A system and method for efficient management of operating modes within an integrated circuit (IC) for optimal power and performance targets. A semiconductor chip includes one or more processing units each of which operates with respective operating parameters. One or more temperature sensors are included to measure a temperature of the one or more processing units during operation. When the measured temperature exceeds a threshold, a power manager on the chip determines a temperature headroom utilizing temperature values based on worst-case ambient temperature. When the measured temperature does not exceed the threshold, the power manager determines the temperature headroom utilizing at least one temperature value based on room ambient temperature. Following, the power manager adjusts the respective operating parameters based on at least the temperature headroom.