Every organization, be it small or large and be it ‘for-profit’ or ‘not-for-profit’, wants to outperform its competitors through maintaining sustained success in the relevant industry. Human resource acts as a catalyst in achieving such a unique status in the industry. Once an organization becomes complacent with its performance and stops moving on a road to continuous improvement, it begins to decline. Main factors responsible for downfall of an organization are either lack of commitment or nonconformity to established standards procedures. Organizations operate through well organized and universally agreed upon systems, one amongst those systems is the Performance Management System (PMS). The research under review explores and studies the existing PMS of the two commercial banking sectors (Pakistani and Foreign) operating in Karachi and then draws a comparison of the two sectors to identify strengths and weaknesses of their respective PMS. In order to ensure coverage of the entire population of the two banking sectors, eight banks (four from each sector), of the banking industry were chosen. Another salient aim of the research has been to recommend a solid methodology to the banking sectors for achieving sustainable economic stimulation through PMS, HRD and employees Compensation. It is suggested to develop Human Resources at the national level in general and in financial institutions in particular, through effective Performance Management System practices. Banking industry is presently facing a hyper turbulent situation where banks have to operate in increasingly competitive and complex local and global markets. The ability to compete, in the fast paced global environment, is of paramount importance – survival of the fittest being the name of the game. The competition has even become xivquite tough and challenging, especially due to globalization, with the entry of many foreign world-class banks and other financial institutions. The central idea behind the research was to identify reasons for failure of our domestic banking sector to successfully compete in the prevailing challenging competitive environment. To cover various aspects of performance management, a sample of 400 managers (50 from each of the eight selected banks of the two sectors) was considered for the purpose of data collection. Since all the banks under study are located at Karachi, face to face interaction was also possible in most of the cases, in addition to other methods available for the purpose. A questionnaire, comprising 50 questions, was prepared to ensure that all areas of PMS, HRD and compensation system were thoroughly covered. Having collected the relevant data, through survey and interviews, a comprehensive analysis was carried out, by comparing the PMS practices being followed in the banks with those given in the world renowned PMS models and literature review. Extensive use of SPSS software was made to formulate statistical presentation of the analysis results. The consolidated analysis has indicated that there is a lack of clear understanding amongst many managers about PMS at macro level. They think that, perhaps, PMS is meant to just enhance employees’ salary and take other administrative actions. They don’t consider PMS as a complete system to enhance overall organization’s performance; neither can they link it with employee development and overall compensation system. It was found that, although most of the banks are trying to implement the PMS along with HR development and its related programs of HRD and Compensation, there was still a lot of room for improvement. In case of Pakistani xvbanks, impact of local culture is quite prominent, and managers make many short-cuts while evaluating the employees’ performance. As a result of analysis, some recommendations have been made for better planning and implementation of the PMS in the banking industry. It is strongly hoped that, through effective use of PMS, the financial sector can develop its workforce and play its vital role in bringing drastic improvement in the economy of Pakistan. Apart from proposing different measures to improve employee performance by effective implementation of the PMS, some suggestions have also been made for the potential research scholars to facilitate and to keep the research an ongoing activity.