Royal Bank of Scotland has been blocked from paying bonuses twice the size of salaries after its plans were vetoed by the Government.
The Treasury, which holds an 81% stake in RBS, insisted the bank should remain a "back-marker" on pay, even though other institutions will be able to ask their shareholders to approve the award of such bonus deals.
By sticking to a smaller bonus-to-pay ratio, RBS said it now faces "commercial and prudential risk" as it tries to compete with bigger-spending rivals.
A 2:1 bonus ratio at Lloyds Banking Group, in which the Treasury has a 25% stake, will not be opposed because it has largely completed its restructuring.
A spokesman said there could be no rise in the bonus cap at RBS because the bank has not yet completed its restructuring and remains majority public-owned.
RBS had wanted its AGM in June to consider a resolution asking for approval under new European rules to award bonuses of up to 200% of fixed pay.
It said: "The b oard believes the best commercial solution for RBS is to have the flexibility on variable to fixed pay ratios that is now emerging as the sector norm.
"This would also allow RBS to maintain the maximum amount of compensation that could be subject to performance conditions including clawback for conduct issues that may emerge in future. This position was understood during consultation with institutional shareholders."
The EU bonus rules, which came into force on January 1, limit annual banker payouts for 2014 onwards to 100% of annual salary, or a maximum of 200% with shareholder approval.
The Treasury's intervention comes despite its own opposition to the European rules, which it believes will not lead to safer and stronger banks.
RBS and other firms are now planning to pay a fixed allowance to senior staff in addition to salaries in a move seen as side-stepping the EU bonus cap.
Barclays yesterday won the support of shareholders for payments of up to 200% of salary, while also introducing new role-based pay awards that mean staff can still pick up bumper handouts.
In its annual report published today, RBS said chief executive Ross McEwan will receive a salary of £1 million this year, as well as the potential for up to three times that amount through the company's long-term incentive plan.
Mr McEwan will be entitled to an additional fixed allowance payment of £1 million from next year, although the bank added that the chief executive and other board members will no longer be in line for annual bonuses.
The bank said its pay policies cut the maximum potential award to directors by 16%, as well as maintaining its exposure to shares and clawback procedures. It disclosed today that it paid 77 staff more than £1 million last year.
Shadow Treasury minister Cathy Jamieson said: "George Osborne is in a terrible muddle over bankers' bonuses. He is spending taxpayers' money on a legal fight in Brussels against the bonus cap and yet imposing the minimum cap at RBS.
"The Government has bowed to pressure on RBS and finally admitted that bonuses of two times salary would be unacceptable at what remains a bank in Government ownership. They voted against Labour's motion to impose the minimum cap at RBS in January, but have now been forced to reverse their position.
"But, confusingly, at the same time the Chancellor is supporting higher bonuses in Lloyds Bank and elsewhere."