John Doyle banked the cash for leaving his role as principal of Coatbridge College, despite the total being nearly three times higher than Scottish Funding Council (SFC) guidelines.
A Holyrood investigation accused Mr Doyle of withholding information from the college board to secure the pay off.
Police last week confirmed they were investigating the case.
But the SFC ruled against legal action to get the money back.
Mr Doyle strongly denies any wrongdoing.
Paul Martin, Labour candidate for Glasgow Provan and former convenor of the public audit committee which investigated Mr Doyle, said: “I am appalled at this.
“For me, the funding council is a lame duck.
“We know from the work the committee did this happened under the council’s nose and I would have thought there was an obligation to try to recoup some of the money to make up for this.”
Mr Doyle was given a lump sum worth 21 months of his £116,000 salary, a three-month bonus and six months’ pay in lieu for overseeing the merger of Coatbridge College and two other institutions.
The investigation into the payment described it as an “appalling abuse of the public purse” and MSPs accused the former principal of having “colluded” with college chairman John Gray to engineer the severance package.
According to the committee’s report, Mr Gray did not pass on SFC guidance that severance payments be capped at 13 months’ salary.
Laurence Howells, chairman of the SFC, wrote to Mr Martin last Tuesday. He said: “We have had a response from Mr Doyle’s legal advisers stating he will not return any of the payment. The SFC has sought legal opinion on potential recovery of the payment. Counsel’s opinion is that such action would not have a sufficient chance of success to justify the expense.
“We will, regretfully, not be taking further action. We will, however, reconsider should further evidence come to light, for example from a police investigation.”
A letter from Brechin Tindal Oatts, Mr Doyle’s law firm, to the SFC stated: “Our client has instructed us to advise you that he is not prepared to repay the severance payment made to him by Coatbridge College in October 2013.
“For the avoidance of doubt, this is because our client does not agree with the findings of the public accounts committee report. His position is that he fulfilled his duties as principal and chief executive officer and in particular there was no collusion between our client and John Gray and information was not deliberately withheld from the (Coatbridge College) remuneration committee.”
Mr Doyle’s lawyers said he passed on an email from remuneration committee member Tom Keenan which indicated he was aware of the SFC guidance but “remained supportive of that payment” to Mr Doyle.
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