The boss of a taxpayer-funded bank has been awarded a bonus worth £963,000, around 60% of his entitlement, following political pressure to limit the payout.

RBS chief executive Stephen Hester, who has a salary of £1.2m, will get 3.6 million shares in the bailed-out financial institution, the bank's board announced.

It is less than half the value of last year's all-shares bonus and comes after Prime Minister David Cameron made clear he considered a seven-figure sum would be unacceptable.

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

RBS, which is 83% state owned, said the board's decisions "recognise tangible achievement in the business and protect the interest of our shareholders, including of course the UK taxpayer".

Deferring the chance to cash in the shares "ensures complete alignment of the chief executive's interests with those of our shareholders", it said.

The £963,000 valuation is at current prices and could rise or fall.

It said the reduction on last year's payout "reflects those areas where financial and business objectives have not been fully met" and a decline in the share price.

Sir Philip said: "The Board is aware of the difficulties in trying to reconcile the competing objectives of all our stakeholders. This is especially true on the issue of pay.

"Stephen Hester's pay award reflects progress in the categories agreed with our shareholders as set out in the Remuneration Report.

"His pay is strongly geared to the recovery of RBS, which he was recruited to turn around, having played no part in its 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.

Union leaders expressed their anger at the size of the bonus, pointing out that millions of public sector workers were facing a pay freeze and lower pensions as well as job losses.

David Fleming, Unite national officer, said: "What planet does Stephen Hester and his banking chums live on?

"Taking almost £1m from taxpayers' pockets as a bonus is utterly disgusting and offensive to every working person across the country. How can a Royal Bank of Scotland senior banker who is responsible for sacking over 21,000 workers be rewarded in this way?"

TUC general secretary Brendan Barber said: "Ordinary people facing the biggest squeeze in their living standards for decades and businesses desperate for credit will not understand why Mr Hester should get such a huge bonus.

"The Government has been lecturing public servants about how they must accept a pay freeze and a big increase in pension contributions. They seem to have made an exception for Britain's best paid civil servant."

Paul Kenny, general secretary of the GMB union, said: "A bonus of nearly a million pounds looks to ordinary people like he has won the lottery - with a ticket they paid for."

David Hillman, spokesman for the Robin Hood Tax campaign, said: "Curbing Hester's bonus at state-owned RBS is a small step in the right direction but nowhere near enough.

"Having just heard our economy has shrunk again, it's beyond belief the Government is letting other City fat cats off the hook."