Feb. 17 (Bloomberg) -- The U.K. government will cut bonuses at Royal Bank of Scotland Group Plc by more than 90 percent and eliminate them for many executives in a bid to end “rewards for failure.”

Executives responsible for the bank’s record 28 billion pound ($40 billion) 2008 losses will receive no bonuses, a Treasury spokesman said. Britain’s biggest government-owned bank said it will impose a pay freeze for directors and executives, and all other pay rises will be below the rate of inflation.

The same principles on bonuses will apply to Lloyds Banking Group Plc, 43 percent government-owned, Chancellor of the Exchequer Alistair Darling said.

“Don’t reward failure,” he told Sky News today. “That’s as good for Lloyds as it is for RBS,” he said.

Bonuses are under pressure across the world as governments bail out banks. President Barack Obama’s administration has pledged to cap top executive’s pay to $500,000 a year for companies getting government money, while Germany’s Chancellor Angela Merkel is also discussing legislation to control bonuses. Financial institutions worldwide have amassed $1.1 trillion of writedowns and losses following the subprime mortgage market’s collapse, data compiled by Bloomberg show.

Britain’s Business Secretary Peter Mandelson today said governments must not allow voters anger to force “hurried judgments” on bank bonuses. The speech revealed splits at the top of the British government on how to deal with rescued banks. Harriet Harman, the ruling Labour Party’s deputy leader, called for tougher rules on bonuses in a Feb. 7 speech, arguing there was “something rotten” in the system of “men paying themselves millions of pounds.”

‘Cultural Change’

RBS will review future remuneration policy to ensure incentives are aligned to shareholders long-term interests, the company said. The bank will announce earnings Feb. 26.

One exception to the bonus policy will be employees deemed essential to the bank’s recovery who might otherwise leave the bank, RBS said. They will get deferred awards for 2008 in three installments beginning June 2010, payable in subordinated debt.

Workers on less than about 19,000 pounds will get a 2009 bonus equivalent to about 10 percent of annual pay.

“We have tried, wherever possible, to focus the worst impact of the changes on our more senior staff and in particular those in the concentrated areas of our business responsible for the major losses recorded in 2008,” said RBS Chairman Philip Hampton in a separate statement today.

The U.K. government may increase its stake to 70 percent after injecting 20 billion pounds into the bank to bolster capital.

“We are now seeing a cultural change in the way in which payments are made,” Darling said in comments to U.K. broadcasters. “I can understand people’s frustration. It takes time for these measures to work their way through.”

To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.netJon Menon in London at jmenon1@bloomberg.net

Last Updated: February 17, 2009 11:30 EST