Stephen Hester has been under fire since it was revealed that he stands to earn a share bonus worth £963,000, and the pressure was ramped up yesterday as Sir Philip Hampton decided to forego his £1.4m payout.
Hampton, chairman of RBS since 2009, had been on course to pocket 5.17 million shares in the bank in February, but it is thought that he told the bank's remuneration committee that it would "not be appropriate" for him to take them.
But while many politicians welcomed the move, Prime Minister David Cameron sidestepped calls to force Hester to do the same, saying: "It is a matter for him."
Cameron added: "My decision is to make sure the team at RBS get on with the job of turning the bank round and we made our views clear on the bonus and that's why it was cut in half compared to last year. The fact is Stephen Hester was brought in by the last government, a contract signed by the last government to turn round RBS – a bank that had got itself into a mess.
"The Government has made its views known ... but we do have to bear in mind that the alternatives to what's happening now could be even more expensive if you had a whole new team coming into RBS."
First Minister Alex Salmond, a former RBS economist, welcomed Hampton's decision but said that Westminster and Labour were "deficient" in allowing Hester's bonus.
He said: "On this matter the Westminster parties have shown themselves to be totally deficient. Both the Coalition Government and the Labour Party are equally culpable.
"Labour negotiated the very deal with Stephen Hester that they now complain about while the Coalition parties huff and puff about shareholder democracy but stand by idly when they carry responsibility for the public shareholding."
But Labour leader Ed Miliband claimed the Prime Minister still had "another chance" to take action at the RBS annual general meeting.
He said: "Freezing the pay of a nurse or hospital porter, while allowing a publicly-owned bank to pay million-pound bonuses, is the last nail in the coffin of this Prime Minister's claim that we're all in it together.
"Having spent weeks boasting he would block bonuses, David Cameron refuses to even publicly explain why he has changed his mind. My message to him is – you've got another chance.
"At the AGM in April the Government as the majority shareholder in RBS will have to decide how to vote on the bonus. They should vote it down."
Simon Hughes, the LibDem deputy leader, added: "The RBS chairman has set the right example by giving up his bonus. In these days of austerity above all, it is unacceptable for anybody whose business has depended on public funds to take bonuses or salaries at levels which many taxpayers regard as obscene."