Bob Diamond, head of Barclays Capital, stood to make £60m over the next few years. Now he will take a pay cut to lead the overall bank

Barclays is to be run by American-born Bob Diamond, the bank confirmed today, in a move that puts one of the highest-profile and best-paid bankers in the City at the helm of one of Britain's biggest companies.

The decision to elevate Diamond, whose pay packets have catapulted him towards the top of the high pay league for a number of years, allows the current chief executive John Varley to leave next March and has heightened speculation that Barclays will become increasingly focused on investment banking rather than its traditional high street business.

The appointment comes amid speculation that another investment banker is being groomed to take the helm of a major UK bank. The appointment of HSBC chairman Stephen Green as a trade minister in the coalition government is expected to be announced later today. One of the leading candidates for the chief executive role at HSBC is the head of its investment bank, Stuart Gulliver.

As part of his elevation to Barclays chief executive, Diamond will in effect be forced to take a pay cut. As the head of Barclays Capital, the investment banking arm, he took a basic salary of £250,000 but earned around 100 times that through bonuses and share incentive packages – standing to receive as much as £60m in the years ahead.

The bank has admitted today that while his basic salary will rise to around £1.3m, his earning potential will be scaled back so that he will be able to earn around 7.5 times this amount in bonuses – a pay structure that will be more familiar to other bosses of FTSE 100 companies and capping his bonus potential for the first time. His potential maximum pay is now around £11.5m.

Diamond's appointment was welcomed by City analysts, but criticised by the GMB union. Its general secretary, Paul Kenny, said it was "insulting and divisive" to promote an investment banker following the damage caused by the financial crisis.

Diamond was passed over for the chief executive job when Varley was appointed in 2004 but was forced on to the Barclays board in 2005 amid concern that he was a "shadow director" because of his influence over the bank – a move that revealed his pay for the first time.

As his appointment was announced this morning, Diamond said: "I am honoured by the board's confidence in me and greatly motivated by the challenge of leading Barclays during the critical period ahead."

While Barclays survived the banking crisis without taking taxpayer funds it controversially took funds from Middle Eastern governments and, like other banks, now faces the challenges of new capital requirements from international regulators and also the government's commission on banking which is to decide whether banks such as Barclays should be broken up into their investment banking and high street banking arms.

Barclays chairman Marcus Agius has warned the government that such a break-up could force the bank to move overseas. The chairman said today that Diamond was "superbly qualified, with more than 30 years' experience in the banking sector, the last 14 of which have been with Barclays. He has a proven track record as a business leader, and I and the board very much look forward to working with him in his new role."

He stressed that the appointment of Diamond meant that the "board is consciously ensuring continuity in management, strategy and our focus on delivering for customers, clients and shareholders". Even so, the bank has been generating more than two thirds of its profits from the investment banking arm run by Diamond, who has no experience of running high street banking businesses.

David Buik, a commentator at BGC Partners, said: "This is such good news for the UK banking sector. It will send a strong message out to the government and to Sir John Vickers' independent banking commission that the banking in the UK is strong, robust and in no mood to surrender its sovereignty to either bureaucrats or politicians."

Diamond, one of nine children and a father to three, had moved back to the US from London after Barclays acquired the Wall Street operations of Lehman Brothers shortly after it collapsed two years ago. At the time the move was seen as his attempt to return "home" and prepare for his departure from the bank. Instead, the fanatical Chelsea fan is now expected to move back to the UK. Varley, who turns 55 on 1 April, will step down on 31 March 2011 and become a senior adviser on regulatory matters to Diamond and to the board of Barclays until 30 September 2011.

Varley said: "I am delighted that the board has appointed Bob as my successor. What he has accomplished in his various roles at Barclays demonstrates clearly that he is a great banker and leader, and an outstanding business builder; I know that Barclays will flourish under his stewardship. Bob and I have worked closely together as president and chief executive in building Barclays over the past years. I look forward to working with him as he transitions into his new role."

The Barclays Capital arm that Diamond oversaw will be run by Jerry del Missier and Rich Ricci, who become co-chief executives of Barclays Capital from 1 October this year, in addition to being co-chief executives of the corporate and investment bank.