Opposition politicians and union leaders joined a chorus of outcry on Friday after the Royal Bank of Scotland, which is 83% owned by the public, awarded nearly £1m as a bonus to its chief executive.

The payout, which has already been condemned by a government minister and described as "utterly unacceptable" by a Liberal Democrat peer, will net RBS chief Stephen Hester, who earns a basic salary of £1.2m, a further 3.6m bank shares that can be cashed in in three years' time. The shares are worth £963,000 at current prices.

Hester's payout was understood to be limited to around 60% of the maximum following intense political pressure at the financial institution, which had to be bailed out during the credit crunch with £45bn of public funds.

Chuka Ummuna, the shadow business secretary, said he would not have paid Hester "any bonus in these circumstances" and called on the government to exercise more shareholder activism.

"The government is the main shareholder here. Ministers have said that shareholders should play a more active role in reining in excess where they see it," he said.

"This is in the main a publicly owned institution, and the prime minister has failed to do so. People … will be flabbergasted that nothing has been done about this," Ummuna said.

The TUC general secretary, Brendan Barber, described Hester as Britain's best-paid civil servant at a time of austerity in the public sector.

"Ordinary people facing the biggest squeeze in their living standards for decades and businesses desperate for credit will not understand why Mr Hester should get such a huge bonus," he said.

"The government has been lecturing public servants about how they must accept a pay freeze and a big increase in pension contributions. They seem to have made an exception for Britain's best paid civil servant."

David Fleming, the Unite national officer, said: "What planet does Stephen Hester and his banking chums live on? Taking almost £1m from taxpayers' pockets as a bonus is utterly disgusting and offensive to every working person across the country. How can a Royal Bank of Scotland senior banker who is responsible for sacking … workers be rewarded in this way?"

Since Hester joined the bank in November 2008, it has cut 33,000 jobs. Shares in RBS are trading at around half their value of their 2010 high.

Paul Kenny, the general secretary of the GMB union, said: "A bonus of nearly a million pounds looks to ordinary people like he has won the lottery – with a ticket they paid for."

The bonus announcement came after David Cameron gave a speech condemning a financial transaction on the City tax as madness.

"Even to be considering this at a time when we are struggling to get our economies growing is quite simply madness," the prime minister told leaders in a speech to the World Economic Forum in Davos, Switzerland.

Last night, the Liberal Democrat Foreign Office minister Jeremy Browne made a public appeal to Hester on BBC1's Question Time to turn down the bonus, equating three days of Hester's pay with a year's salary of a soldier "risking his life" in Afghanistan.

"He is working for a company which is five-sixths owned by us, the taxpayer, and I think he has to think like a public servant, not like someone who's there to line their own pocket.

"He needs to think like a public servant who has a duty to his country, not just his own wealth."

He added: "No one's forcing him to take this money. He could struggle on with £1.2m," Browne said.

Norman Lamb, chief political adviser to the deputy prime minister, Nick Clegg, also stepped into the debate saying that he, and most people, would be "deeply uncomfortable with a bonus of that size".

Lord Oakeshott, the Liberal Democrat peer who resigned as a Treasury spokesman for his party a year ago over what he perceived to be the lax treatment of the financial sector by the government, said the bank should realise that any bonus for Hester this year was "utterly unacceptable".

Sir Philip Hampton, the RBS chairman, said on Thursday night: "The board is aware of the difficulties in trying to reconcile the competing objectives of all our stakeholders. This is especially true on the issue of pay."

Hampton added: "[Hester's] pay is strongly geared to the recovery of RBS, which he was recruited to turn around, having played no part in its collapse. The priority is to reshape a business that was far too big and far too risky, reducing legacy losses whilst improving performance in the group's strong core businesses."

Hester is not the only member of the bank to receive a large remuneration package. John Hourican, head of RBS's investment arm who will oversee a restructuring that will include around 3,500 job losses, will receive up to £4m in longterm incentive shares that he was awarded in 2009.

Britain's biggest banks are expected to unveil their bonus plans next month when they publish their annual results.