Part-nationalised Lloyds Banking Group and Ulster Bank parent Royal Bank of Scotland must pay competitive bonuses to help the taxpayer get its money back from the banks, MPs have been told.
UK Financial Investments (UKFI), the body charged with overseeing the Government's banking assets, said bonuses for chief executives and key staff were vital in keeping top talent and to maintain value at Lloyds and RBS.
In a hearing with the cross-party Treasury Select Committee, UKFI said it was "very closely involved" in determining pay at the two banks as part of the controversial new year bonus round.
Robin Budenberg, chief executive of UKFI, said: "I understand that it is very difficult to justify the sort of bonuses paid at these banks. But if we want to sell these shares, we have to make sure the banks are able to retain top talent."
Prime Minister David Cameron has stressed he wants RBS and Lloyds to be the "backmarker" in setting bonuses.
RBS is 83% owned by the state and Lloyds 41% owned after billions of government cash was pumped in at the height of the financial crisis.
However, there are concerns over bonus plans at RBS for chief executive Stephen Hester and its investment bankers, while Lloyds is rumoured to be giving a £2m windfall to outgoing boss Eric Daniels.