The approach adopted towards environmental management in the rural context is different from that in the urban context in that the first is generally based on voluntary controls accompanied by compensation, whereas the second is based on involuntary controls without compensation. The arguments relating to the payment of compensation are examined with the use of management agreements on Sites of Special Scientific Interest taken as an example. Criteria for determining whether or not compensation is paid may be based on arguments concerning efficiency or fairness. Standard Pareto measures of efficiency cannot determine whether or not compensation should be paid. The basis on which compensation is paid can create incentives, either for occupiers to take preemptive action and extinguish conservation values or for them to make claims for excess compensation. The payment of compensation by the state may provide an incentive for the efficient allocation of resources, but this will not be so if it is based on the financial cost rather than the opportunity cost. Any approach to compensation is based upon a reference point which indicates the level of environmental quality which is expected to be achieved by a land manager. But this point is not immutable and could shift towards an expectation of a higher level of environmental management. There is no single level of compensation which can simultaneously provide appropriate incentives both to the farmer and to the state. A possible resolution would be for the conservation agency to pay only the proportion of the compensation payment which represents the resource cost.