The Government was "protecting the taxpayer" by allowing the Royal Bank of Scotland bonus for chief executive Stephen Hester to go ahead, the Chief Secretary to the Treasury said today.
The statement comes as Hester faces mounting pressure to follow the bank's chairman and waive his bonus of almost £1 million.
Danny Alexander suggested blocking the payout by stepping in to directly control the arm's-length operation would have potentially triggered bigger financial risks.
The Liberal Democrat said the Government had "looked at all the options in terms of how we should deal with" the bonus.
He told the BBC's Sunday Politics with Andrew Neil: "In this case, the judgment we had to make was should we go further, as many of us would like to, and say let's have no bonus at all?
"Have the Government taking control directly of RBS, and therefore causing potentially much bigger financial risks to the taxpayer?
"And in the end the calculation, from the point of view of protecting the taxpayer, is it was better to ensure that that didn't happen to RBS, given that there are tens of billions of pounds of your money and all your viewers' money tied up in this."
Work and Pensions Secretary Iain Duncan Smith said there would be "chaos" if the Government got rid of the bank's board.
He told BBC1's Andrew Marr Show: "The reality is the contract we inherited from Labour meant that very clearly the board takes the decision on this, you can't interfere and tell them what to do.
"If we didn't like that then, of course, the only option would be to get rid of the board. Now, if you do that, imagine what would happen in the banking sector and imagine what would happen to RBS. You'd have chaos."
Mr Duncan Smith said it was for Mr Hester "individually to make a decision about" whether to accept his bonus.
He added: "Nobody would be happy with the Government if, of course, he took such decisions, but it's up to him."
Lord Turner, chairman of the Financial Services Authority, and its chief executive Hector Sants will report to the Commons Treasury committee tomorrow on RBS.
Speaking to Sky News from the World Economic Forum in Davos, Switzerland on Friday, Lord Turner said that excessive bonuses are "not good for society".
Mr Hester is facing mounting pressure to follow the bank's chairman, Sir Philip Hampton, and waive his bonus.
Sir Philip, chairman of RBS since 2009, had been on course to claim 5.17 million shares in the financial institution in February, but it is thought he told the bank's remuneration committee it would "not be appropriate" for him to take a £1.4 million payout.
It also emerged that a double bonus scheme could greatly inflate Mr Hester's £1.2 million annual salary to a possible £8 million over the coming years.
The bank chief is entitled to both short-term bonuses and long-term incentive bonuses based on factors such as performance and meeting targets.
The £963,000 he was awarded last week was a short-term bonus equalling 3.6 million shares, relating to the 2011 calendar year.
Short term bonuses are capped at 200% of his annual salary, so his last payout was not as large as it could have potentially been.
The long term scheme is based on the previous three years, so Mr Hester is approaching the point at which it can come into effect.
It is thought the long term bonus could potentially reach £6.4 million. Mr Hester's combined salary and bonus earnings could therefore reach £8 million but it is unlikely that maximum target will be met.
Prime Minister David Cameron yesterday sidestepped calls to block Mr Hester's award, saying: "It is a matter for him."
Speaking at Chequers, the Prime Minister told journalists: "It's obviously his decision. My decision is to make sure the team at RBS get on with the job of turning the bank round and we made our views very clear on the bonus and that's why it was cut in half compared to last year."
But he was accused of trying to "have it both ways" by shadow business secretary Chuka Umunna.
He said: "It is staggering that ministers should have allowed themselves to get into such a quandary over the Hester bonus given they knew it was in the offing for many months and would be a matter of immense public interest.
"Ministers infer there would have been 'chaos' and that the board of RBS would have resigned if prohibited from paying out a huge sum by way of bonus to the RBS chief executive when there is little evidence to support this.
"Instead, the chairman of the board has responded to mounting public criticism by giving up the £1.4 million worth of shares he was due to receive himself next month.
"Ministers want to have it both ways - on the one hand they seek to take credit for the reduction in the total amount of bonuses paid out across RBS since they came to office, on the other hand they tell the British people they can't do anything about excess at the top of this publicly owned bank."