Despite widespread implementation of payments for ecosystem services (PES), benefits to poor people in developing countries have been limited. The success of PES varies with the local context, policy environment and PES design and its implementation. Until recently, there have been few studies of factors that might contribute to the success of PES and associated outcomes. Ex-ante analysis of design considerations is critical in developing a robust and sustainable PES scheme. This research aimed to determine the key elements of PES design and prioritise those likely to support successful PES for community-managed forests using a case in the Phewa watershed in western Nepal. Community perceptions and expert opinion were used to identify 19 design considerations relevant to stakeholders. These were integrated into a PES design index. Analysis using this index indicated that livelihoods, pro-poor participation, tenure arrangements, transaction and opportunity costs, payment structures and government policy were perceived as most important to stakeholders. Although the effectiveness of a PES scheme has often been measured economically or biologically, our results indicate that the most important design considerations for stakeholders were policy, social, financial and institutional arrangements. The analysis indicated that there are often trade-offs between equity, efficiency, and effectiveness involved in achieving livelihood improvements for rural poor and, consequently, the longer-term sustainability of a PES scheme.