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As a developing country, Indonesia requires sufficient national revenue to support its development process. As the natural resources such as crude oil, copper, tin, gold, silver, and other non renewable resources gradually declines in production, the reliance on other sources of income becomes higher. One prospective source that reflects the autonomy of a nation in financing its development process would be tax income. Data from Indonesian Directorate General of Taxes (DGT) from 2001 until 2009 has shown that the contribution of revenue generated from tax to domestic income has reached more than 65% (Kinerja Penerimaan Pajak, 2010). It indicates that in the future, the country would consider tax income as its primary revenue source.
In order to generate optimal tax revenue, the need to have a reliable, efficient and professional tax administration is a must. Previously, the tax institution was regarded as a red tape and rigid bureaucrat due to its coercive power to collect tax. To support the wind of reformation process, DGT has launched the modernization program with three main objectives: to have high taxpayer compliance, high public trust in tax organization, and high productivity of tax officers (Rizal, 2010). Compare to other government institution, DGT has been given the privilege in terms of budget and flexibility in human resource practices to continuously improve its performance. Given the responsibility of collecting large amount of tax money, not only the infrastructure such as information and technology has been modernized but also reformation in terms of strategic human resource management has been implemented to support the attainment of organization objectives.
Specifically, the initiative intends to improve the productivity and integrity of tax officers by rendering the DGT with greater flexibilities to manage its human resource (HR) management policies. As a government institution, human resource practice in the DGT should comply with standard civil service system which has long been perceived as ineffective in motivating its employee and establishing accountability for the work result. For this rationale, flexibility to implement strategic human resource management based on organization needs is an important factor for transforming DGT into a high performance revenue collection agency and indeed DGT was chosen as a pilot project for modernizing the whole country human resource management system (Rizal, 2010).
Based on the authority given the government, several actions and programs has been established which are the actualization of human resource management practice, begins with the staff selection process, setting up new compensation system, adequate training in tax management for tax officers, establishing new job classification system based on competencies and workload, and finally formulation of a comprehensive system for performance evaluation.
Among many systems in Directorate General of Taxes, tax audit is the most prominent tools for ensuring taxpayers compliance on the tax regulations. Centre for Tax Policy and Administration (2006) defined that "tax audit is series of examination to determine whether a taxpayer has correctly assessed and reported their tax liability and fulfill their respective obligations". Audit performance will be assessed by the quantity of audit accomplished and quality of audit result. The demand of having qualified and reliable tax audit are getting higher and higher due to the increasing number of tax revenue targeted from the audit process and the awareness of delivering better services to the citizens. From the perspective of human resource management, tax audit department have conducted several actions which objectives is to improve the motivation of tax auditor and subsequently increase the organization performance as a whole. Those actions are:
Incentives improvement and better grading measurement for the tax auditor
Providing training and education for the tax auditor in terms of business process and audit software
Modernizing and enhancing information and technology required for audit procedure and also linking online databases with the independent party that provide business data
From the administration of tax laws point of view, tax audit has been regarded as an important function. In the process of detecting and deterring noncompliance taxpayers, tax auditors oftentimes required to interpret complex regulations, carry out intensive examinations of taxpayers' books and financial records, and at through intensive interaction with the society, they should behave and act as representation as the tax organization as a whole (Centre for Tax Policy and Administration, 2006).
Considering that the function of tax audit department as a law enforcing entity and the process which is rigorous and requires highly professional and talented people, tax auditor were given better compensation compare to other position in the Directorate General of Taxes.
From the government perspective, such compensation is regarded as a reward for the employee in exchange for their performance or actual work contribution which also has connection with professionalism and job satisfaction. Compensation or reward in this context are intrinsic which reflects employee's psychological mind sets that result from performing their jobs and extrinsic which includes both monetary and nonmonetary rewards (Martocchio, 2009).
Greene et al in 1985 stated that employee express satisfaction in relation to the rewards they receive; those whose rewards are equivalent on their performance will be motivated to deliver their best performance. They expect their compensation is fair and equitable that it provides them with tangible reward proportional with their skill and ability. Weighting proper proportion among extrinsic and intrinsic compensation would be a challenging part for human resource manager since public sector has some characteristics that differs from private sector. Incentive systems should properly meet the need of each organization instead of benchmarking from specific organization. Chenhall noted that what might be effective and efficient in one organizational context, might be ineffective or even counterproductive when implemented in a different organizational context (as cited in Weibel et al., 2009).
Scholars such as Perry, Wise, Buelens, and Van den Broeck stated that in the developed countries perspective, there is an opinion about people who work for public organization were not striving for a good income, instead they are interested in the job itself which is considered interesting (as cited in Weibel et al, 2009). Consequently, based on studies by Rainey and Francois, public sector needs to have a different compensation system compare to private sector by putting more emphasize on non monetary rewards such as good working environment, interesting, and challenging tasks in order to maintain or even improving the level of employee motivation (as cited in Weibel et al., 2009 ).
Compare to developed countries context, what makes it different with Indonesia or any other developing countries might be the level of prosperity that the government employees have. Asian countries especially Indonesia still has to struggle with reality that public servant compensation was not adequate enough even to support their basic needs. Maslow (1943) contended that once a person has been satisfied by a specific need and move toward higher need, lower need wouldn't be his priority again. It is highly likely that developed countries government employees has satisfied with their basic needs so that they would strive to higher needs which is intrinsic need, while the Indonesian government employee still have to fulfill shelter needs, educations needs, and others so that they put more emphasize on extrinsic needs instead of intrinsic needs.
II. Problem Definition
Considering the above explanations, this research basically wants to measure two things, the first is that whether there is relationship between compensation and job satisfaction in the context of Indonesian government employee particularly Tax Auditor in Directorate General of Taxes. Second, to determine which particular elements of compensation whether intrinsic or extrinsic are perceived to have significant factor on employee job satisfaction.
III. Research Objective
The need to determine whether any impact of compensation on job satisfaction in the scope of tax auditor is important since Indonesian Directorate General of Taxes was regarded as a role model for reformation process in the scope of Indonesian government. Weighing proper and adequate reward composition to be rendered to the employees is critical if the reward system is intended to function effectively (Byars & Rue, 2006). The fact that the tax organization has spent on average 37% budget on personnel expenditure within 3 consecutive years or equivalent with US$ 134.73 million, has given the signal that compensation strategy is significant to the attainment of Directorate General of Taxes objectives (Directorate General of Taxes, 2011-2012). The unique function of tax auditor in terms of law enforcing entity and service delivery were the best respondents in this research since it represents the majority function of government which is policy implementer and service grantor.
In addition, differentiating which factors have significantly influence the job satisfaction would further be a beneficial input for the government to design proper structure for employee compensation system. Dynamic process within the DGT in terms of strategic human resource implementation would be valuable sources for the government to determine whether to implement the new compensation system through out the whole institutions or not. The resources in terms of fund to finance the human resource reformation process dealt with considerable amount of national revenue. The reformation process should be properly managed as the form of accountability to the citizens.
This thesis is divided into five chapters. The first chapter explains background and objective of the research to Indonesian Directorate General of Taxes as targeted organization; the second chapter describes concepts of employee satisfaction and compensation in terms of extrinsic and intrinsic reward, hypothesis determined for research, and also theoretical framework utilized in the study; the third chapter elucidates methodology applied in the study which covers population, sampling , and measurement of the research; the fourth chapter presents the results achieved and evaluate the hypotheses, particularly it discuss relationship between compensation and job Satisfaction and factors that influence job satisfaction; and lastly the fifth chapter defines conclusion, derive some implications for the targeted organization and outline some limitations of the research.