The Royal Bank of Scotland has announced that its chief executive Stephen Hester has decided to waive his £1m bonus.
It comes just hours after the Labour Party said it would force a House of Commons vote calling for Mr Hester to be stripped of his shares-only payment .
Mr Hester had been facing mounting pressure to follow the bank's chairman, Sir Philip Hampton , and forego the award.
Although the move has been welcomed by politicians across the board, a spokeswoman for the Prime Minister said it was a "matter for individuals" whether to accept bonuses.
Sky News City editor Mark Kleinman said: "My understanding in is that Mr Hester is abroad on holiday at the moment and only made the decision on Sunday night.
" RBS shares are now languishing so much that British taxpayers risk a loss of £10bn on their investment."
The bank has lost nearly 45% of its value in the last 12 months.
Kleinman added: " Stephen Hester has decided, after days of mounting criticism about his million-pound bonus award, to relinquish that bonus.
"He has decided to waive it and he will not accept the 3.6 million shares that he was granted by the board of directors.
"He has been saying to friends over the last few days that he does not see any reason why he should give up that bonus, but I think the political pressure on him has become intolerable.
"The Labour Party called for a vote in the Commons on the issue and Mr Hester is said by friends of his to be deeply concerned by the fact that he is becoming a pariah of the banking sector, despite the fact that he was parachuted in to help turn RBS around after it was bailed out by British taxpayers in 2008.
"This is clearly an attempt by him to prevent the escalating row from distracting him from the job of running RBS, which is one of the biggest corporate turnarounds in the history of the banking sector."
Shadow business secretary Chuka Umunna, who criticised the payment, said Mr Hester was finally responding to public sentiment.
He told Sky News: "He is responding to public concern and criticism about the level of remuneration in the bank, in particular in relation to his position.
"For somebody to listen and respond, we of course would not criticise that."
He added: "Of course, the financial sector should be able to operate properly but it needs to command the confidence of the British people."
Sky News chief political correspondent Jon Craig said Mr Hester came under pressure from the Government and that Prime Minister David Cameron would be "relieved".
"He will be relieved because he had been made to look rather foolish and he has been criticised by the Labour Party and by some of the Lib Dems for not doing more to prevent this happening," he said.
RBS required a £45.5bn rescue package in 2008 after business errors and light financial regulation led to its near-collapse under the leadership of Sir Fred Goodwin .
RBS is now 82% owned by the Government and thus under extra scrutiny when it comes to banker remuneration.
Labour leader Ed Miliband said foregoing the bonus was "the right thing" for Mr Hester to do.
Mr Miliband said: "It is a shame that a feeble, out of touch David Cameron did not realise he should do the right thing and stand up for the interests of the British people.
"Labour was right to seek a parliamentary vote on this so that the people's voice could be heard. But the debate about fair executive pay and responsible capitalism is only just beginning.
"We need a Government that will tax bankers' bonuses and bring responsibility to the boardroom."
Chancellor George Osborne also called the decision "sensible".
He now hoped Mr Hester could "focus on the very important job he has got to do, namely to get back billions of pounds of taxpayers' money that was put into RBS".
But Albert Ellis from the City recruitment firm Harvey Nash Group told Sky News that the majority of those in the Square Mile think Mr Hester has done a good job at RBS.
"So I think he will not be short of offers (if he decided to leave) in a world that is highly competitive, where good banking management actually is still quite scarce," he added.
Taxpayers' Alliance spokesman Matthew Sinclair said both Labour and the current Government had let down the British public over successive years with RBS.
He told Sky News: "The Government needs to ensure the company is being run in the interest of the taxpayer and not its staff."
Scotland's First Minister Alex Salmond said: "This is a welcome development but it should never have come to this stage as these circumstances cannot be left to individual decisions. They must be a matter of public policy."
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