Labour has called for all British banks to cut bonuses after public pressure led Royal Bank of Scotland chief executive Stephen Hester to waive his near £1m payout.
The party says bumper City payments are damaging the economy and wider society.
It used an opposition day debate to insist bosses of banks shored up by the taxpayer should only get bonuses for "genuinely exceptional performance".
Labour also wants employee representatives to be on remuneration committees of company boards as an extra safeguard against excessive rewards.
In reply, Chancellor George Osborne warned the row over bonuses and pay threatens to undermine the jobs and prosperity provided by the free market economy.
In a speech to business leaders he also suggested Labour was "anti-business" - a claim rejected by shadow business secretary Chuka Umunna.
Mr Umunna told MPs it was not fair so many people were suffering an "extraordinary squeeze" on their living standards while those who had caused the problem continued to enjoy "very high remuneration".
Mr Umunna went on: "The public rightly expects the culture of excessive bonuses must stop.
"That means bank executives' remunerations stated to be 'performance-related' should be just that - related to performance.
"Very large bonuses should only be paid to reflect genuine exceptional performance if trust in the system is to be maintained."
Earlier the City's bonus culture was defended by the chief of oil giant BP which has just announced fourth quarter profits of just under £5bn.
Bob Dudley told Sky News' Jeff Randall London must offer competitive pay if it is to remain a global business centre.
He confirmed BP would pay bonuses this year but declined to say how much they will be worth.
Labour's motion - which was defeated - came as the Lloyds Banking Group confirmed almost 1,000 jobs are to be axed and three offices closed.
The original aim of the motion was to force a vote on RBS boss Stephen Hester's proposed shares bonus for last year - until he decided to forego it.
The debate came as Mr Hester broke his silence on the issue. In a letter to the largely state-owned bank's staff, he said press coverage had been "discomforting to say the least".
But he insisted RBS was "making progress in the face of a difficult inheritance". The best way to deal with criticism was to "prove the critics wrong", he added.
All of the three main parties are vying to be seen as taking the lead in establishing what has been dubbed "responsible capitalism" in the wake of the credit crunch.
Labour believes it has captured the public mood amid popular anger at the perceived excesses of the City at a time of economic austerity.
But the party has also faced criticism that it is stoking anti-business sentiment which risks driving banks and other financial institutions overseas.
On Tuesday the boss of Network Rail said he will pass up on his annual bonus after a new row erupted over whether the Government could veto the payout.
Chief executive Sir David Higgins said he would put the money towards improving safety instead.
Transport Secretary Justine Greening had planned to attend the company's annual general meeting on Friday to vote against reported plans to hand Sir David a £340,000 bonus.
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