RBS chief Stephen Hester is forced to give up £1m bonus

The announcement came just hours after the Labour Party said it would force a House of Commons vote calling for Mr Hester to be stripped of the payout.

Mr Hester, who was appointed chief executive at the end of 2008 to replace Sir Fred Goodwin after the bank had to be bailed out by the government, is said to have been concerned he was becoming a “pariah” of the banking sector.

The decision comes after a weekend of intense pressure on Mr Hester after the bank’s chairman, Sir Philip Hampton, announced he would waive his payout.

Sir Philip, chairman of RBS since 2009, had been on course to claim 5.17 million shares in the financial institution in February, but it is thought he told the bank’s remuneration committee it would “not be appropriate” for him to take a £1.4 million payout.

Mr Hester was awarded £963,000 last week in a short-term bonus equalling 3.6 million shares sparking public outrage.

Speaking about announcement, Labour leader Ed Miliband said: “Stephen Hester has done the right thing. It is a shame that a feeble, out of touch David Cameron did not realise he should do the right thing and stand up for the interests of the British people.

“Labour was right to seek a parliamentary vote on this so that the people’s voice could be heard. But the debate about fair executive pay and responsible capitalism is only just beginning. We need a government that will tax bankers’ bonuses and bring responsibility to the boardroom.”

The decision was welcomed by Chancellor George Osborne, who said: “This is a sensible and welcome decision that enables Stephen Hester to focus on the very important job he has got to do: namely to get back billions of pounds of taxpayers’ money that was put into RBS.” Shadow business secretary Chuka Umunna who criticised the payment said it was “a very welcome move” by Mr Hester.

He added: “He is responding to public concern and criticism about the level of renegotiation in the bank, in particular in relation to his position.

“For somebody to listen and respond, we, of course, would not criticise that. He is doing the right thing.”

He went on: “It’s a shame that the government, having gone around lecturing shareholders in other large companies to take an active role in bringing about wage restraint, chose to sit on its hands in this case and that it took so long for there to be a public clamour and row of this order for the change in position that we have just witnessed to take place.

“It says something, if you like, of the government talking the talk but not walking the walk.”

Reacting to Mr Hester’s decision, former Liberal Democrat Treasury spokesman Lord Oakeshott said it was “better late than never”.

He added: “I’m glad that eventually Stephen Hester has seen sense and seen the outrage of most people in this country and Lib Dems who have been complaining bitterly about this for weeks. I’m very sorry that David Cameron and George Osborne didn’t see that, and have been defending the indefensible right up to today.”

Just hours before the announcement last night, Labour said it would stage an Opposition Day debate the week after next to heap pressure on the government over the payment.

Labour had also said the government, which owns 82 per cent of the bank, should stop the payout. However, ministers had said that would mean “ripping up” their relationship with RBS and putting tens of billions of pounds of public money at greater risk.

The Prime Minister had sidestepped calls to block Mr Hester’s award, saying: “It is a matter for him.”

Speaking at Chequers over the weekend before Mr Hester decided to turn down the bonus, Mr Cameron had said: “It’s obviously his decision. My decision is to make sure the team at RBS get on with the job of turning the bank round, and we made our views very clear on the bonus and that’s why it was cut in half compared to last year.”

Also, speaking before the latest announcement, Cabinet minister Iain Duncan Smith said there would have been “chaos” if the government had overruled RBS over the bonus.

He said “nobody would be happier than the government” if Mr Hester decided not to take it, but it was “up to him”.

Chief secretary to the Treasury Danny Alexander had also earlier insisted that ministers were “protecting the taxpayer” by allowing the bonus to go ahead. Stepping in to directly control the arm’s-length operation of the bank would have potentially triggered bigger financial risks, he said.

“All the options had been looked at. The judgment we had to make was, should we go further, as many of us would like to, and say: ‘Let’s have no bonus at all; have the government take control directly of RBS’, and therefore causing potentially much bigger financial risks to the taxpayer.

“In the end, the calculation, from the point of view of protecting the taxpayer, is it was better to ensure that that didn’t happen to RBS.”

Mr Alexander said there are “tens of billions of pounds” of taxpayers’ money tied up in the bank.

However, it also emerged yesterday that a double bonus scheme that existed could greatly inflate Mr Hester’s £1.2m annual salary to a possible £8m over the coming years.

The bank chief is entitled to both short-term bonuses and long-term incentive bonuses based on factors such as performance and meeting targets.

The £963,000 he was awarded last week was a short-term bonus equalling 3.6 million shares, relating to the 2011 calendar year.

Short-term bonuses are capped at 200 per cent of his annual salary, so his last payout, which he has not turned down, was not as large as it could have potentially been.

The long-term scheme is based on the previous three years, so Mr Hester is approaching the point at which it can come into effect.

It is thought the long-term bonus could potentially reach £6.4m. Mr Hester’s combined salary and bonus earnings could therefore reach £8m, but it is unlikely that maximum target will be met.

But he was accused of trying to “have it both ways” by shadow business secretary Chuka Umunna.

The MP said: “It is staggering that ministers should have allowed themselves to get into such a quandary over the Hester bonus, given they knew it was in the offing for many months and would be a matter of immense public interest.

“Ministers infer there would have been ‘chaos’ and that the board of RBS would have resigned … Instead, the chairman of the board has responded to mounting public criticism by giving up the £1.4m worth of shares he was due to receive himself next month.”