The planned pay-off would have been made in the form of shares worth £963,000 – but the CEO is said to have caved under pressure from MPs.

Labour had suggested they would force a House of Commons vote on the issue of the huge windfall for the publicly owned bank’s boss, after Prime Minister David Cameron refused to block the payment.

Labour’s leader Ed Miliband said he thought that Hester had “done the right thing” and Chancellor George Osborne called the move “a sensible and welcome decision”. The proposed vote was expected to see MPs call for the banker’s bonus to be rejected.

Hester is already currently on a basic salary of £1.2 million a year, which had been pointed out by MPs who have argued against the bonus. However, this level of pay and bonuses is an industry standard for most bankers at Hester’s level.

Ed Miliband has called for a “real change” to the system of bankers bonuses in the wake of the news.

“I think that it was the threat of that parliamentary vote that led to change…I don’t think this can be just a one-off episode…if we don’t deal with the issue of bankers’ bonuses in a proper way, this kind of thing is just going to re-occur.” said the Labour leader.

David Buick, a partner at broker BGC Partners, last week called Stephen Hester “magmanimous” and said that he “deserves every nickel” of his bonus having turned the bank around from the brink of disaster.

A Downing Street spokeswoman told the BBC today that there are no plans to block other RBS bonuses “We are not going to micro-manage bonuses…They are doing a good job and making good progress” she said.

Images: Getty