We develop a model to characterize optimal compensation when large risk-neutral firms and individual risk-averse consumers compete for heterogeneous workers. Production generates consumption utility over two periods, with an uncertain return in the second period. We analyze how screening motives interact with consumption smoothing across time and states. In the optimal compensation scheme, consumers account for the outside option that firms provide to workers in competitive equilibrium. If firms are productive so that the workers’ outside option is sufficiently high, it becomes optimal for consumers to smooth the higher total compensation paid to workers across periods, implying less high-powered incentives.