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The accumulation of firm-specific knowledge improves firm productivity and employee retention, by creating a wedge between what the employee is worth inside and outside the firm. How does the firm create incentives for investment in firm-specific human capital when this investment requires costly employee effort and is not contractible? We characterize the optimal linear wage policies that provide such incentives. In a one-period model with stochastic outside offers, we obtain several results. (1) The firm-specific and general investments are substitutes in the employee’s utility function, even if they are not in the cost function. (2) The firm-specific investment is zero below a threshold sharing rule, but it can jump discontinuously to a large level above the threshold. (3) For some parameters, the firm is fragile (the employees are indifferent between staying and leaving), but for others it is stable. We go on to derive the optimal wage policy in a dynamic framework when the firm can credibly commit not to change the policy over time. We show that this full-commitment wage policy is not dynamically consistent: the firm would like to renege on its commitment to pay high wages in later periods. This research sheds light on how the incentives for and the accumulation of firm-specific knowledge lead some firm