Royal Bank of Scotland revealed a £576 million bonus pot for staff today despite slumping deeper into the red with annual losses of £8.2 billion.
The bonus pot - down 15% on 2012 - includes a £237 million payout shared among its investment bankers.
The taxpayer-backed lender, which is just over 80% owned by the Government, saw losses widen significantly from £5.3 billion in 2012 after taking a £3.8 billion provision for a string of scandal-related charges and a £4.8 billion hit for the creation of an internal "bad bank".
But chief executive Ross McEwan outlined a revival plan to make the bank "smaller, simpler and smarter" that will see it shrink from seven divisions to three and overhaul its service and products for retail customers.
Deputy Prime Minister Nick Clegg said RBS was "in a different category" from other banks because it is largely taxpayer-owned and should show restraint on pay and bonuses.
Mr Clegg told ITV1's Daybreak: "A loss-making bank that is basically on a life-support system because of the generosity of British taxpayers shouldn't be dishing out ever larger amounts of money in pay and bonuses.
"The overall amount has been coming down. It needs to continue to come down. They are entitled to pay their staff what they want when they are standing on their own two feet. At the moment they are not."
Mr McEwan warned there would be job losses because of plans to slash the number of divisions and make savings under a swingeing cost-cutting drive, which will see £1 billion of savings this year alone and £5 billion overall by 2017.
But he said it was too early to give details on the impact on its workforce.
Mr McEwan admitted the group was the "least trusted bank in the least trusted marketplace", but said the turnaround was designed to turn its reputation around.
It will axe teaser rates that lure in new customers and offer the same deals to both new and existing customers, while also rolling out a team of business banking representatives in branches on the high street as part of its overhaul.
But the bank's bonus pool has stoked controversy given the mammoth losses and as it remains under investigation over allegations of unscrupulous treatment of small firms.
The group is facing a series of investigations after a shocking report from government adviser Lawrence Tomlinson accused RBS of driving firms to collapse in order to profit from their property assets.
Mr McEwan defended the bonus handouts, saying: "We need to keep people engaged in the job they do all day every day - from the high street to those in our markets business in the United States.
"We need to pay these people fairly in the marketplace to do the job."
RBS said it was still in discussions with UK Financial Investments - the body that manages Government stakes in banks - over whether to ask shareholders for permission to pay bonuses of up to double an employee's salary for 2014 onwards, the maximum allowed under new EU rules to cap payouts.
It is also said to be planning to follow the lead of rivals such as Barclays and HSBC by introducing monthly allowance payments to sidestep the rules further and boost potential bonuses.
Mr McEwan said no decisions had been made, adding only that the group must be "competitive in the marketplace".
RBS has already sought to deflect flak over bonuses by scrapping 2013 payouts for its eight-strong executive committee in the wake of hefty provisions, while Mr McEwan has already said he would not take a bonus for 2013 or 2014.
But trade union Unite said the bank's decision to pay out more than half a billion pounds in bonuses was an "astonishing betrayal", given the scale of losses.
Unite national officer Rob MacGregor said: "This is a state-sponsored grab by greedy senior bankers."
Chris Leslie, shadow chief secretary to the Treasury, also repeated calls for Chancellor George Osborne to veto any request by RBS to pay bonuses worth more than 100% of salary.
He said: "Taxpayers will be incredulous that such large bonuses continue to be paid out at a time when huge losses are being made.
"At a time when ordinary families are facing a cost-of-living crisis and bank lending to business is down, it cannot be justified."
RBS remained on the side-lines over Scottish independence, despite Standard Life's announcement today that it was considering moving some of its operations out of the country as part of contingency plans being lined up.
Mr McEwan said the bank was looking at plans in the event of a vote in favour of Scottish independence, but said: "Let the Scottish people decide on this."
RBS shares dropped 6% after its results.
Richard Hunter, head of equities at Hargreaves Lansdown stockbrokers, said: "The numbers make for grim reading as RBS continues to wrestle with the legacy of its troubled past."
The bank's hefty losses come after mammoth charges for scandals and litigation, including £900 million in 2013 for payment protection insurance (PPI) mis-selling, bringing its total so far to £3.1 billion.
It also set aside another £550 million last year for mis-selling of interest rate swaps to small businesses, making a total of £1.25 billion.
But the group said that, excluding the £4.8 billion costs of creating an internal "bad bank" to hive off troubled assets, it made an operating profit of £2.5 billion last year, 15% lower than in 2012.
The Treasury welcomed the new strategy unveiled by RBS.
A spokesman said: "The Chancellor said last year that he wanted RBS to be a bank that is focused on lending to British businesses and families.
"The plan, announced by Ross McEwan and the board today, delivers that vision and is further evidence of RBS's new management getting to grips with the problems of the past and taking the bank in its new direction."
But Mr McEwan denied heavy involvement by the Treasury in his strategy overhaul, insisting: "This is our plan - we own it."
Mr McEwan said that the depth of problems at the bank was still coming as a "shock".
"I think that people, including executives at the bank, did not realise how big a change process we had to go through to get this bank back into shape," he said.
"It has been a real shock how much time it is taking to turn it round."
He conceded that bonuses were a "highly emotional issue", but dodged questions about whether sums could be clawed back from those who underestimated the difficulties.
"You have a much safer bank today than you had five years ago," Mr McEwan said.
"I understand it is a highly emotional issue to see bonuses paid in which we are still losing money.
"The issue for me as a pragmatic executive is that I need to be able to pay what it takes to actually get people to do the job for us.
"When you look at RBS, we of all banks have been the one who have been pulling the pay and bonus structures down, but I do need to be in the market to get people to do these jobs."
Mr McEwan warned that his best staff were constantly being "tapped on the shoulder" by other institutions.
"We do see the turnover of good people and I have got to say they are in demand," he added.
He insisted that "no decisions" had been taken over whether the bank would pay packages that would breach the EU's cap on bonuses of 200% of salary.
Meanwhile, RBS is to ban teaser rates and "sweeteners" in a bid to get back to basics with simpler products which put customers at the heart of its business.
The banking group, which includes NatWest and Ulster Bank, has promised to offer a faster and fairer service which recognises loyalty by no longer offering better products to new customers than existing ones.
The length of time it takes to open a personal current account with the bank will be cut to the next day by the end of 2014, from five days at present.
The group will stop offering different rates to people online to those who apply in branch or over the phone and ditch 0% balance transfers on credit cards.
Chief executive Ross McEwan said his ambition is to make RBS "a bank that gets the basics of everyday banking right".
He added: "Sweeteners and cash payments might encourage people to switch banks but they send out a terrible message to loyal customers and to staff about our priorities."
He said that RBS wants to run a credit card business that is "fair and transparent" for customers rather than trapping them in debts that turn out to be unaffordable.
The ban on 0% balance transfers will start in mid-March. NatWest, for example, currently offers a "platinum balance transfer" credit card with a 0% rate for the first 28 months.
The group plans to improve the process of opening a current account online so that customers will be able to upload proof of identity such as a passport and open their entire account from home.
It has also pledged to use simpler language and by the end of the year it will be able to explain its charges to customers on one side of A4 paper.
By the end of the year RBS plans to have halved the number of products it offers to make it simpler for customers to choose the right deal.
Mr McEwan said the bank had previously "lost its way" because it became detached from customer-focused values.
He said: "We are the least trusted company in the least trusted sector of the economy. That must change. So the goal of my plan is very simple. We have to be a bank that earns your trust."
RBS announced plans last week that will enable customers to deposit and withdraw money in Post Office branches.
Mr McEwan said that with a 30% decline in branch use since 2010, there will be fewer of them over time, although he promised that RBS will keep a "very large branch network".
Which? executive director Richard Lloyd welcomed the announcements, saying: "This is an essential step towards winning back consumer trust in the bank but it's the start of a long journey and it will be important that changes are clearly communicated to customers."
RBS and sister bank NatWest recently shifted their Isa customers on to newer deals so that everyone now earns at least 1% interest, whereas some older accounts had been paying 0.5%. They now only offer one variable rate cash Isa per brand.
The use of teaser rates generally to pull in customers has attracted controversy, with concerns raised about "zombie" accounts that attract people in with high introductory rates which then plunge - often without the customer realising.
The Financial Conduct Authority (FCA) launched an investigation last year to find out more about how often customers who have been given an introductory rate switch their account.
HSBC has also recently announced it is doing away with teaser rates on savings products to make its deals more transparent.
The only on-sale cash Isa HSBC now has is its "loyalty" account, which has no introductory bonus.