In this paper we discuss a class of budget-based performance evaluation schemes with the desirable feature that they induce an informed manager to set unbiased standards. We show that these schemes are frequently optimal incentive contracts in the presence of moral hazard, and we find that they retain their incentive properties in the presence of several competing managers. For concreteness, our analysis focuses on the problem faced by headquarters (HQ) in evaluating the performance of a cost center manager. In the simplest form of the budget-based schemes, compensation can be expressed as the sum of two terms. The first depends only on a cost estimate (standard) issued by the manager and the second term consists of the difference between estimated and actual cost, multiplied by a proportionality factor which varies with the estimated cost. A budgetbased compensation scheme can then be viewed as a menu of linear compensation functions, each corresponding to a different cost estimate submitted by the manager. In previous work, Ijiri, Kinard, and Putney [1968] discuss an evaluation system based on estimated and actual performance. However, they do not explicitly model preferences, information asymmetries, or moral hazard, and therefore they cannot model the behavior induced by their proposed evaluation scheme or compare alternative evaluation schemes. In reference to a proposed Soviet incentive scheme, Weitzman [1976]