ROYAL Bank of Scotland's retail banking chief Ross McEwan has accepted a reduced pay deal for two years after being appointed to replace chief executive Stephen Hester.

In what RBS chairman Sir Philip Hampton described as a gesture, the New Zealander has agreed to a basic pay package of £1 million, some £300,000 less than Mr Hester receives, and will get limited bonuses until 2015.

The move minimises the chance of yet another pay row between politicians and the part- nationalised bank, which yesterday posted its second consecutive quarter of profits.

However, the bank made it clear Mr McEwan will later move to a commercial package, in line with the rest of the industry.

Mr McEwan said: "Stephen Hester and all of our employees have done a remarkable job in saving this bank. And now, five years on, we are ready to focus on the future."

Sir Philip said: "With his extensive experience in banking and the leadership he has shown in his time at RBS, Ross will be a great chief executive for the group. Ross has already become a champion for customers in our business and will continue that role as CEO."

Mr McEwan's promotion comes just 11 months after he joined Edinburgh-based RBS as chief executive of its retail banking arm from Commonwealth Bank of Australia.

He will accept no bonus as chief executive for 2013 and 2014. And any bonus due for his current post for 2013 will be deferred until 2017 and linked to RBS's share price.

He will also get £350,000 instead of a pension plan when he takes over on October 1. He will be eligible to receive a long-term incentive award in 2014 having received shares with a paper value of around £2m under the scheme for this year.

Sir Philip said: "Ross wants to start off life as the RBS CEO with as little pay drama as possible.

"We would expect that provided we see some progress towards value for taxpayers, value for shareholders generally, emerging over the years Ross is CEO, he will be able to earn a good commercial package."

With new European Union rules over banking pay still to be finalised, the bank is likely to present its longer-term pay plans for Mr McEwan to shareholders in 2014.

Any bonus arrangements are likely to mirror those at 39% state-owned Lloyds Banking Group, owner of Bank of Scotland, where pay-outs to chief executive Antonio Horta-Osorio are linked to the break-even price for the taxpayers' stake.

The Government paid the equivalent of around £5 a share during RBS's 2008 bail-out, but the shares are valued at around 407p on the Treasury's books and the break-even price could be defined as even lower than this if various fees paid by RBS are taken into account.

RBS yesterday posted a pre-tax profit of £1.4 billion for the six months to the end of June, compared with a loss of £1.7bn in the same period of 2012.

This was despite an extra £185m provision to compensate customers for the mis-selling of payment protection insurance, taking its total bill to £2.4bn.

RBS's shares closed down 11p or 3.3% at 322.5p over concerns about lower than expected earnings in its core bank.

Mr Hester made it clear yesterday he would have preferred to have stayed until the Government started selling its 81% stake in RBS, but he will leave at the end of September with a year's salary.

RBS said it launched an international search for a new chief executive and said Mr McEwan was the only candidate it offered the position. Sir Philip confirmed the bank had decided it was not going to compensate external candidates for any share awards they might have lost on joining RBS, a move that could have excluded a number of high earners.

Sir Philip said buying out awards is "not terribly helpful" and could have led to a dispute with politicians

Chancellor of the Exchequer George Osborne welcomed Mr McEwan's appointment.

Dominic Hook, at trade union Unite, said: "We welcome the return to profitability after Fred Goodwin financially shipwrecked the bank. We call on Ross McEwan to stop the slash-and-burn culture that has seen more than 30,000 UK jobs go at RBS since 2009 - a third of its workforce."