: personnel committee report :

Pearson wants to be the best company to work for in the world. The personnel committee plays an important part in developing pay and benefits packages to help the company fulfil this aim.

The company wants to find, inspire, reward and retain the very best people and recognises that its remuneration packages have to reflect the very competitive global market in which Pearson operates. The committee is responsible for approving the pay and benefits packages of the executive directors and the chief executives of the main operating companies. It also recommends the chairman’s remuneration to the board, reviews the company’s management development and succession plans and monitors the operation of Pearson’s various reward programmes.

In the past year, Pearson has started a number of management development initiatives designed to enhance the high-level skills of senior executives and to encourage them to develop a deeper understanding of the common challenges and opportunities facing the company. These programmes include a tailor made course which was launched at INSEAD and will run again later in the year at Harvard, a wide range of other courses and a new ‘Pearson MBA’ which is a joint venture with Duke University in North Carolina and FT Knowledge. The company has also launched a series of development forums designed for executives who have been with the company for a short time.

The company’s goal is that everyone who works in Pearson should have a chance to own part of it and the company has made dramatic progress over the past three years in increasing the number of its staff who own shares or are saving to buy them. With this year’s company-wide profit sharing plan, it will now stand at over 90%. The company has also developed bonus and share ownership plans for executives which clearly link performance with reward and underline the fact that employees and shareholders have a common interest in success. These plans offer above average rewards to senior staff, but only in return for outstanding performance.

Last year, for the first time, the company introduced a profit sharing plan under which all staff (except executive directors) received a cash bonus and Pearson shares. The plan is linked to the company’s overall profitability and is activated at the discretion of the board. For the past two years, all staff worldwide (in over 50 countries) have been able to own Pearson shares through a savings contract linked to a share plan. The company has also steadily increased the number of staff in receipt of awards under the executive share option plan to over 2,600 this year compared with 185 in 1996. The committee is considering further initiatives to expand the reach of this programme.

The company’s most senior executives also benefit from two other recently introduced plans. The first gives them the opportunity to invest some of their bonus in Pearson shares under an annual bonus share matching plan. The second, introduced last year, is the Pearson Reward Plan, a long-term programme which offers a significant extra shareholding opportunity through a combination of premium priced options and equity incentives providing that the company meets stretching targets which are set and monitored by the personnel committee.

Composition and compliance The committee is chaired by Gill Lewis and its other members are Terry Burns and Reuben Mark. All are non-executive directors.

The London Stock Exchange requires companies to comply with the provisions of the Combined Code on corporate governance. The committee has considered the provisions in schedule A of the Code on the design of performance-related remuneration and schedule B on what should be included in this report and believes that the company has complied throughout the year.

In detail, the main components of the company’s remuneration policy for executives are base salary, an annual bonus plan, long-term incentives, pension benefits and other market specific benefits. The current remuneration plans consist of:

Base salary Base salaries are set at levels competitive with pay for directors and executives in similar positions in comparable companies.

Annual bonus The maximum bonus that can be earned by executive directors and chief executives of the company’s main operating companies is 100% of annual base salary. Maximum bonuses for other senior executives range downward from that level. Receiving the maximum requires the achievement of very challenging financial targets set by the committee. The targets for 1999 related to the company’s stated goals of increasing earnings per share, revenue growth, margin improvement and cash generation. In the case of Greg Dyke, part of his bonus also related to the performance of Pearson Television.

The committee will continue to review the bonus plans and reserves the right to revise the bonus limits and targets in the future. The committee may also award individual discretionary bonuses, but none were awarded for 1999. Bonuses do not form part of pensionable earnings.

Annual bonus share matching plan The annual bonus share matching plan permits executive directors and senior executives around the Group to take up to 50% of any after tax annual bonus in the form of Pearson shares which, if held for certain specified periods of time, will be matched by the company on a gross basis. Details of directors’ matching awards are set out in tables 3 and 4 on pages 54 and 55 of this report.

Long-term incentives Long-term incentive plans align the interests of directors and executives with those of shareholders. The committee’s view is that if shareholders do well, this should be reflected in the remuneration of senior executives. The committee reviews the operation of long-term incentive plans on a regular basis, taking into account legislative and regulatory developments, particularly with regard to performance targets and evolving best practice.

Reward plan At the AGM on 30 April 1999, shareholders approved the new Pearson Reward Plan. The plan has two elements: Pearson Premium Options (PPOs) linked to the rise in the Pearson share price over three to seven years and Pearson shares in the form of Pearson Equity Incentives (PEIs) linked to the three-year cumulative growth in Pearson’s free cash flow (being operating cash flow less tax liabilities on operating activities and interest paid). The first grant under the plan was made in June 1999 and the grants to executive directors are shown in tables 3 and 4 on pages 54 and 55 of this report.

Executive directors and managers covered by the new plan are not eligible for grants of conventional options under the executive share option plan in any year in which they receive an award under the reward plan.

Share option plans Options at market value at the date of grant are granted to eligible employees not covered by the new Reward Plan based on guidelines approved by the committee. These guidelines govern the total number of options which may be granted and the frequency of awards and ensure that the progression to maximum awards are within the individual and overall limits authorised by shareholders.

Incentive share plan The incentive share plan was introduced in 1993 to reward executives of the Group based on the performance of the company over the medium to longer term as measured by total shareholder return relative to the average of the FT-SE 100 total return index.

The three-year performance period for the incentive share plan award made in 1997 ended on 31 December 1999. Since Pearson’s total shareholder return out-performed that of the FT-SE 100 by 105% over the period and Pearson’s adjusted earnings per share for 1999 were higher than those for 1996, 150% of the shares awarded in 1997 have been released to participants. There is one further outstanding award, relating to Lord Stevenson, covering the five-year performance period May 1997 to April 2002. No new awards have been or will be made under the incentive share plan.

Service contracts All executive directors have agreements which can be terminated by the company on 12 months’ notice. In the case of early termination of their contracts by the company without cause, these contracts provide for liquidated damages equivalent to 12 months’ base salary, benefits and a proportion of bonus. During the year, no material changes were made to the service contracts of the executive directors. Non-executive directors do not have service contracts.

Non-executive directors’ remuneration Fees for non-executive directors are determined by the full board with regard to market practice and within the restrictions contained in the articles of association. Fees are reviewed annually with the help of outside advice. Non-executive directors receive no other pay or benefits (other than reimbursement for expenses incurred in connection with their directorship of the company) and do not participate in the company’s long-term incentive plans.

Since January 1995, non-executive directors have received an annual fee of £25,000 each. One overseas-based director is paid a supplement of £7,000 per annum. The non-executive directors who chair the personnel and audit committees each receive an additional fee of £5,000 per annum.

Retirement benefits The highest paid director, Marjorie Scardino, has pension arrangements comprising defined benefit and defined contribution arrangements in the US. She participates in the funded, approved Pearson Inc. Pension Plan. This is a non-contributory final salary pension arrangement providing a lump sum convertible to a pension on retirement. The lump sum currently accrues at 6% of capped compensation. In addition, she participates in an unfunded, unapproved defined contribution arrangement, which provides a benefit based on an annual notional company contribution of 25% of base salary. This plan is non-contributory. The company also contributed $4,800 to the Pearson Inc. funded, approved, defined contribution 401(k) arrangement and $17,700 to the Pearson Inc. Excess Savings and Investment Plan.

David Bell and John Makinson are members of a defined benefit section of the Pearson Group Pension Plan (the Plan), with a member contribution rate of 5% of pensionable salary. David Bell is eligible for a pension from the Plan of two-thirds of final base salary at normal retirement date due to his previous service with the Financial Times. It is anticipated that John Makinson will receive a pension of two-thirds of capped salary at normal retirement date (inclusive of benefits transferred from his previous pension plan). John Makinson is subject to the pensions earnings cap introduced by the Finance Act 1989. John Makinson participates in the company’s Funded Unapproved Retirement Benefits Scheme (FURBS) arrangements, under which a contribution equivalent to 31.1% of his annual base salary is made by the company to compensate him for pension benefits which cannot be provided from the Plan because of the pensions cap regulations.

Greg Dyke left Pearson on 17 September 1999. He was a member of a defined benefit section of the Plan, with a member contribution rate of 5% of pensionable salary. He was subject to the pensions earnings cap and received a supplement of 50% of his annual base salary to compensate him for the loss of pension provision as a result of pensions cap regulations.

All the UK executive directors are also eligible for dependants’ pensions and a lump sum payment on death in service. Details of directors’ pension arrangements are set out in table 2 on page 53 of this report.

Remuneration of the directors Excluding contributions to pension funds and related benefits set out in table 2, directors’ remuneration was as follows:

‘other’ excludes pension contributions.
Includes amounts to former directors.

Note : Marjorie Scardino was the highest paid director in 1999. Her base salary increased by 4.5% from £445,000. Her total remuneration, including pension contributions, amounted to £2,655,649. Over half of this total (£1,533,074) relates to a gross award of 66,342 shares under the long-term incentive share plan (ISP), and relates to performance over a three-year period. She received the maximum payout because, over the last three years, total returns to Pearson’s shareholders have grown by 164%, more than twice the rate of growth (80%) achieved by the FT-SE 100 index. The value of the shares released to Marjorie Scardino and David Bell is based on the middle market value of Pearson shares of £23.03 on 3 March 2000 (being the latest practicable date prior to the announcement of the results for the final year of the three-year performance period). For Marjorie Scardino, David Bell, Greg Dyke and John Makinson, ‘other’ emoluments include company car and health care benefits. Also included in ‘other’ emoluments for Marjorie Scardino is £34,180 in respect of housing costs.

Or date of leaving, if earlier.

Note 1 : The increase in accrued pension during the year excludes any increase for inflation. Accrued pension is that which would be paid annually on retirement at 62, the normal retirement age under the Pearson pension plan in the UK, based on service to 31 December 1999 (David Bell and John Makinson) or to 17 September 1999 (Greg Dyke’s date of leaving). As members of the UK plan, David Bell and John Makinson have, and Greg Dyke had, the option to pay Additional Voluntary Contributions (AVCs). They did not pay any AVCs in 1999.

Note 2 : The column headed ‘other pension and related benefits costs to the company over the period’ comprises payments to FURBS and pension and insurance supplements for UK benefits. For US benefits, this includes life assurance, Group term life cover, company contributions to the Pearson Inc. 401(k) and excess savings and investment plans and notional contributions to Marjorie Scardino’s notional defined contribution plan.

Further information relating to directors’ pensions:

Early retirement : UK directors and other UK employees may retire before the normal retirement age of 62 and receive an immediate pension provided they have obtained company consent. In such cases, the pension entitlement from the UK plan will be scaled down to reflect the shorter service in accordance with normal actuarial practice. Early retirement reduction factors will also be applied to the accrued pension if retirement occurs before age 60. The earliest any director can retire and receive an immediate pension from the UK plan other than on ill-health grounds is age 50. Under the company’s FURBS arrangements, early retirement is possible with company consent from age 50 onwards. The benefit payable will be the amount of the member’s fund at the relevant date. In the US, Marjorie Scardino has a normal retirement age of 65 but may retire with company consent from age 55 with a reduced pension on a broadly equivalent actuarial basis.

Dependants’ pensions : If a UK director dies while in employment before normal retirement age, a spouse’s pension will be payable from the UK plan, or in the absence of a spouse to a financial dependant nominated by the member. The amount of the pension will be one-third of the director’s annual base salary (capped for relevant directors). If a former director dies after leaving service but before retirement, a pension of 50% of the director’s deferred pension will be payable to the spouse or nominated financial dependant. If John Makinson or David Bell die in retirement, the pension payable to their spouse or nominated financial dependant will be 60% of the director’s pension. In the case of Greg Dyke, the relevant percentage is 67%. Children’s pensions may also be payable to dependant children. As a member of the company’s FURBS arrangements, John Makinson’s member’s fund would be paid to his dependants if he died before withdrawing it. Marjorie Scardino’s US plan provides a spouse’s pension on death in service from age 55 and death-in-retirement benefits broadly equivalent to 50% of the member’s pension on early retirement.

Pension increases : John Makinson, David Bell and Greg Dyke are guaranteed post-retirement pension increases at the rate of 5% per annum or the Retail Price Index, if lower. The guaranteed increases relate to the non-Guaranteed Minimum Pension element of the pension. The plan has a recent history of providing discretionary pension increases at the full Retail Price Index rate. The US plans provide no guaranteed post-retirement pension increases for Marjorie Scardino.

Or date of leaving, if earlier.
Michel David-Weill’s interests include 12,560,849 ordinary shares owned by companies associated with Lazard Frères et Cie., Paris.
The number of shares shown represents the maximum number of shares, plus in the case of the incentive share plan accumulated share dividend shares, comprised in the original award which may be transferred to the individual concerned.

Amounts include shares acquired by individuals under the annual bonus share matching plan.
These shares are held in trust and represent the maximum award required to provide the company’s matching contribution of shares in respect of that part of the bonus taken in shares by each director. The shares only vest if the performance and other conditions of the plan are met.

Note : Executive directors of the company, as possible beneficiaries, are also deemed to be interested in Pearson Employee Share Trustee Limited, the trustee of which held 300,936 Pearson ordinary shares of 25p each at 31 December 1999 and also at 6 March 2000.

The award as stated is the maximum number of shares, including share dividends on incentive share plan shares but not on reward plan shares, which may vest, subject to the performance conditions being fulfilled.
3 March 2000 being the latest practicable date prior to the announcement of the results for the final year of the three-year performance period.

Note : Cash dividends may be paid on incentive share plan shares.

Or date of leaving, if earlier.

Note : Shares under option on 31 December 1999 are designated as:  a) where the options are exercisable, and  b) where the options are not yet exercisable. Total combined gain on the exercise of the options for all directors during 1999 amounted to £1,008,168. The register of directors’ interests (which is open to inspection during normal office hours) contains full details of directors’ shareholdings and options to subscribe for shares. Options granted to Greg Dyke in respect of 94,743 shares lapsed during the year. The market price on 30 December 1999 was 2004p per share and the range during the year was 1173p to 2004p per share. Subject to any performance conditions being met, outstanding executive and premium priced options become exercisable on the third anniversary of the date of grant and lapse if they remain unexercised after the tenth. Save for Shares options become exercisable on the third, fifth or seventh anniversary of the start of the contract and lapse if not exercised within six months after that anniversary.

Options are held under the executive and save for shares plans. Premium priced option grants marked * above were made in three tranches under the reward plan and are exercisable between 2001 and 2009. Grants marked ** were made under the Save for Shares plan at a price of 1022p and are exercisable between 2004 and 2005.