Purpose: The competency trap can occur when organizations become resistant to change due to their existing competencies, leading to a culture of complacency and hindering adaptability and innovation. This paper aims to understand this trap and its hindrance to organizational learning and knowledge acquisition. The study aims to integrate employee well-being into knowledge management (KM) strategies to overcome obstacles and demonstrate its significant contribution to effective KM and improving overall organizational health. Design/methodology/approach: A systematic literature review (SLR) process was used in this research, with the Preferred Reporting Items for Systematic Reviews and Meta-Analyses (PRISMA) protocol used to scrutinize articles for review. Only 50 peer-reviewed articles from 2000 to 2023 that focused on KM and employee well-being were included for review. Findings: Organizations can tackle the competency trap by managing knowledge effectively and prioritizing employee well-being. When considered for effective KM, the PERMA (positive emotions, engagement, relationship, meaning and accomplishment) facets of well-being strategically supports knowledge sharing and sustainable organizational change through KM. Practical implications: Focusing on PERMA facets of well-being in KM, an organization can emphasize employees' sense of achievement, addressing the competency trap to build a culture of knowledge sharing. This approach benefits professionals in developing an effective KM system. Originality/value: This paper addresses the challenge of the competency trap, which has gained less academic attention, and explores KM from a well-being perspective.