The Tory leader said that executives should not get bonuses
Giving bonuses to executives at Lloyds Bank would be "completely wrong", Tory leader David Cameron has said.
Payments totalling £120m are reportedly to go to workers at Lloyds - which is 43% state-owned - despite record losses at the bank's subsidiary HBOS.
Mr Cameron told the BBC that it was "not possible" to rule out a full nationalisation of the institution.
The Lib Dems said the bonuses would reward "failure". Ministers said lower-paid workers should not miss out.
But Lloyds said its staff deserved "financial recognition" for hitting targets.
A Lloyds spokesman stressed that no decision had been finalised on this year's bonuses, although the group's five executive directors have all voluntarily agreed to forego any bonus they may be awarded for 2008.
HBOS - bought by Lloyds with government backing last year - is set to record a loss of nearly £11bn, raising concerns that it may need more help from the state.
Employment Minister Tony McNulty said staff on lower salaries should not forgo their bonuses, but the issue was totally different for senior executives.
"I would draw the line between senior managers, board members, executives, those responsible for the business model and strategy that got them into the mess, they shouldn't get a penny," he said.
Reports of £120m in bonuses come amid speculation that the government - which has already poured £17bn into the group - may be forced to take a majority stake in Lloyds, or even nationalise it.
Asked whether staff should get extra cash, Mr Cameron told BBC One's Politics Show: "Basically no. Those banks that are owned by the taxpayer or where the taxpayer has a large stake - it's completely wrong to be paying bonuses."
He added: "The prime minister seems to have been sleeping on the job and the government seems to have been completely incompetent on this."
Mr Cameron also said: "I wouldn't deny the teller in the bank one or two thousand pound bonuses if they are on a modest salary.
Times have changed, circumstances have changed and it's important the banks recognise that
"Bonuses to the board, to senior executives, to big traders, to the big managers - that's completely wrong when it is out of government money."
Asked whether Lloyds had to be nationalised, Mr Cameron said: "It may have to be. We can't rule it out. It may happen."
Lloyds TSB shareholders voted 95.98% in favour of the takeover of HBOS last year.
As part of government plans to recapitalise the banks, Lloyds TSB and HBOS receive £17bn of public money between them.
Liberal Democrat Treasury spokesman Vince Cable told BBC One's Andrew Marr Show: "We are getting into nationalisation accidentally... The group may well have to come back to the government....
Cable: Banks are almost nationalised but 'not being run in the public interest'
"We have these banks that are almost nationalised and they have to be run in the national interest. The government's got to be more decisive."
On the Lloyds bonuses, Mr Cable said: "There are contractual problems that have to be overcome, but as a general policy position no bonuses should be paid to banks that have failed and are dependent on the taxpayer.
"We should be quite clear about that. There is a longer-term question about how you have a bonus system and how you do create incentives and prevent people taking cash that creates excessive risk.
"But those big long-term reforms have to be kept separate from today's problems, which are not using taxpayers' money to pay out very large bonuses, for the most part, to very highly paid people who have failed as business people."
Environment Secretary Hillary Benn told Sky News: "If you are talking about bank tellers getting their performance-related pay, I don't think anyone's going to quarrel with that.
"But when it comes to large bonuses for bankers, some self-restraint is required and I think the public rightly looks askance if people don't do that.
"Times have changed, circumstances have changed and it's important the banks recognise that."
A Lloyds spokesman said: "We are a retail and commercial bank where most colleagues earn approximately £17,000 a year.
"We have been stretching performance targets and if they are met we believe it is right that colleagues receive some financial recognition.
"In most cases this means an annual bonus of £1,000 or less."
Last week Chancellor Alistair Darling told RBS failure should not be rewarded with huge bonuses, but says he cannot rule out pay-outs for some bank staff.
The comments came as reports put the potential total bonus figure at up to £1bn for the company's 177,000 workers.
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