Unions and investor groups reacted with fury to the news that Royal Bank of Scotland has awarded Stephen Hester, the chief executive of the group that is majority owned by the taxpayer, a £9.6 million pay package.

Roger Lawson, of the UK Shareholders Association, said: “The Government doesn’t seem to have learnt anything. Such a package incentivises reckless behaviour and encourages risk taking. It is absolutely outrageous that the Government does not use its power to bring the remuneration of bankers in these companies down to a reasonable level. Do they need to pay him this much to make him work harder?”

Matthew Elliott, the chief executive of the TaxPayers’ Alliance, said: “Neither RBS nor the Government are taking due care of taxpayers’ money. Just because RBS has been protected from bankruptcy by a public bailout does not mean it should ignore all market conditions.

“At a time when people are losing their jobs, inflation is flatlining and millions are taking pay cuts, it is unjustified to pay Mr Hester such a huge amount. Taxpayers would get a better deal and a more motivated management if he was simply promised a large reward when the bank repays all the taxpayers’ money it was given and re-enters the private sector.”

It is understood that UK Financial Investments (UKFI), the body that controls the Government’s 70 per cent stake in RBS, together with the bank's other major shareholders, approved a long-term incentive plan on Friday.

Graham Goddard, the deputy general secretary of Unite, said that Mr Hester's pay packet would be "met with absolute disbelief" by RBS staff. “Unite is appalled that instead of striving to save jobs in this state-controlled bank, UKFI is approving such an incentive plan," he said. "Staff and customers are sick of seeing senior bankers earn such huge financial awards, when every week hundreds of hardworking and loyal staff are losing their jobs.”

The pay package is believed to consist of a £1.2 million salary, about £2 million of annual non-cash bonus payments and almost £6.4 million of long-term share options.

An RBS spokeswoman said that the deal had been agreed but was in the process of being finalised by the bank’s board. “We have said consistently it is all linked to performance and will only be paid out if targets are met,” she added.

The deal is similar to what other bank chief executives receive, but is considerably more lucrative than the pay packages offered to the bosses of other banks in which the Government holds large stakes.

Eric Daniels, the chief executive of Lloyds Banking Group, is paid a salary of £1 million a year but only £2 million in long-term incentives.

Sir Philip Hampton, the chairman of RBS, is understood to be the driving force behind the deal, which is based on a mix of targets such as improving the bank’s share price. It would need almost to double to 70p for Mr Hester to get the full payout.

The size of the remuneration package is likely to divide opinion, with some critical of big pay packages and others believing that the difficulty of reviving RBS's fortunes means that anyone taking on the task would require lucrative incentives.

Sir Fred Goodwin, the bank's former chief executive, bowed to public pressure last week and agreed to sacrifice £4.7 million of his £17 million pension award.

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