Royal Bank of Scotland has defended plans to pay £588m in staff bonuses despite suffering an £8.24bn loss in 2013 as it slumped into the red for the sixth successive year.

The size of the bank's bonus pool fell 18% from last year but the RBS chief executive, Ross McEwan, acknowledged that the issue was "highly emotional" as he explained the multimillion pound windfall at the taxpayer-owned institution.

"I need to pay these people fairly in the marketplace to do the job. I do need to make sure we are there or thereabouts and that is all I'm asking for," he said.

The latest annual loss was caused by £3.8bn of costs for settling litigation and regulatory problems – including £1.5bn extra to compensate customers mis-sold payment protection insurance and interest rate swaps in the UK – and £4.5bn of losses on bad assets.

The company's shares fell 6.7% to 330.2p in early trading, wiping more than £2.5bn off the market value of a business that is 81%-owned by the taxpayer.

McEwan, who took over from Stephen Hester in October, said RBS needed to regain the trust of its customers and the public.

"We happen to be the least trusted bank in the least trusted sector in the marketplace," he said.

McEwan also announced plans to revitalise the business, including:

• Refocusing on UK retail and business customers to increase the share of total assets from Britain to 80% from 60%.

• Shrinking RBS from seven businesses into three: personal and business banking, commercial and private banking, and corporate and institutional banking.

• Simplifying products for retail and small business customers, including scrapping "teaser rates" and 0% credit card transfers.

• Cutting costs because the bank is "too expensive and too bureaucratic".

RBS had warned last month that its pretax loss for the year would be about £8bn but investors were shocked by an operating loss of £2.3bn – far worse than the £1.7bn analysts expected. Ian Gordon, banks analyst at Investec, said: "We currently see no relative or absolute support for RBS' 'frothy' valuation; a correction is due. Sell."

RBS was bailed out by taxpayers during the financial crisis of 2008 and 2009 with a £45bn investment, following a disastrous expansion into risky investment banking and trading. The bank has since slashed those businesses but McEwan said the cuts would go further still so that its markets business served the basic requirements UK and European companies.

He declined to put a figure on potential job cuts but he said RBS – which employs 120,000 people – could get out of more businesses that customers did not need after quitting equity capital markets, mergers and acquisitions and structured finance.

Bankers' bonuses continue to plague the industry amid public uproar over past misconduct. Barclays increased bonuses by 10% last week to £2.4bn. HSBC said on Monday it would increase salaries for its bosses to get around a European union cap on bonuses.

McEwan, who has turned down his bonus for 2013 along with his executive team, declined to say whether RBS would ask shareholders, including the government, for permission to circumvent the EU bonus cap this year. "The board has not opined," he said.

McEwan replaced Stephen Hester as chief executive after Hester was forced out last year by chancellor George Osborne. At the time, RBS said Hester was leaving because a new boss was needed for the start of privatisation, possibly this year.

But McEwan said his plan would take up to five years to complete, casting doubt on the government's ability to sell its 81% stake any time soon. McEwan said any sale was for the government to decide but that he was concentrating on doing what was needed to revamp the bank.

"I'm not saying five years is the time when the government moves. At some point the government would like to get out and our interests are aligned.

He said 0% transfers and other introductory rates were "abhorrent" and that customers hated them. It was wrong to chase a new customer and "dump them" months later instead of giving the best deal to an existing customer.

McEwan refused to be drawn on what plans RBS was making for a possible "yes" vote to Scottish independence in September.

"This is an issue for Scotland. The people have to decide and the governments will agree and we need to be thinking about the plans around that." By contrast, Standard Life said it was working on contingency plans to move its base from Edinburgh to London if Scotland leaves the UK.

A Treasury spokesperson 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."