What is Total Cash and key components
The total cash is one of the most important term in Compensation and Benefits area, but many people do not understand the Total Cash and its main components. The Total Cash is usually the cash earned during the year, connected with the particular fiscal year.
The total cash consists of two main components:
- fixed pay
- variable pay
The fixed pay is represented mainly by the base salary. In some organizations the employees can receive additional extra payments, but it is not a common practice on the market.
The fixed pay is the item in the total cash, which gives “a security” to the employee. The base salary is not a part of the total cash, which can change quickly over a period of time. The company decides to pay the base salary as it want to provide the employee with the possibility to plan cash flow to the future. The base salary is paid for conducting tasks, which are defined in the job profile at 100%.
The variable pay consists of the bonus and incentives. The bonus is a part of the total cash, which is focused on the development over a longer period of time. The goals for the payment can be defined for a year, in some cases it can be even longer. The bonus depends on the individual performance of the employee and the overall performance of the company. When the year is really bad, the bonus does not have to be paid.
The incentives are a strongly individualized component of the total cash. The incentives are paid to the sales force usually and they depend just on the individual performance and the manager has usually no chance to influence the payment. The Incentive Scheme define the formula for the calculation and the manager can just make a confirmation.
Many managers believe in the power of the variable pay to influence and increase the individual performance of the employees, but it is not that true. It is very easy to demotivate employees by changing the bonus or incentive schemes, but is very hard to motivate them by adjusting the bonus or incentives schemes.It is very dangerous to change the total cash.