Current federal and state soil and water conservation programs consist primarily of cost-sharing or compensating farmers for implementing a set of pre-defined best management practices. This approach does not consider specific environmental outcomes or the cost-effectiveness of the program at the farm or watershed level. Performance-based incentives are payments that are attached to a specified environmental performance measure, for example a reduction in nutrient, sediment, pesticide, or bacteria loss from a field, or reduction in loading at the mouth of a watershed. Assessing environmental performance requires the definition of a performance measure, which is used to calculate resulting incentive payments. In this paper, we discuss issues related to the selection of a performance measure, such as the scale at which the performance is measured, modeling versus monitoring, and the ability of the measure to foster farmer learning and adaptive management. Numerous examples of performance measures adopted or considered by watershed stakeholders in several states are presented. Watershed managers, policy makers, and extension agents can consider this information to make informed choices among proposed approaches toward improving water quality in streams affected by agricultural nonpoint source pollution.