Executives at AIB will not receive backdated bonuses totalling 40m euros (£33m) after an intervention from the Irish Finance Minister Brian Lenihan.
The bank's board made the decision after Mr Lenihan threatened to withhold state funding.
In a letter, he said financial aid would be conditional on the non-payment of bonuses "no matter when they may have been earned".
AIB has already had a 3.5bn euros bail-out.
The bank was due to send bonus cheques totalling 40m euros (£33m) to 2,400 senior members of staff on 17 December for work carried out in 2008 as a result of a High Court ruling earlier this year.
An employee had taken the legal action to force the bank to pay him his bonus.
Mr Lenihan said: "I appreciate that AIB was not in a position to put up a sworn defence in the High Court proceedings and that the Executive Chairman and the Board have acted with complete propriety in this matter."
The bank met on Monday to discuss the letter. It said its legal advice had been that it was obliged to pay the bonuses but that the minister's intervention overtook that obligation.
It said: "The bank very much appreciates the support it has received to date from the State and the Irish taxpayers and acknowledges that it will continue to rely on this support for some time to come."
AIB Executive Chairman David Hodgkinson said the bank was "relieved" to be in a position not to pay the bonuses, according to RTE.
Earlier, the Irish Prime Minister Brian Cowen said the government was looking at all its options to see if anything could be done to stop the payment of the bonuses.
Minister for Health Mary Harney said it would have been better if AIB had contested the legal action. She also highlighted the amount which had been put into the bank.
Ms Harney said: "Clearly the bank's ability to pay is very much in doubt given the state of the bank and the huge amount of capital the Exchequer, on behalf of the taxpayer, have had to invest in the bank.
"At a time when the Exchequer is putting a huge amount of capital into AIB, everyone has to be mindful of their responsibilities, and that includes management, the board and the government."