Optimizing Long-term Incentive Plans



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Unfortunately the companies of the peer group are also inter-correlated, thus we also have to take their relationships into account [12]:
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So the formula for the multiple correlation coefficient with inter-correlated variables is as follows:
. (4)
Note that the maximum coefficient of multiple correlation criterion will be of no help in picking the value. This does not affect our results, because adding or subtracting of a value will not change the value of the correlation. So, to find the maximum of this function we have to find the values where the first derivative of this function approximates zero. The first derivative to parameter l is:





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