We characterize the optimal incentive scheme for a manager who faces costly effort decisions and whose ability to generate pro…ts for the fi…rm varies stochastically over time. The optimal contract is obtained as the solution to a dynamic mechanism design problem with hidden actions and persistent shocks to the agent's private information. When the agent is risk-neutral, the optimal contract can often be implemented with a simple pay package that is linear in the …firm's pro…fits. Furthermore, the power of the incentive scheme typically increases over time, thus providing a possible justi…cation for the frequent practice of putting more stocks and options in the package of managers with a longer tenure in the …rm. Contrary to other explanations proposed in the literature (e.g. declining disutility of effort, career concerns), the optimality of seniority-based reward schemes is not driven by any particular assumption on the agent's preferences/technology. It results from an optimal allocation of the manager's informational rents over time. Building on the insights from the risk-neutral case, we then explore the properties of optimal incentive schemes for risk-averse managers. Contrary to the risk-neutral case, the optimal pay package is typically non-linear in the fi…rm's profi…ts (although, there are instances where it is a convex function of a linear aggregator). Furthermore, we …nd that risk-aversion may contribute to reducing (but not necessarily eliminate) the benefi…t of offering incentives whose power increase, on average, over time.