The Public Administration Select Committee called for a rise in honours for volunteers in the local community.
Its report said an independent honours commission should be set up to remove political influence from the process.
The government denied honours were dominated by officials and celebrities, while Labour said it was vital the system's "independence" was maintained.
The committee criticised the way in which honours are granted, calling the process "opaque" and "mysterious".
Instead, the MPs called for increased transparency and accountability with a reduction in the influence of politicians and civil servants.
'Must stop'
"We believe that no-one should be honoured for simply 'doing the day job', no matter what that job is," the committee said.
"In particular, honours should not be awarded to civil servants or businessmen unless it can be demonstrated that there has been service above and beyond the call of duty.
"It is distasteful and damaging for people who already command vast personal remuneration packages for doing their job, to also be honoured for simply being at the helm of large companies. This must stop."
As well as calling for an independent commission, the committee recommended the removal of the prime minister's "strategic direction" over the honours system.
It wants to see the publication of longer explanations of why someone has been given an honour and it calls on the Cabinet Office - the department responsible for honours - to broaden the range of independent members who currently sit on honours committees.
The Honours Forfeiture Committee, which stripped former Royal Bank of Scotland boss Fred Goodwin of his knighthood earlier this year, should be made independent with clearer rules and criteria.
At the moment it is run by a "shadowy group of senior civil servants, acting in secret," the committee's chairman Bernard Jenkin said.
The Honours lists are published twice a year, at New Year and in mid-June on the date of the Queen's official birthday.
Earlier this month, a senior civil servant told the BBC Team GB's Olympic medallists would not get an "automatic gong", sparking concerns there were plans to limit the number of athletes who will receive an honour in the New Year Honours list.
However, Downing Street denied this.
Mr Jenkin said: "The public values the honours system, and it commands a significant degree of public confidence, but people still say that honours appear to be awarded through a mysterious process by the various committees to the usual suspects they already know.
"Far too few are being awarded to ordinary citizens for the extraordinary contributions they make to their communities - which is what the honours system should be for.
"While the honours system is a valued and popular part of British life, the fact that so few people understand how or why honours are awarded does nothing to help bolster public confidence or interest in the system."
The Cabinet Office denied honours are dominated by politicians and celebrities, with 72% of the awards in the last honours list going to people who were actively involved in charitable or voluntary work.
"Honours are awarded on merit to those who make outstanding contributions and not for simply doing the day job," a spokesman said.
"Far from being the preserve of politicians, civil servants and celebrities, the vast majority go to the unsung heroes who do remarkable work in their communities.
"Awards are recommended by committees with independent chairs and a majority of independent members. We will carefully consider the committee's recommendations."
Michael Dugher, Labour's shadow cabinet office minister, said: "It is vitally important that the independence of the honours system is maintained.
"We welcome proposals for greater transparency, and for more recognition from within the system for people who do voluntary work in their communities."
Mr Dugher also said there should be greater recognition for public sector workers, not just for those in the top jobs in Whitehall.
"We also need an honours system that puts no artificial quota on extraordinary achievements or performances that contribute to this country," he said.
"Clearly numerous heroes from Team GB have met this criteria during London 2012 and the public would expect them to be rewarded appropriately."
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