Royal Bank of Scotland chief executive Stephen Hester will not take his bonus of shares worth almost £1 million, the bank said last night.
The decision comes after a weekend of intense pressure on Mr Hester after the bank's chairman, Sir Philip Hampton, announced he would waive his payout.
Sir Philip, chairman of RBS since 2009, had been on course to claim 5.17 million shares in the financial institution in February, but it is thought he told the bank's remuneration committee it would "not be appropriate" for him to take a £1.4 million payout.
Mr Hester was awarded £963,000 last week in a short-term bonus equalling 3.6 million shares.
The decision was welcomed by Chancellor George Osborne tonight.
He said: "This is a sensible and welcome decision that enables Stephen Hester to focus on the very important job he has got to do, namely to get back billions of pounds of taxpayers' money that was put into RBS."
Labour had planned to force a Commons vote calling for Mr Hester to be stripped of his bonus with party sources claiming Prime Minister David Cameron's "failure of leadership" could not be allowed to stand.
Shadow business secretary Chuka Umunna tonight told Sky News: "For somebody to listen and respond, we of course wouldn't criticise that he's doing the right thing.
"It's a shame that the Government having gone around lecturing shareholders in other large companies to take an active role in bringing about wage restraint chose to sit on its hands in this case and that it took so long for there to be a public clamour and row of this order for the change in position that we have just witness to take place.
"It kind of says something, if you like, of the Government talking the talk but not walking the walk."
Labour leader Ed Miliband said: "Stephen Hester has done the right thing.
"It is a shame that a feeble, out of touch David Cameron did not realise he should do the right thing and stand up for the interests of the British people.
"Labour was right to seek a parliamentary vote on this so that the people's voice could be heard. But the debate about fair executive pay and responsible capitalism is only just beginning. We need a government that will tax bankers' bonuses and bring responsibility to the boardroom."
Mr Hester is still expected to be entitled to another shares bonus that could potentially reach £6.4 million based on a long term incentive scheme that is approaching the point at which it can come into effect.
Chairman of the Financial Services Authority Lord Turner, who said last week that excessive bonuses are "not good for society", will report to the Commons Treasury Committee on RBS today.