Royal Bank of Scotland cut its chief executive's 2011 bonus to 963,000 pounds, heeding political pressure to curb pay at the part-nationalised bank while ignoring calls to axe the bonus altogether.

RBS, 83 percent owned by the British government following a state bailout during the 2008 credit crisis, allocated CEO Stephen Hester a 2011 annual performance award of 3.6 million shares.

It said this was worth 963,000 pounds based on its closing share price of 26.75 pence when it made its decision on the bonus payment earlier this week.

The bonus award is down from Hester's share-based bonus of 2 million pounds for 2010 and will also be deferred, meaning Hester will not be able to cash them in full until late 2014. Hester's total pay for 2010 was 3.3 million pounds.

There had been calls from trade unions and politicians for RBS to cancel any sort of bonus for Hester, with RBS in the midst of a difficult restructuring that has seen more than 30,000 jobs cut since Hester took over in 2008.

The decision by Antonio Horta-Osorio, the chief executive of rival part-nationalised bank Lloyds , to waive his bonus after he spent time off work on sick leave put further pressure on Hester to make a similar gesture.

Giving Hester a reduced bonus would help the government strike a compromise between curbing bankers' pay in light of the country's economic slowdown, while sending out a message that top financiers can still get good pay in London, compared to Asia and America.

Nevertheless, Hester's bonus drew criticism from members of both the Labour party and the Liberal Democrats.

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, said Labour's financial secretary Chris Leslie.

Liberal Democrat lawmaker Matthew Oakeshott also attacked Hester's bonus, saying RBS was not lending enough money to businesses to help the economy recover under a deal struck last year between the government and banks called Project Merlin.

This is a totally unacceptable reward for failure when RBS under Mr. Hester has missed its key lending target to small companies, which it pledged under Project Merlin, Oakeshott told Reuters.

PUBLIC STILL ANGRY OVER BANKERS' PAY

Public fury over bankers' salaries has shown few signs of abating as job losses and pay restraint are the order of the day for many people as the economy stalls.

In Britain, the salaries of top staff at RBS and Lloyds are particularly controversial because both banks were bailed out to the tune of 66 billion pounds during the credit crisis.

The bailouts left Britain owning around 83 percent of RBS and roughly 40 percent of Lloyds.

Hester joined RBS in October 2008 from property company British Land as RBS was reeling from its disastrous acquisition of Dutch bank ABN AMRO.

Britain used some 45 billion pounds of taxpayers' money to rescue RBS.

Hester, who had previously worked at rival banks Abbey National and Credit Suisse , was given a brief to restructure RBS and return it to health. Assets and businesses were sold and jobs were cut.

RBS recently took the axe to its investment bank, cutting thousands of jobs as it exits certain businesses.

RBS shares closed at 27.67 pence on Thursday, nearly 50 percent below the 49.90 pence average price at which the British public effectively acquired its stake in the bank.

RBS said Hester deserved his bonus for having made the bank safer, improving customer support and boosting the performance of certain businesses.

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, RBS Chairman Philip Hampton said.

(additional reporting by Tim Castle, Steve Slater and John O'Donnell)