The mega-bonus pay culture among banks encouraged a "lethal combination of reckless and excessive risk-taking", MPs have said.
The Treasury Select Committee's report on bank pay said the banking crisis had "exposed serious flaws and shortcomings" in remuneration policies.
It also slammed bonus schemes for encouraging risk-taking at the expense of shareholder interests and the long-term health of the banks themselves.
MPs called on the Financial Services Authority (FSA) regulator to make tackling pay reform a higher priority.
"Looking forward, we are concerned that the FSA seems not to be taking tackling this issue seriously enough," committee chairman John McFall said.
The report highlighted practices such as cash bonuses made immediately regardless of the long-term impact of a deal or transaction. MPs urged the City watchdog "not to shy away" from using powers to sanction firms over poor pay practices and give regular updates on its progress.
"This would enhance transparency and provide reassurance to the public that changes in remuneration practices within the sector are being enforced," the report said.
A swathe of bank bosses have sacrificed their bonuses after a tumultuous year of devastated profits as well as billions in taxpayer support for Royal Bank of Scotland and Lloyds Banking Group.
But the committee also pushed for genuine reform to prevent a return to the excesses of the past - and a more widespread use of powers to claw back bonuses to align the interests of bankers and shareholders.
"We have a suspicion that many bankers remain unconvinced by the need for change and believe that, once 'the storm dies down', it will be a case of 'business as usual'," the report said.
