Managed grasslands contribute in a number of ways to the biodiversity of European agricultural landscapes and provide a wide range of ecosystem services that are also of socio‐economic value. Against the background of a rapid biodiversity loss in agricultural landscapes, increasing attention is being paid to farming practices that enhance ecosystem services. Therefore developing cost‐effective conservation payment schemes is the main challenge facing present European agri‐environmental policy. This article deals with the design, implementation and results of a case‐study payment scheme in Steinburg county in Germany that compares payment‐by‐results conservation procurement auctions with a fixed flat‐rate payment‐by‐results approach as a means of improving the cost‐effectiveness of conservation schemes for grassland plant biodiversity. The empirical work indicates cost‐effectiveness gains of auctioning – compared to current fixed flat‐rate payment schemes – of up to 50 per cent. These findings along with the relatively high number of successful participants indicate that this specific approach will probably be an improvement over current action‐orientated fixed flat‐rate payments. This is mainly because low‐cost producers gain smaller information rents and the conservation agency will – with a given budget – be able to close contracts with (some) high‐cost farmers due to cost‐effectiveness gains provided by low‐cost landowners.