The bank was due to put the proposal to a vote at its AGM in June. However, UKFI has made it clear it would vote against the motion, which has also drawn criticism from the treasury.
UKFI manages the treasury's 81% share of the bank, and as the motion needs 66% of its shareholders to vote in favour for it to pass, RBS has no choice but to abandon it.
The vote is necessary due to new EU rules, which means any bonus awards over 100% must be put to a shareholder vote. Bonuses for employees will now be capped at 100% of base salary.
RBS non-executive board member Penny Hughes, who chaired the remuneration committee, earlier said that the board has to make decisions on bonuses that are not always popular with all shareholders.
"We understand why RBS is subject to public and political scrutiny and has an obligation to the public that goes beyond that of our competitors," she said. "But truly living up to our responsibilities means we have to reject easy options which are not in the long-term interests of our stakeholders."
In February of this year the bank announced a pre tax loss of £8.2 billion for 2013.
The news comes a day after Barclays narrowly won a shareholder vote over plans to increase the bonus pot by 10%, bringing it to just under £2.4 billion. Almost a quarter (24%) of shareholders voted against the motion, including major stakeholder Standard Life. A further 10% withheld their votes.
Earlier this week, Vince Cable urged the banks to "make peace with the public" and show restraint when agreeing bonus packages for executives.
