["Agricultural Economics, Volume 57, Issue 3, May 2026. ", "\nABSTRACT\nDairy farming is faced with environmental, social and economic sustainability challenges, which call for the uptake of more sustainable farming practices. Policy schemes involving public and private sectors can support the uptake of more sustainable farming practices through the provision of incentives to farmers if designed appropriately. However, empirical research in designing such policy schemes is scarce. This paper examines dairy farmers’ preferences for policy attributes in environmental compensation schemes for more grass‐based feeding systems. Using data from a discrete choice experiment in Sweden and a hybrid latent class model, we find that while size of financial compensation matters, farmers’ likelihood of participation in grass‐based feeding schemes is also driven by how the financial compensation is designed and by non‐financial attributes of the policy schemes. Notably, we find three distinct groups of farmers who differ in their likelihood of participating and exhibit heterogeneous preferences for schemes with private versus public sector‐led implementation mode, and direct subsidy payment versus consumer price premium and tax relief. Furthermore, findings demonstrate that behavioral factors, including farmer attitudes toward different forms of compensation and risk aversion, partly explain the observed heterogeneous preferences. Overall, our findings highlight the need to accommodate preference heterogeneity in policy design to improve participation, especially in settings where the transition to more grass‐based feeding is challenging for farmers.\n"]