The First Division club claimed the player was poached by the Hammers and had demanded a sum "in excess" of the pounds 2m Arsenal paid to Notts County for the teenager Jermaine Pennant.
Charlton will receive only pounds 400,000 immediately following yesterday's decision by the Football League's Appeals Committee. Thereafter there will be four further awards of pounds 250,000 after five, 15, 25 and 40 appearances by Defoe. Charlton will also receive pounds 250,000 if the youngster is capped, as well as 15 per cent of any future profit West Ham make on the player.
West Ham denied the allegations of poaching, but their secretary, Graham Mackrell, said he was happy with the pounds 1.65m total. "It's possibly a little more than anticipated for the initial payment but not significantly. If the player makes the progress we hope he's going to make, I think it's fair to both parties," Mackrell said.
Defoe scored twice as West Ham beat Charlton 4-1 in the Times FA Youth Cup on Tuesday.