Barclays revealed staff costs jumped by a fifth to almost £12 billion last year, despite a 12% cut in the bonus pool for its investment bankers.
In a year when pre-tax profits rose 32% to £6.1 billion, Barclays added the group-wide pot for performance-related awards fell 7% to £3.4 billion.
The banking giant denied it was ramping up pay at Barclays Capital to compensate for the smaller bonus pool, claiming the higher staff costs were partly caused by a 7% increase in headcount and deferred pay and bonuses from previous years. The average bonus at Barclays Capital, not including salary, was £104,839 compared with £125,100 a year earlier.
Amid intense public scrutiny on bank bonuses, Barclays' decision to reduce its performance-related pay follows its recent Project Merlin agreement with the Government.
Chief executive Bob Diamond is expected to receive an estimated package of more than £9 million in pay and bonuses but the company refused to reveal details until it releases its annual report next month.
Presenting his first set of results, Mr Diamond warned that the tighter regulatory environment will lead to lower returns and said he had instigated a rigorous review of the bank's business to make it more efficient.
Although the results show an improved performance, the profits figure falls short of pre-financial crisis days when 2007 profits hit £7.1 billion.
At its star investment banking arm Barclays Capital, which saw pre-tax profits excluding own credit rise by 2% to £4.4 billion, the bonus pool for 2010 will be 12% lower than last year at £2.6 billion.
Despite the reduction in total bonuses, overall pay to staff increased 20% to £11.9 billion, while at BarCap the ratio of staff costs to income increased to 44%, up from 33% last year.
Barclays also disclosed a raft of measures that will see senior staff bonuses deferred over three years and will only be paid if the bank meets its capital requirements under the Basel agreement.
The number of staff who will see 60% of their pay deferred has also been significantly expanded beyond the requirements of the FSA's remuneration code, the company added.
Mr Diamond said: "We are committed to demonstrating that we are both responsible in our compensation decisions and practices and that we take our regulatory obligations and UK Government commitments seriously.
"In particular, our overall performance awards in 2010 have been directly influenced by the commitments that we have made under Project Merlin.
"In reaching our final decisions, we have had to balance carefully our obligations with our need to ensure that our decisions are commercial in a highly competitive global environment."
Total performance-related pay across the group, including bonuses which had been deferred from previous years, increased by 25% to £3.5 billion.
Although smaller than last year, the bonus pool is far higher than the group's £531 million dividend payments to shareholders for the year.
Len McCluskey, general secretary of the Unite union, said: "The Barclays decision to award these mammoth bonuses for their top bankers is shameful.
"These bonuses undermine any claim by the Government that there is fair pay in banking. Those at the top of the big banks are paid more then 100 times the pay of those workers at the lowest level.
"These excessive rewards widen the gap between those at the top and ordinary workers struggling to pay their bills."
Barclays revealed it paid tax of £6.1 billion, of which £2.8 billion was in the UK.
The bank's better-than-expected profits performance was mainly down to fewer bad debts.
BarCap, which accounts for the bulk of the bank's profits, had a strong final quarter of 2010, despite City expectations that it would be disappointing.
The investment arm saw revenues rise to £3.4 billion in the final quarter, a 20% increase on the previous three months, as it benefited from the global economic recovery.
In UK retail banking, profits increased 39% to £989 million after a 21% fall in bad debt charges to £819 million was partially offset by an 11% increase in operating expenses to £2.8 billion, partly due to higher pension costs.
Lower bad debt charges also benefited Barclaycard, which increased profits by 9% to £791 million in the year.
The bank said it has made a strong start to 2011, with income and profits above average in January, while bad debts continue to decline.
Richard Hunter, head of UK equities at Hargreaves Lansdown stockbrokers, said: "Barclays has opened the bank reporting season in some style, exceeding analyst estimates despite a challenging 2010.
"In all, the results are representative of something of a return to normality."
Shares in Barclays were up 3% following the release of the results, having already climbed 11% over the past three months.