Personnel Committee Report

Pearson’s personnel committee is responsible for approving the remuneration and benefits packages of the executive directors and the chief executives of the main operating subsidiaries. It also recommends the chairman’s remuneration to the board and reviews the Group’s management development and succession plans.

As a result of the committee’s work in 1998, the Company’s package of incentives and rewards now includes bonus and share ownership plans which have strengthened the link between performance and reward and more closely aligned the interests of employees and shareholders.

Share ownership is at the heart of Pearson’s remuneration philosophy. All staff worldwide have been given the opportunity to own Pearson shares through a savings contract linked to a share plan. An executive share option plan covers about 1,000 employees around the world. The Group’s most senior executives are also encouraged to invest their own funds in Pearson shares, again strengthening the links between their own and shareholders’ interests, through the annual bonus share matching plan. In addition to share ownership, staff also may benefit from a Group profit sharing plan which gives employees the chance to receive an annual bonus linked to the Group’s profitability. The report of the committee sets out this philosophy in more detail, particularly as it applies to executive directors.

Composition And Compliance

The committee is chaired by Gill Lewis and its other member is Reuben Mark. Both are non-executive directors. The board will add at least one further independent director to the committee when the board’s complement of non-executive directors is increased as the result of a selection process currently being undertaken by the board.

The London Stock Exchange requires companies to comply with the principles of good governance and the Code. The committee has considered these provisions and believes that the Company has complied throughout the year with Section A on remuneration committees and followed the provisions of Section B in determining remuneration policy for executive directors and senior executives.

Renumeration Policy for Executive Directors

The Company’s executive remuneration policy aims to attract, retain and motivate high calibre senior executives through pay and other arrangements which are competitive and represent best practice. The philosophy that guides the Company’s policy is to help employees own shares and to ensure that the rewards for the most senior executives follow from, and are consistent with, the overall system of compensation that applies to Pearson’s employees. Within a framework of linking reward to performance, the philosophy also seeks to align the interests of directors and senior management with the interests of shareholders by creating an overall compensation system to enable the Company to attract and retain the highest calibre executives worldwide by giving significant rewards but only for outstanding achievement.

The main components of the Company’s remuneration policy 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 1998 related to the Company’s stated goals of increasing earnings per share, revenue growth, margin improvement and cash generation. In the case of two executive directors, David Bell and Greg Dyke, part of their rewards also related to the performance of the Financial Times Group and Pearson Television respectively.

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. For 1998, a discretionary bonus of £100,000 was paid to Marjorie Scardino. For 1998, a special performance-related bonus of £275,000 was paid to Greg Dyke, delivered in the form of Pearson shares which have to be held for three years. Bonuses do not form part of pensionable earnings.

Annual Bonus Share Matching Plan

At the AGM on 1 May 1998, shareholders approved a share matching plan which 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.

Long-Term Incentive

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.

Some changes to the long-term incentive plans are being put to shareholders at the AGM. Details of these changes have been set out in a separate circular to shareholders dated 30 March 1999. The two main reasons for these changes are that the existing long-term incentive plans do not provide a strong enough connection between performance and reward and that, having reorganised Pearson into four complementary businesses all of which are number one or number two in their markets in the world, the Group is now competing internationally for its top executives with reward packages which, at the moment, are not competitive.

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 1996 ended on 31 December 1998. Since Pearson’s total shareholder return out-performed that of the FT-SE 100 by 30% over the period, 150% of the shares awarded in 1996 were released to participants. None of the current directors received an award in 1996, and so none were eligible for a release of shares.

The only outstanding award under this plan was made in 1997. To the extent that the Company has provided funds to the trust for the purchase of shares, provision has been made in the accounts for the costs associated with the plan.

Subject to shareholder approval at the AGM of the new long-term incentive arrangements, no further awards will be made under the incentive share plan.

Share Option Plans

In 1998, shareholders approved at the AGM a new executive share option plan which took account of changes in market practice and institutional share plan guidelines since the previous plans were introduced and which has worldwide application. Options at market value at the date of grant are granted to eligible employees 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. Subject to shareholder approval of the new long-term incentive arrangements, no further awards of share options under the 1998 plan will be made to executive directors.

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' Renumeration

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 $5,000 to the Pearson Inc. funded, approved, defined contribution (401k) arrangement.

David Bell, John Makinson and Greg Dyke 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). Both John Makinson and Greg Dyke are 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 receives 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.

David Veit retired with effect from 1 May 1998. In the US, he participated in the funded, approved Pearson Inc. Pension Plan. He was additionally entitled to a pension supplement under his service agreement. In combination, these arrangements provided a level pension from retirement. The Company also contributed $5,000 to the Pearson Inc. funded, approved, defined contribution (401k) arrangement.

All the UK executive directors are also eligible for dependants’ pensions and a lump sum payment on death in service.