Small firms are a major and growing provider of employment and are playing a vital role in economic regenerations. The ontribution of contemporary, relevant and focused management techniques to enhance competitive advantage is crucial, especially in performance management and reward systems. The performance management systems of large organizations simply cannot be scaled down to fit the smaller enterprise which often exhibits a radically different management process and operating context. The skills and abilities of managers are fundamental to the success of any performance management system. Consistency and clarity in both design and implementation are essential features. Smaller enterprises need to be aware of the paradox of formalized performance management systems which may erode the flexibility, innovation and team working required for long-term success and strategic health.