The chief executive of RBS (LSE: RBS.L - news) has launched a robust defence of the £800m bonus pool paid out by the taxpayer-backed bank amid £2bn of losses.
In an interview with Sky News business presenter Jeff Randall, Stephen Hester said bonuses for 2011 had been reduced to reflect the bank's performance.
"We believe in pay for performance and that's exactly what we practise," he said.
The total bonus pool has been reduced by 43% while bonuses in the investment banking arm, where year-on-year profits were down by about 50%, have been reduced by 58%.
Mr Hester said it was "quite right" that bonuses had been reduced to reflect performance.
But he said the remaining bonus levels were justified because the bank's overall performance last year had been "strong".
His comments came on the day that RBS announced its full-year results, posting overall losses of £2bn.
It is the fourth consecutive year of losses at the bank, which is 82% owned by the Government and has been at the centre of a recent furore over pay and bonuses.
Last month, Mr Hester waived his own bonus of £930,000 for this year following the political and public backlash.
Mr Hester explained that last year RBS made £6.1bn of profits in its core banking business - similar to those made by rival Barclays (LSE: BARC.L - news) - but his bank was dragged down by "the biggest timebomb on a balance sheet ever in history - the RBS legacy".
RBS was given a £45bn bailout by the taxpayer during the height of the financial crisis, rescuing it from collapse.
Fred Goodwin, recently stripped of his knighthood, was in charge at the time.
Mr Hester said the bank's current leadership had reduced RBS's debts by £700bn over the last three years - a sum that is twice the size of the debt of embattled Greece - but that involved bringing forward losses to reduce risk.
In further defence of the bonus payouts, he said the investment banking arm had made £11bn of profits over the last three years - "profits that if we didn't have, the taxpayer would have to put their hand in their pocket for another £11bn for RBS".
Mr Hester added: "It's important that we have good people making progress with these banks, both taking away legacy losses and creating profits that once we have paid for the legacy losses will drive the share price in the future."
Despite a recent increase in the RBS share price, stocks remain well below what the Government paid for them in 2008, making the prospect of taxpayers breaking even as remote as possible.
Sky's Jeff Randall said RBS' share price was the "most uncomfortable element" for Mr Hester since it is the "City's running commentary on how you are doing".
RBS shares were worth about 9p each when Mr Hester took over from Mr Goodwin at the bank, and while they rose to about 55p a couple of years ago they have since gone down to around the 22p mark - leaving the taxpayer with a £20bn shortfall.
Randall added: "Many people - taxpayers - will ask, quite properly, how it is if we are losing all this money we are still paying bonuses?"
Prime Minister David Cameron, who was accused of stoking an anti-business climate during the row over Mr Hester's bonus, said he was content with the bonuses being paid to RBS staff this year.
He said RBS had rightly become the "back marker" when it came to bankers' pay.
On Thursday, Mr Cameron gave a speech to the Business in the Community charity warning against hostility towards UK businesses and calling for responsible capitalism.
He said: "Today business needs champions, more than ever. In recent months we've heard some dangerous rhetoric creep into our national debate that wealth creation is somehow anti-social, that people in business are out for themselves.
"We have got to fight this mood with all we've got.
"Not just because it's wrong for our economy, because we need growth and jobs but because it's wrong for our society."
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