendor contracts, data access controls, encryption standards, and secure data transfer protocols, to protect employee privacy and mitigate regulatory risks.

Advanced Payroll and HR Systems

Modern payroll and HR platforms allow employers to implement incentive deductions, bonuses, and vesting outcomes with greater precision. When configured correctly, these systems help ensure compliance with wage protection laws, statutory contributions, and tax obligations, while mitigating risks of industrial relations disputes. Our employment practice works closely with clients to align system design with employment law, company policies, and multi-layered incentive frameworks, including cross-border ESOP structures, while ensuring that these systems embed privacy-by-design principles, safeguarding employees’ personal and financial data even when integrated with third-party platforms.

Data Analytics and Incentive Effectiveness

Data-driven insights now enable employers to measure the impact of incentive programs on retention, performance, and employee engagement. By integrating legal oversight into these analytics, our employment practice helps clients ensure that incentive programs are not only compliant, but demonstrably effective. Through collaboration with HR, finance, and international counsel, we support practical decision-making on plan design, participation thresholds, and distribution mechanisms, helping clients optimise outcomes while managing regulatory, operational, and reputational risks.

Collectively, these technological advancements allow multinational companies and other employers to administer sophisticated employee incentive programs efficiently, transparently, and in full compliance with applicable Indonesian and cross-border legal frameworks.