Britain's biggest pharmaceutical company was forced to put the controversial plan on hold to avoid a full-scale battle with its shareholders, who do not believe the French-born executive deserves such a large pay rise.

GSK's retreat was heralded as one of the most significant victories by City investors. Two years ago shareholders exerted pressure on the telecoms group Vodafone to reduce a £10m bonus for its chief exec utive Sir Christopher Gent, while earlier this year the insurance company Prudential dropped a proposed pay deal for its top executives.

Mr Garnier, who took home £7m last year, demanded the increase to put his earnings in line with rivals in the United States, where he is based and where pay packets are more generous than those given to UK executives.

Shareholders in GSK, who had made their opposition clear in a series of secret meetings with the company chairman, Sir Christopher Hogg, last week, were elated.

However, some urged a note of caution amid fears that the company will try to secretly reintroduce the package in the coming months once the furore has died down. This is because GSK said that while it was postponing a decision on the deal, it remained "committed to aligning its incentive plans with those of its pharmaceutical peer group".

A spokesman for the National Association of Pension Funds, whose members control around £650bn of pension fund assets, said: "Two cheers for Glaxo, one because they bothered to consult and the second because they listened to shareholders. But, we will be keeping a very close eye on them in the future."

At the Association of British Insurers, whose members control a third of the stock market, Peter Montagnon, head of investments, made it clear that any attempt to reintroduce the scheme would meet with further scrutiny from shareholder bodies.

"It remains very important that there must be a link between the remuneration and value generation for shareholders," Mr Montagnon said.

The proposed pay deal for Mr Garnier was intricately structured, involv ing awards of US-listed shares known as American depository receipts, options over shares and "career performance shares".

This pushed the value of the deal to around £20m, according to the Guardian's calculations, after his base salary of £935,000 and other bonuses are added.

The timing of the announcement, following a series of top-level crisis meetings at GSK, surprised the City as it appeared to contradict com ments made only yesterday by Sir Christopher Hogg in an interview with the Financial Times.

The planned rise for Mr Garnier was regarded as ill-judged by the City as it came after a 30% fall in the company's share price, a 25% slump in profits and a failure by the company's scientists to develop any blockbuster drugs.

It also came at a time when US-style pay deals are being discredited after a wave of corporate collapses across the Atlantic such as the oil company Enron.

One major shareholder, who asked not to be identified, said: "This is a tactical withdrawal, but in our view JP [Jean-Pierre] is unrepentant and undaunted and they remain committed to the US pay model."