Labour leader hopes to embarrass PM, who has refused to say whether he would stop award of £1.3m payout

Ed Miliband is turning up the pressure on David Cameron in the escalating row over "crony capitalism" by demanding that the prime minister intervene to block a seven-figure bonus for Royal Bank of Scotland's chief executive, Stephen Hester.

Before a week in which the government will announce plans to curb excessive pay deals in Britain's boardrooms, the Labour leader is calling on Cameron to match his tough talk with action in what is now seen as the key test case of the government's resolve.

Last week, after delivering a speech on "popular capitalism", the prime minister refused to say whether he would block a bonus for Hester, who is widely seen as having done a good job at RBS, after taking over from the much-maligned Sir Fred Goodwin in 2008. The board of RBS, which is 83%‑owned by the taxpayer, is said to be considering a bonus of £1.3m to £1.5m for Hester, on top of his £1.2m annual salary. A final decision from the company's remuneration committee is expected on Wednesday.

But Miliband, who is determined to define his leadership around the issue of "fairer and better capitalism", said it was entirely wrong for a bank, majority-owned by taxpayers, and which is making thousands of people redundant, to pay its boss a £1m-plus reward in such circumstances.

The Labour leader told the Observer that the public would not regard it as "fair or right" for the head of a company whose share price had halved in the past year and which had missed its target for lending to small businesses to cash in when so many hard-working people were struggling to make ends meet. Miliband said the case would show whether Cameron was as good as his word. He said: "David Cameron has said on numerous occasions that he would stop banks paying out big bonuses. He has also called upon shareholders to stop excessive executive pay.

"The best thing that could happen is that top management at RBS recognises the need for restraint. But if it doesn't happen, Cameron should act to stop Stephen Hester being paid a bonus of this scale.

"David Cameron will be judged by his deeds, not his words. And he should adopt Labour's plan for another bank bonus tax to fund 100,000 jobs for young people."

Ministers are expected to speak to Hester in the run-up to the RBS remuneration committee meeting on Wednesday, amid reports that he may quit if his bonus is not paid.

The RBS chief executive, who was brought in to clear up the chaos left by Goodwin, is entitled to up to 6m shares – worth about £1.5m at today's prices – under the contract he agreed when Labour was in power.

Hester is highly regarded in the industry and in government and is credited with cutting RBS's sprawling investment banking arm down to size, and selling off "non-core" parts of the bank, such as its aviation leasing business. After waiving last year's bonus, he is said to be keen to receive his entitlement this year.

Former Labour chancellor Alistair Darling was determined that the bailed-out banks should be run at arm's length by UK Financial Investments, the body set up to manage the government's stakes in them.

David Cameron has taken a more hands-on approach, and is insisting this year that any cash payouts at RBS be capped at £2,000. But after his speech on "popular capitalism" on Thursday, he refused to say whether he would block a bonus for Hester.

The row over top pay at the taxpayer-backed bank comes as Vince Cable, the business secretary, prepares to announce new rules aimed at taming the culture of excessive pay.

In a speech on Tuesday, Cable will attack the remuneration consultants who are paid by boards to compare bosses' payouts with those at rival firms, and set stricter guidelines for how they should operate.

He is also expected to hand new powers to shareholders to vote down lavish pay deals, and tighten reporting rules, so boards have to reveal in simple terms to shareholders and employees exactly how much executives are paid.

After a difficult few weeks for the Labour leader, Miliband sees the issue of executive pay as one on which Labour can embarrass Cameron and expose the Tories' closeness to big-business interests.

The shadow business secretary, Chuka Umunna, said the Tories were backing away from the tough action called for by Labour: "On excess pay and rewards for failure in the City and the boardroom, the government is refusing to take the action needed to meet the tests Labour has set on transparency, accountability and fairness.

"Ministers are ducking out of matching Labour's call for the proposals of the independent High Pay Commission to be implemented in full and, despite claiming they wish to promote employee engagement, won't support the proposal to put employees on company remuneration committees."