The man who has transformed London's bus services has been appointed as the city's new transport commissioner.

Peter Hendy, Transport for London's chief of surface transport, will replace American Bob Kiley, 70, at the end of the month, London mayor Ken Livingstone announced yesterday.

Mr Kiley, one of the world's highest paid public servants with a salary and bonus package worth more than ₤600,000, is stepping down three years before the end of his term.

He will stay on as the mayor's principal transport advisor for the next two and a half years, earning £3,200 a day. In 2006 and 2007 he will work 90 days, plus 50 days in 2008, totaling more than £700,000.

Over this period Mr Kiley will live rent-free in the £2.1 million Belgravia home bought for him by the mayor.

Today the London Assembly will question Mr Livingstone over the controversial pay-off of the man who introduced the congestion charge and secured £10 billion for transport development.

At his press conference yesterday, the mayor said he was "spoilt for choice" in his decision to replace Mr Kiley.

Apart from Mr Hendy, internal contenders included Tube boss Tim O'Toole and Jay Walder, TfL's finance director in charge of the five-year transport investment program.

Since 2001, Mr Hendy's work has seen bus passengers increase by a third, or two million a day.

Mr Livingstone said he had "no doubt" that the new commissioner will work with his two fellow-leaders to "provide inspirational leadership" for TfL.

Mr Hendy said he was "delighted" with his appointment.

"The challenge facing TfL is to deliver the largest investment in our transport system for a generation and prepare London for the 2012 Olympics," he added.

"My job is to make this happen and with the expertise and professionalism here at TfL I am confident that we can meet this challenge."