Royal Bank of Scotland is said to be coming under pressure from the Government to halve chief executive Stephen Hester's bonus.
The Treasury is expected to tell bosses at the majority taxpayer-owned bank that Mr Hester should receive no more than £1 million this year.
The news comes after the governor of the Bank of England, Sir Mervyn King, attacked pay packages amongst bankers, whilst warning of a difficult year ahead. The UK looks to continue its recovery from the banking crisis, despite the IMF slashing Britain's growth forecasts yesterday.
Sir Mervyn said in a speech on 24 January : "Those taking decisions on remuneration, in the financial sector and elsewhere, need to understand that a market economy rests not just on incentives, but on the acceptance that the distribution of rewards is fair."
Pay at RBS has become a lightning rod for public fury over huge rewards in the financial sector ever since its £45 billion state bailout.
The coalition announced moves to crack down on boardroom excesses earlier this week, but David Cameron has refused to say whether he will seek to limit Mr Hester's pay.
The RBS remuneration committee - which will meet on 25 January- had reportedly been considering a bonus of £1.3 million to £1.5 million for its highly-regarded leader.
However, ministers are said to be demanding he gets lets than half the £2 million he received last year.
It is believed any payout would be in shares rather than cash, and deferred for three years.
Labour leader Ed Miliband has already urged the Prime Minister to scrap Mr Hester's bonus altogether.
Details of the negotiations emerged as Bank of England governor Sir Mervyn King repeated his calls for banks to moderate pay ahead of the bonus season.
He insisted rewards should not go disproportionately to a small elite - especially one that had benefited from the support of taxpayers.
Protesters from civic campaign group Avaaz are due to gather at the RBS headquarters in London later to call for bonuses to be dropped.
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