Param-Shiva is called as Parmatma because he is the own-self of all beings. Worldly people take their body, mind, house, wife and children as their own-self. Own-self is defined as someone who is the object our expression of excessive love.
According to Panchadashi, the suffix ‘param’ is added to Parmatma to separate him from the Gaunatma (secondary soul) and Mithyatma (false soul). Though he is undoubtedly supreme, still the word ‘param’ is used to show his supremacy. Shiva is called Parmatma to indicate that Shiva himself is the principal soul.
According to Linga-Purana the symptom of soul is –

यच्चाप्नोति यदादत्ते यच्चात्ति विषयानिह।
यच्चास्य सन्ततो भावः तस्मादात्मेति कीर्त्यते॥

According to Kalpa-Lata the sacred meaning of Parmatma is—

अन्तर्यमयंस्त्वं भूतान्यखिलानि।
भूयः कथितोऽसि श्रुत्या परमात्मा॥

Purport: Vedas address you as Parmatama at many spots because you are internally governing all the living beings. This Parmatma name of Lord Shankar is famous in Maha-Narayanopnishad— tasyah shikhaya madhye parmatma vyavasthitah. Administration of the Lord is of two kinds. External control is applied like a king who enforces punishments etc. And internal control is applied on account of oneness with the controlled. Just as Somdutta solely administers his reflection, by becoming the soul of that. Similarly God controls by becoming the soul of living beings who are identical with his own reflection. Brihadaranyak-Upanishad elaborately describes the super-conscious nature of the Lord. A living individual must think himself non-different to super-self, this is the true sense of worship of Parmatma.