In today’s fast-paced economy, businesses have to be more ambitious in setting their goals and developing new strategies in order to survive and succeed. Implementing organization’s business strategies is impossible without qualified, motivated and engaged employees who hold the unique set of competencies; as the professional and personal potential of workforce is a key factor in improving organization’s efficiency in the face of dynamic and diverse changes of the market. In recent years a competency-based approach has become an integral part of the businesses’ Human Resources (HR) management system. Today companies believe that employees, as a strategic asset, should be, first of all competent – i.e. have the knowledge, skills and behaviours necessary for the effective performance in that organization. The main feature of the competency-based approach in HR management is transition from staff-related operational issues to tasks of a higher strategic importance. Nowadays, statuary and mandatory training and the code of conduct are insufficient for improvement of labour efficiency and business performance and therefore, managers must pay particular attention to employees’ personal development, engagement and motivation. Therefore, a competency-based approach formulates goals in a way that leads to improvement of business performance by achieving better results, changing employee behaviour, increasing productivity and efficiency of the organization. The aim of this article is to underline the importance of prompt implementation of the competency-based approach in the HR management system. We determined the essence and value of the competency-based approach to the formation of HR system and defined the concept of a "competency model". We investigated the approaches to developing a competency model as part of HR management and analysed its stages of formation. This article outlines the methods of creating competency models and their assessment criteria as well as explaining the difference of competency models to other traditional approaches. The relationship of the competency model with other areas of HR system was examined.