LONDON  - Lloyds Banking Group on Friday posted annual losses of £1.43 billion, hit by huge insurance mis-selling compensation, while it awarded its boss a bonus linked to an eventual sale of the government’s stake.

The loss after tax, equivalent to $2.16 billion or 1.66 billion euros, was almost half the £2.79-billion shortfall it suffered in 2011, Britain’s LBG said in a results statement. The bank is 39-percent owned by the British government after a state bailout following the 2008 global financial crisis. LBG added that annual pre-tax losses narrowed sharply to £570 million from £3.5 billion last time around, but the group opted against issuing a shareholder dividend, sending shares sharply lower.

Lloyds added that it set aside another £1.5 billion in the fourth quarter to cover compensation for mis-selling payment protection insurance (PPI), taking its annual provision to a vast £3.575 billion. The group’s total bill now stands at £6.775 billion, which makes Lloyds the worst affected bank by the mis-selling scandal. It also put aside £400 million to compensate clients who were sold interest rate hedging products.

Underlying annual profit, stripping out exceptional items, surged to £2.6 billion from £638 million in 2011, as the bank cut bad debts, costs and non-core assets. It shed 7,000 jobs last year.

Lloyds also said that chief executive Antonio Horta-Osorio would receive a 2012 performance bonus of £1.485 million, deferred in shares until 2018.

However, at Horta-Osorio’s request, the bonus will be paid only if the British government sells at least a third of its stake above 61 pence—the average price it paid during the bank’s bailout—within the next five years. In Friday afternoon deals, LBG shares tumbled 8.21 percent to 50 pence on London’s FTSE 100 index, which was 0.74-percent lower at 6,313.69 points.

Lloyds added that staff would share a total bonus pot of £365 million despite the fresh losses. That was three percent lower than in 2011, but would give each employee about £3,900 on average. Cash bonuses were capped at £2,000.

Chairman Winfried Bischoff defended its bonus policy move.

“Whilst Lloyds Banking Group continues to show restraint in its annual bonus awards, we believe our employees should be rewarded for their contribution to the further strengthening of the business in 2012,” Bischoff said.

“The group continues to make sure that its remuneration structure places the focus on strong customer service and the long-term sustainability of the business.” The news comes one day after the bailed-out Royal Bank of Scotland posted a 2012 net loss of £5.97 billion after enduring a scandal-hit year, but revealed it would pay out a bonus pool of £607 million. RBS is 81-percent owned by the state. Bonuses at taxpayer-rescued banks have long been a flashpoint for public outrage as many Britons are suffering from austerity measures imposed by the coalition government, in the wake of the financial crisis that was rooted in the banking sector.

In Brussels this week, the European Union agreed to new rules that would cap bankers’ bonuses, blamed by critics for helping to drive the global financial crisis but also defended as crucial for the smooth working of the banking system. Lloyds was sunk by an ill-fated 2008 takeover of rival lender HBOS, causing the lender to axe more than 40,000 jobs in a bid to return to profitability, while it continues to slash the number of countries in which it operates.

“The substantial progress we made in 2012 means that we are now ahead of our plan to transform the group, and this was reflected in our stronger underlying financial performance in the year,” Horta-Osorio added on Friday.

“Since setting out our strategy in June 2011, we have significantly strengthened the balance sheet, and substantially improved efficiency and focus, while continuing to work through legacy issues,” he said.

Britain’s beleaguered banks have additionally been forced to pay out vast amounts to compensate clients who were mis-sold PPI, significantly slashing their profits in the process. The policy covered repayments on credit products such as consumer loans or mortgages.

RBS and rival British bank Barclays have been hit also by the Libor rate-rigging scandal, which has seen the pair pay out hundreds of millions of dollars in fines and suffer major damage to their reputations.

On Monday, British banking giant HSBC will announce its 2012 results and could also revise its provisions for PPI compensation. The Asia-focused lender has so far booked a total provision of $2.1 billion for the scandal.

In a separate development late last year, HSBC also increased the amount set aside for fines linked to money-laundering in the United States to $1.5 billion, and warned that it could face criminal charges over the matter.