Organizations operating in extreme environments rely on teams to tackle the highly demanding and complex situations. This study aims to provide new insights into the management of such teams by exploring the influence of environmental extremity on the relationship between performance management and team effectiveness. Mixed‐method and multilevel analyses of police teams working in different levels of environmental extremity suggest that environmental extremity moderates the rela- tionship between performance management features and team effectiveness. Both the vertical alignment of performance management and constructive feedback have a positive effect on team effectiveness. However, these positive effects are constrained in teams working in heightened levels of environmental extremity. The effects of performance management consistency and two‐way communication on team effectiveness are more nuanced and dependent on environmental extremity. When teams operate in heightened levels of environmental extremity, both features are positively related to team effectiveness. When teams operate in lower levels of environmental extremity, performance management consistency is not significantly related to team effectiveness and two‐way communication is negatively related to team effectiveness. These results provide a nuanced understanding of how perfor- mance management engenders team effectiveness in extreme environments.