This paper contrasts optimal employment contracts in a world of full information and in a world in which the worker's alternative employment possibilities cannot be observed by the firm. The difference between income and severance pay-that is, the opportunity cost of separating-will be higher in more productive states of nature. With complete wage insurance no longer possible, we therefore have an explanation of higher-ability individuals receiving high wages in the short run in long-term contracts. The explanation does not rely, as past explanations have done, on the imperfections in bonding arrangements or in loan markets.