Royal Bank of Scotland has indicated it will bow to pressure to slash executive bonuses after a bruising row with the Treasury, it was reported today.
The bank, which was compelled to give the Government power over its bonus pot as part of its entry into a scheme to insure its toxic assets, is thought to want to cool tensions over the level of rewards it is able to pay.
According to the Financial Times, RBS insiders have said that pay-outs in its investment banking division would be "at the low, low end of the scale", even if that meant losing experienced staff to better-paying rivals.
It has been reported that RBS directors could threaten to quit the bank if the Treasury used its power to imposed a cap on the bonus pot.
The Government has warned it might veto the size of the RBS bonus pool for 2009 - thought to have increased by 50% on last year to £1.5 billion in the wake of rising stock markets and the beneficial effects of stimulus measures on the economy.
RBS, which will be 84% state-owned under the terms of the Asset Protection Scheme (APS), has to agree the size of its pay-outs with UK Financial Investments (UKFI), the body set up to manage the public stakes in financial firms.
The bank has indicated that a clampdown on the amount it pays to its staff would put it at a competitive disadvantage and threaten its ability to recover and therefore return the taxpayer's £46 billion investment.
Yesterday City Minister Lord Myners appeared to stoke the argument by saying highly-paid bankers should "come back into the real world".
Gordon Brown played down suggestions that RBS would be singled out by saying all banks would follow international guidelines and "nobody is being discriminated against".
As attention focused on the issue, Barclays' investment arm, Barclay Capital, increased basic salaries for its 21,000 employees as it looks to boost staff compensation in line with competitors and comply with G20 guidelines on bonuses.
Salaries for managing directors are capped at £150,000, with the remainder of bankers' pay derived from a variable bonus.
Lloyds Banking Group has also come under the spotlight amid plans for a one-off share payment potentially worth up to 200% of salary to a small number of senior managers.
The bank negotiated the deal with shareholders as it geared up to embark on its merger with HBOS at the beginning of this year.
As a result of the negotiations, the planned bonus is understood to have been trimmed from 375% to 200%.
Of this, 120% is to be based on the bank's economic profit and 80% will derive from the success of the merger.
Bonuses are believed to be based on early 2009 wages and will be calculated in late 2011 depending on the performance of the firm and the success of its integration with HBOS. They will be paid in 2012.
A spokesman for Lloyds said its scheme was "very closely aligned" to the success of its merger.
"We introduced a new long-term performance plan earlier this year following extensive consultation with our shareholders, including UKFI," he said.
"There has been no pay-out under this plan, nor will there be until the spring of 2012.
"If any payments are made, they will only happen if stretching performance targets are met."
Lloyds, which is now 43%-owned by the taxpayer, is looking to create annual cost savings of £1.5 billion as a result of the merger.
Yesterday it announced plans to reduce the benefits staff receive under its final salary pension schemes.
Mr Brown's spokesman told a regular briefing of Westminster reporters: "There is a clear agreement between the Government and RBS... that their bonuses are quite specified in terms of no cash bonuses and deferral to 2012.
"Those details are documented. There's an agreement. It's as simple as that.
"When that agreement is effective is for the RBS senior management and UKFI to agree."
The same principle applied to other UK banks, he added.
"Every one of the UK banks has to agree with the UKFI and the FSA what their bonus arrangements are. They've signed up to that. It's quite clear what they've signed up to.
"It's not been signed up to in quite the same way as with RBS, because RBS bonus arrangements have been set out in more detail, but it's exactly the same principle which will be underlying the Lloyds bonus arrangements."
The spokesman added: "The Prime Minister's view continues to be that we must have responsible banking and part of that is having remuneration systems in place that are actually proportionate and are aligned with the principles set out on a number of different occasions.
"Every bank in the UK and every bank that is UK-based will have agreed already how those arrangements are going to apply to them individually."
The spokesman added: "Obviously one of the issues we have to be cognisant of is that we want to retain a competitive banking industry in the UK, and part of that is remuneration.
"But there is no stepping away from the fact that the old bonus system wasn't working."
Asked whether the Prime Minister was concerned that banks like Barclays may get round restraints on bonuses by increasing salaries, the spokesman said: "The Government clearly can't interfere in individual salaries. That wouldn't be appropriate."