Food security has become one of the most important issue of the world. One of the aspects of food security often discussed about is fulfilling the need of milk products. According to Food and Agriculture Organizations of United Nations (FAO), approximately 150 million households around the globe are engaged in milk production. Indonesia as one of the most populated countries has high need of milk products. Aiming to increase production volume and improvement of competitiveness of Indonesian milk products, small farmers are confronted with the challenge of challenging paradigms of bureaucracy, centralization, stability, static and rigid policies and procedures, and sheer complacency with traditional practices. Compensation is a systematic approach to providing monetary value to employeees in exchange of work performed in order to boost the performance of employees and create a more engaged workforce that’s willing to go the extra mile of SMEs in milk industry.

This research conducted to determine the extent of implementation of compensation practices in Indonesian-owned SMEs and formulating grand strategy through application of compensation and benefit system which is ideal for Indonesian milk industry. The subjects of this study are 8 (eight) owners of small scale enterprise and 8 (eight) leaders group of Dairy cow farmers at Ngantang, Malang Regency, East Java Province. Data collection used primary and secondary data through questionaire, observation and in depth interview also literature study. This study used descriptive and quantitative analysis by salary mapping, eckenrode methode and linear regression to formulating job grading and job value based on Hay system.

The results of this study showed that the characteristics of Milk-based Small scale enterprises were using traditional management, simple record-keeping administration, having local market and regional sale, utilize local or regional raw material, perform continous production system, having good quality awareness, using self or family capital resource, utilize simple equipments and technology and also having good innovation capability. Moreover there were 5 (five) job classification in Small Scale enterprises in milk cluster which were owner, manager, secretary, milker and feeder with 9 (nine) compensable factors which were : experience, skills, initiative, social capability, responsibility for equipments, span of control, visual attention, working condition, and physical work, thus initiative has the strongest influences . According to the salary mapping and linear regression, the main strategy to formulating of Milk-based Small scale enterprise at Malang regency, East java using compensation system with grading.