Steps need to be taken to make the "mysterious process" by which honours are awarded clearer, according to MPs.
The Commons' public administration select committee (Pasc) has called for more ordinary people to be recipients of honours - as opposed to the 'usual suspects' of civil servants, celebrities and sporting heroes - in its report on the way the system operates.
MPs want the prime minister's strategic direction over the honours system to be replaced with an independent commission to consider nominations - a request made in the last parliament but ignored by the New Labour government.
It has called for the Queen's lord lieutenants to be given a greater role in considering nominations to help increase the number of volunteers in local communities who are rewarded for their work.
"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," Pasc chair Bernard Jenkin said.
"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."
MPs also called for the honours forfeiture committee to be made independent and transparent. The committee of civil servants opted to strip former RBS chief executive Fred Goodwin of his knighthood after the prime minister made his views on the matter clear.
"It appears to many that the decision to strip Fred Goodwin of his knighthood was made in response to media pressure, by a shadowy group of senior civil servants, acting in secret, with no clear rules or criteria," Jenkin added. "This is no longer satisfactory."
The committee should be chaired by an independent figure such as a retired court judge, today's report recommended.
Shadow Cabinet Office minister Michael Dugher backed the report's findings, saying that despite "significant improvements" in recent years more could be done.
"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."
Labour's calls for more Olympic knights did not appear to be heeded by the cross-party committee of MPs, however.
Their report concluded: "We are concerned by the relatively low proportion of the public (44%) who feel that the honours system is 'open and fair to all'.
"Despite efforts to change this perception, celebrities and sports stars are viewed as more likely to receive honours than people with years of service to their local communities."