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.
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."