Gary Hoffman came under fire on Thursday when it emerged he would continue to receive up to 80,000 a month until April, despite leaving with immediate effect.
Hoffman, who left to join NBNK Investments, a new banking start-up led by Lloyd's of London chairman Lord Levene, could have received a combined total 500,000 in remuneration, while he effectively contributed nothing to the business.
He had been due to continue taking home his 58,000-a-month salary and 23,000-a-month pension contribution, as well as a 1,000-a-month car and petrol allowance.
But unions were quick to react and labelled the move a "punch to the stomach" for the 2,500 employees who have lost their jobs at the bank during the last two years. Andrew Tyrie, the chairman of the treasury select committee, said the public would be concerned by the deal.
Just over 24 hours after Hoffman announced his departure, the bank released a statement confirming his change of mind.
"Northern Rock confirms that Gary Hoffman has voluntarily waived his contractual right to be paid salary, pension and benefits for the period of his garden leave," it said.
Hoffman will be replaced by Ron Sandler, who led the failed lender in the months after its multi-billion-pound state bailout and will now stand in as executive chairman.
The outgoing boss has been credited with beginning a turnaround at Northern Rock, leading to the removal of the government deposit guarantee implemented in the immediate aftermath of a run on the bank.
He also led the separation of Northern Rock into a so-called "good bank", consisting of the company's continuing operations, and a "bad bank", made up of Northern Rock Asset Management - the home of toxic assets that will be run down over several years.
It has been speculated that Hoffman may lead a bid for Northern Rock in his new role - however, that is unlikely to happen after the bank confirmed NBNK has agreed not to make any moves on it until 1 November next year.
UK Financial Investments (UKFI), which manages Northern Rock on behalf of the taxpayer, may put it up for sale within a matter of months.
UKFI also holds the nationalised stakes in Lloyds Banking Group and Royal Bank of Scotland. It is mandated with managing the sell-off of these holdings, and the sale of Northern Rock is a large part of its work.
Northern Rock Asset Management (NRAM) was transferred to another organisation, UK Asset Resolution. NRAM's portfolios will be merged with the toxic assets of defunct lender Bradford & Bingley, which was nationalised around the same time as Northern Rock.
Assets are being sought by a number of new entrants including Virgin Money and Santander, the Spanish bank whose UK chief executive Antonio Horta-Osorio resigned last week to take up a similar post at Lloyds Banking Group.
NBNK is targeting a "significant share" of the UK retail banking market by offering a traditional branch banking service to retail, small business and corporate customers in the UK, alongside a web-based service.
It has raised 50 million and its directors include Lord McFall, the former MP for West Dunbartonshire, and former Scottish secretary Lord Forsyth.