I work for a diplomat based in Vietnam. I get paid in cash and banks do not accept personal deposits from foreigners. I want to apply for a Schengen visa but I don't have bank statements however, i can provide pay slips from my boss. Do i need a confirmation letter to support the pay slips? Since I'm paid in cash, do i have to prove that I have the money needed to support my travel for the last 3 months?
You need to show both that you are not likely to stay in the Schengen area illegally (i.e. that you have a stable situation in your country of residence) and have enough money to cover your trip (that's travel to the Schengen area and back plus the costs of your stay, two separate requirements).
Bank statements help with all three requirements and showing you have a stable income over a period of several months (not just cash in hand) is especially useful with respect to the first requirement. Being paid in cash does not really change that, it just makes it harder to document your situation (and being paid in cash and spending it without ever depositing it on an account makes it harder still). Pay slips are good too but any additional evidence can be useful.
Incidentally, do you have a bank account/credit card in another country? Euro banknotes? You also need to be able to spend your cash for your application to be credible.