A damning report has revealed that a head teacher who earned £156,000 a year took advantage of his position.
Auditors highlighted the "unacceptable" culture which evolved at West Exe Technology College in Exeter, under the executive leadership of Steve Maddern and which brought the reputation of the school into disrepute.
They said the actions of the board of governors and the senior management team established a culture which was "not ethically sound", and which tarnished professional standards and the reputation of the school.
The senior management team included Mr Maddern's wife, Beverley, who was earning £86,000 a year as his senior deputy.
The report, carried out on behalf of Devon County Council, also found that there was not enough professional distance between Mr Maddern and his head of governors, Paul Smith, who oversaw the pay awards.
Both the Madderns stepped down last term, while Mr Smith quit in February.
The revelations came to light as West Exe was in the process of applying for academy status, which would have meant the school was free from local authority control. The application was suspended in light of the scandal.
Yesterday, Exeter MP Ben Bradshaw said the report "fully vindicates" questions asked about the governance of the school.
He said it showed the dangers where a school has a dominant head who is too close to the chair of governors and they are not challenged.
"It also exposes a flaw in the Government's model for academies which removes local public accountability and any role for the local authority.
"It is vital the governors and Devon ensure West Exe is free from the vestiges of the old regime and can look to the future with the confidence and support of parents, students and staff."
The report found that Mr Maddern had been too closely involved in the appointment and pay of his family members, and did not provide the right information for governors to make "sound decisions" on his own pay. It concluded he had too great a leadership hold on governors.
The report found: "The culmination of this decision structure and in some circumstances misuse of position by the executive headteacher, has established a culture which ethically is not sound and publicly is unacceptable to the extent that it has compromised standards expected of school leaders, trust of the staff and public and brought the reputation of the college into disrepute."
But auditors also concluded that senior staff had the "best interests of the school at heart", and praised Peter Scott, the current chair of governors, for the "strength of resolve" needed to carry out an initial review.
Mr Scott said: "The changes we have already put in place clearly ensure we demonstrate a policy of honesty, openness and trust in West Exe Technology College.
"The staff have been very supportive throughout the last few months, and really want West Exe to move forward with the new approach."
Yesterday, one mother who has a son at the school said staff had managed to carry on through a crucial exam period without too much disruption, but she said: "It must have affected morale. I'm sure some of them must have known what was going on, but were powerless to do anything about it. They have been very professional despite that."