A £963,000 bonus for the boss of a taxpayer-funded bank was attacked as "out of touch" by Labour, as a government minister claimed he had a public "duty" to refuse it.

Royal Bank of Scotland chief executive Stephen Hester's payout was limited to around 60% of the maximum following intense political pressure.

The senior City figure, who has a salary of £1.2 million, will get 3.6 million shares in the bailed-out financial institution, which is 83% state owned.

It is less than half the value of last year's all-shares bonus and comes after Prime Minister David Cameron made clear he expected the bonus to be "a lot less" than in 2011.

Treasury sources said they were pleased at the reduction on the previous bonus and that the Government's view had been "made very clear" over recent weeks.

But the Opposition said that the scale of the payout showed the Government was "desperately out of touch" with voters and not serious about reining in executive pay and perks.

Concern was also raised by Deputy Prime Minister Nick Clegg's chief political adviser Norman Lamb who said he, and most people, would be "deeply uncomfortable with a bonus of that size".

And his Liberal Democrat colleague Jeremy Browne issued an outspoken appeal to Mr Hester to put the taxpayer before his personal wealth and refuse to take the shares.

The bank chief earned the same in three days as a soldier fighting in Afghanistan did in a year, the Foreign Office Minister told BBC1's Question Time, adding: "I think he should reflect on that."

"He is working for a company which is five sixths owned by us, the taxpayer, and I think he has to think like a public servant, not like someone who's there to line their own pocket," he said.

"He needs to think like a public servant who has a duty to his country, not just his own wealth."

He added: "No-one's forcing him to take this money. He could struggle on with £1.2m."

Pay at RBS has become a lightning rod for public fury over huge rewards in the financial sector ever since its £45 billion state bailout.

The bank's remuneration committee had reportedly been considering a bonus of up to £1.5 million for its highly-regarded leader but Mr Cameron publicly said it should be less.

Today's decision followed talks with UK Financial Investments (UKFI), the body which manages the taxpayer's stakes in Britain's bailed-out banks.

RBS Group chairman Sir Philip Hampton said the company was "aware of the difficulties in trying to reconcile the competing objectives of all our stakeholders", especially on pay.

Defending the award however, he said it reflected that the turnaround of the bank was "progressing well" under Mr Hester, who had "played no part" in its collapse.

Deferring the chance to cash in the shares, meaning the final value of the bonus could fall or rise, protected shareholders, including the taxpayer, the bank said.

Shadow financial secretary to the Treasury Chris Leslie said: "Nobody doubts that Stephen Hester has done some important things at RBS.

"But what this award shows is David Cameron's promises about reining in excessive bonuses at state-owned banks or using shareholder power have proved to be utterly worthless.

"Indeed, anyone who thinks it is acceptable to award a bonus of almost £1 million on top of a basic salary of £1.2 million in these tough times is desperately out of touch with millions of people who are struggling to make ends meet."

Tory MP Matthew Hancock, an ally of Chancellor George Osborne, said the bonus was too high but that the board "had to sign it off" under rules imposed by Labour, a claim rejected by Mr Leslie.

Mr Lamb told BBC2's Newsnight: "I, like most people, would be deeply uncomfortable with a bonus of that size, I have to say, but I don't know the details of the contractual terms that were clearly established to provide a significant bonus under the last Labour government."

A Conservative Party spokesman said they were "pleased" the bonus was halved from last year and accused Labour of failing to tackle big bonuses and presiding over the bank collapse.

The decision comes after Business Secretary Vince Cable unveiled proposals to crack down on hefty salaries and bonuses, including binding votes for shareholders and improved transparency.

However, RBS's concession on Mr Hester's bonus will not defuse the row over directors' pay completely, as John Hourican, head of RBS's investment arm, who will oversee a restructuring that will include around 3,500 job losses, picks up £4 million in long-term incentive shares that he was awarded in 2009.

Britain's biggest banks are expected to unveil their bonus plans next month when they publish their annual results.

Antonio Horta-Osorio, chief executive of part-nationalised Lloyds Banking Group, announced he would forgo his annual bonus of up to £2.4 million following his two-month leave of absence and a rocky period for the banking giant.

Elsewhere, reports have suggested Barclays boss Bob Diamond could receive a £10 million payout in the forthcoming bonus season.