Catchment forests occupy a total of 2.8 million hectares in Tanzania. This is about 8% of the total forested land in Tanzania. While catchment forests offer both direct tangible benefits and indirect benefits of which some are perceived as environmental services, they are threatened by prevailing high rate of deforestation and general degradation. Traditionally the management of catchment forests focused on expanding the area under state tenure by excluding local communities. This approach has resulted in greater forest degradation as a result of increasing demand for forest products by local communities due to population increase and lack of alternative sources of income. Inadequate government resources in terms of manpower and funding to effectively manage catchments forests and other forests also contributed to the failure. This reason and others have led to the emergence of Participatory Forest Management (PFM) in its varying facets reflecting varying degrees of involvement of local communities in the management of forest resources. PFM has two main scenarios in Tanzania, Joint Forest Management (JFM) where by villagers and the government jointly manages the forest, and Community Based Forest Management (CBFM) whereby management of the forest is vested wholly in the hands of the local communities. JFM is adopted in catchment forests because of their sensitive nature. The total forest area which is under PFM or is in the process of changing is 2,975,919 ha of which 1,890,613 ha are under JFM. The last decade has witnessed an overwhelming popularity of PFM in most developing countries with varying levels of success. A well managed catchment forest normally benefits a wide range of stakeholders, normally far away from the forest in the form of water for domestic use, hydroelectricity, tourism and carbon sequestration among others. It is logical that these stakeholders should pay for the outcomes of good forest management as incentives to the managers, the local communities. In a study carried out with respect to catchment forest reserves in Tanga, Morogoro, Arusha and Kilimanjaro regions the actual Total Economic Value (TEV) of the forests was rated at USD 496 million per year. A fraction of this value should be ploughed back to the local communities as payment for environmental services. Various benefit sharing mechanisms have been explored in this paper as incentives for improved forest management.