Cash compensation comes in two forms: base salary and variable pay. As the term implies, cash is any type of compensation paid in the form of a bank check or direct deposit into your bank account. But what does cash compensation for doing your job really mean?
Base salary is a cash payment from the employer in exchange for your performance of your job. For most role, base salary makes-up the largest proportion, about 85% on average, of an employee’s total cash compensation. Base salary represents a fixed cost to the company, and the total cost of all employee’s base salaries are often an organization’s largest expense.
Base Pay, Premium Pay, and Performance
Your base salary will not typically vary according to your performance, unlike commissions or bonus pay. Once a year, your employer may conduct an annual salary review for all employees in the organization to consider them for a salary increase. As a result of the annual salary review, you may be rewarded with a merit increase to your base salary, setting a new base salary rate for the following year. These annual increase budgets typically represent about 3% of your company’s total payroll budget, according to data from Salary.com’s annual US and Canada National Salary Increase Budget Survey.
Overtime pay is considered a form of premium pay, not a part of base pay. Employers typically pay overtime at the rate of 1.5 times base pay for any hours worked over 8 in a day, or for any hours worked on a holiday.
Variable Pay Is Icing on the Cake
Variable pay is the other form of cash compensation and is composed of bonuses, incentives, and commission payments.
- Bonuses – bonuses are a form of cash compensation that varies with performance. Unlike base salary, bonuses are a variable expense for your organization. The bonus payment typically has a target level of payout, expressed as a percentage of base salary. For example, you might be eligible for a 15% bonus, meaning you’re eligible to earn up to the equivalent of 15% of your base pay rate in bonus payouts. Bonuses are typically tied to a performance metric, such as company profits over a specific period of time. If your company offers a profit-sharing plan and the company achieves budgeted profits, then that typically translates to bonus payouts to employees at target. But bonus payouts can be more or less than their target depending on performance, hence the term “variable pay.”
- Incentives – incentive pay is typically based on pre-defined goals set at the beginning of the performance period, such as your company’s fiscal year. Like bonuses, incentive pay programs typically define a target level of payout, expressed as a percentage of your base salary. Your relative achievement against your goals determines the payout. Goals can be individual, team, or organizational. Incentive pay is variable, so payouts can be more or less than target, as with bonuses.
- Commissions – usually, only employees in revenue producing jobs (e.g., sales representatives) are eligible for commission pay. Sales compensation plans are complex and can be paid against revenues gained or units sold, depending on your organization’s sales commission policies.
Bonuses vs. Incentives
You may hear the words “bonus” and “incentive” used interchangeably in your organization, or your HR department may define these as different types of variable pay. If you’re unsure if you’re receiving a bonus or an incentive as part of your total cash compensation, or if you’re confused by the different types of variable pay programs offered by your company, reach out to your HR department for clarification.
Total Cash Compensation Is Stacks on Deck
Total cash compensation is the cumulative value of base salary plus any variable cash payouts. Your total cash compensation is defined as all cash payments earned during a year of full-time employment. Adding together your base salary and your variable pay gives you the total cash paid on an annual basis.
Benefits, such as healthcare (dental, medical or vision insurance), short-term disability, long-term disability, 401k, vacations, etc., are part of a total compensation package, and are examples of non-cash compensation. They are not included in a total cash compensation calculation.