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By Daniel Martin, Alex Brummer and Tim Shipman

Last updated at 8:04 AM on 30th January 2012

Living the high life: Stephen Hester, chief exec of Royal Bank of Scotland

Royal Bank of Scotland chief executive Stephen Hester bowed to pressure last night and gave up his controversial bonus.

He told the state-owned bank’s board that he would not accept his 2011 award, worth almost ?1million, saying he did not wish to become a pariah.

Mr Hester finally acted after days of intense criticism from MPs and the public over the scale of his pay and perks.

His move was a direct response to Labour’s announcement yesterday evening that it would force a Commons debate on the payments at the bank, allowing MPs to vote on the bonus.

Pressure mounted earlier in the day after RBS chairman Sir Philip Hampton decided to waive his own ?1.4million bonus.

RBS sources said that Mr Hester was ‘surprised by the vilification’ he had received.

They said his hand was forced in the end by the prospect of a House of  Commons vote to remove his bonus.

A source said: ‘It was 100 per cent his own decision. He has decided to waive the bonus permanently rather than reserve his right to take it at a later date. He recognised that if it got to a vote in the Commons, he would have had to give it up anyway.’

Mr Hester’s shares-only bonus payment  was worth around ?963,000, but it emerged yesterday that he could pocket as much as ?39million in total during his time with  RBS.

The bank had already set aside ?3.3million for Mr Hester’s bonus next year.

That is on top of the potential ?35.5million package he has enjoyed since he moved to RBS in 2008.

It is made up of pay, pension, bonuses, shares and a long-term incentive plan that is worth up to ?4.8million a year, four times his ?1.2million basic salary, and is due to start paying out from 2014 if he hits certain targets.

This is how it is calculated:

2008: ?4.99million in shares instead of pay and bonuses;2009: ?6.9million total package;  2010: ?8.16million total package; 2011: ?8.08million total package; 2012: ?7.38million total, including up to ?4.8million long-term incentive plan, salary of ?1.2million, ?420,000 in pension contributions and his bonus which was worth ?963,000 when issued last week but was expected to top ?1million as RBS shares rise in value;2013: RBS have set aside ?3.3million of shares for his bonus next year. The exact size will be decided this time next year.

Mr Hester has presided over a 40 per cent fall in the RBS share price and failed to hit the Government’s targets for lending more money to businesses.

Last night Labour business spokesman Chuka Umunna said Mr Miliband’s plan for a vote had forced the move.

He told Sky News: ‘We have absolutely no problem with people who create wealth being well rewarded, but excess reward for failure undermines trust in the economy.’

The decent thing: RBS chairman Sir Philip Hampton waived his right to a one-off payment worth up to ?1.4m amid pressure from protesters, right

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.’

Chancellor George Osborne 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.’

A senior Government source said ministers were ‘relieved’ Mr Hester had decided to waive his bonus – although they had not pressured him to do so.

A Downing Street source said: ‘The Prime Minister said it was a matter for him. It looks like he has decided.’

Senior Lib Dem Lord Oakeshott, a former Treasury minister, said: ‘He’s done the right thing belatedly.’

He added: ‘I’m very sorry that David Cameron and George Osborne continued to defend the indefensible for so long.

‘The Government needs to get a grip. It has been a pretty pathetic spectacle: the Government should have acted sooner.

‘We cannot be wasting such large amounts of money on bonuses. Getting the banks to lend should be the priority now.

Hand back that ?1m, Mr Hester

‘A year ago RBS promised to lend to small business – they have broken that promise and there should be no more bonuses until they do.’

Before Mr Hester’s announcement last night, Work and Pensions Secretary Iain Duncan Smith said: ‘Nobody would be happier than the Government if he [Hester] took such decisions, but it’s up to him.’

Labour planned to hold an opposition day debate next week ‘to let MPs show the public’s disapproval of Mr Hester’s bonus’.

A source said: ‘It’s not binding but if there is an overwhelming majority RBS will have to take notice and act.’

As an 83 per cent shareholder in RBS, the Government could have voted down Mr Hester’s bonus at the bank’s AGM.

Mr Miliband had warned earlier in the day: ‘While nobody doubts Mr Hester has done a decent job, there are grounds for real doubt about whether this really justifies a bonus which practically doubles his salary.

‘The Chancellor explicitly said that reward would be linked to performance in small business lending but we know RBS failed to meet their Project Merlin targets [the Government initiative to get credit flowing through the economy] in the third quarter of last year.

‘At the AGM in April the Government as the majority shareholder in RBS will have to decide how to vote on the bonus. They should vote it down.’

David Cameron faced fresh embarrassment this week after insiders warned that Mr Hester’s bonus could top the ?1million limit set by the Prime Minister.

More to come: RBS is braced for more criticism as it prepares to unveil the bonuses paid to staff in its investment banking division

The RBS board awarded Mr Hester shares worth ?963,000 last week but they are already worth ?999,000 because the bank’s share price has edged up and are expected break the ?1million barrier this week – making a mockery of Government claims to have slashed the bonus.

Mr Osborne faced calls to intervene personally to lean on the RBS board to slash the bonus as ministers argued that failing to pay the money would have cost taxpayers even more.

Tory MP David Ruffley, a member of the Commons Treasury Committee, said: ‘If Stephen Hester does not voluntarily relinquish some or all of this year’s bonus, it is for George Osborne, on behalf of the British taxpayer, to have a very serious discussion with the RBS board, who granted the bonus in the first place.’

But with the political damage growing, ministers attempted to rally round Mr Hester, warning that failing to give him a bonus could have forced the RBS board to resign, pitching the bank into chaos.

Lord Turner, chairman of the Financial Services Authority, and its chief executive Hector Sants will report on RBS to the Commons Treasury committee tomorrow.

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