The government is set to grant new powers to the Financial Services Authority (FSA) so it can closely scrutinise executive remuneration in the banking sector.
In his unveiling of the Financial White Paper, Chancellor Alistair Darling outlined a new system to regulate city pay and bonuses.
This will mean the FSA will be able to impose financially penalise a company if its executive pay package encourages risk taking. The FSA will also produce yearly reports on companies' remuneration practices.
Darling said: "Our economy has a clear need for well managed, well functioning banks and financial institutions - to perform a vital set of functions - channelling investment and helping people save and plan for the future. But regulators and governments too must learn from the events of the last two years - better understanding the risks that come from rapid globalisation in the financial system."