Stephen Hester, boss of taxpayer-funded RBS, has been awarded a bonus worth £963,000, around 60% of his entitlement, following political pressure to limit the payout.
The bank's chief executive, who has a salary of £1.2 million, 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 today's 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 priority is to re-shape a business that was far too big and far too risky, reducing legacy losses whilst improving performance in the group's strong core businesses.
"It is a very large, complex and challenging corporate restructuring task. A safer and more valuable RBS is in the interests of our customers, shareholders and the UK economy and we are progressing well to towards this goal under the leadership of Stephen Hester."
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.
However, RBS's concession on Mr Hester's bonus will not defuse the row over directors' pay completely, as John Hourican, head of RBS's investment arm, who will oversee a restructuring that will include around 3,500 job losses, picks up £4 million in long-term incentive shares that he was awarded in 2009.
Britain's biggest banks are expected to unveil their bonus plans next month when they publish their annual results.
Antonio Horta-Osorio, chief executive of part-nationalised Lloyds Banking Group, announced he would forgo his annual bonus of up to £2.4 million following his two-month leave of absence and a rocky period for the banking giant.
Elsewhere, reports have suggested Barclays boss Bob Diamond could receive a £10 million payout in the forthcoming bonus season.
The Barclays chief executive - who was once dubbed the unacceptable face of banking by former business secretary Lord Mandelson - could receive a share award worth as much as seven-and-a-half times his £1.3 million salary.
Labour said the scale of the bonus showed the Government was "desperately out of touch" with voters and that its promises to rein in executive pay were worthless.
Shadow financial secretary to the Treasury Chris Leslie said: "We now know that ministerial claims that the RBS board is contractually bound for years over bonuses were false. The board decides bonuses on an annual basis - and the biggest shareholder at the bank is the Government.
"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.
"Indeed, anyone who thinks it is acceptable to award a bonus of almost £1 million on top of a basic salary of £1.2 million in these tough times is desperately out of touch with millions of people who are struggling to make ends meet.
"Instead of fiddling at the margins of this issue, David Cameron should take proper action on excessive executive pay as well as agree to Labour's call for a new tax on bankers' bonuses this year to fund 100,000 jobs for young people."