Report on directors’ remunerationSub‐section report on directors’ remuneration

Annual incentives

The committee establishes the annual incentive plans for the executive directors and the chief executives of the company’s principal operating companies, including performance measures and targets. These plans then become the basis of the annual incentive plans below the level of the principal operating companies, particularly with regard to the performance measures used and the relationship between the incentive plan targets and the relevant business unit operating plans.

The committee will continue to review the annual incentive plans each year and to revise the performance measures, targets and individual incentive opportunities in light of current conditions. The committee will continue to disclose details of the operation of the annual incentive plans in the report on directors’ remuneration each year.

Annual incentive payments do not form part of pensionable earnings.

Performance measures
The financial performance measures relate to the company’s main drivers of business performance at both the corporate, operating company and business unit level. Performance is measured separately for each item. For each performance measure, the committee establishes threshold, target and maximum levels of performance for different levels of payout.

With the exception of the chief executive, normally 10% of the total annual incentive opportunity for the executive directors and other members of the Pearson Management Committee is based on performance against personal objectives as agreed with the chief executive. These comprise functional, operational and strategic objectives relevant to the executives’ specific areas of responsibility and inter alia objectives relating to corporate social responsibility.

For 2009, the principal financial performance measures are: sales; operating profit (for the operating companies) and growth in underlying earnings per share for continuing operations at constant exchange rates (for Pearson plc); average working capital as a ratio to sales; and operating cash flow. The selection and weighting of performance measures takes into account the strategic objectives and the business priorities relevant to each operating company and to Pearson overall each year.

Incentive opportunities
Since 2008, the individual annual incentive opportunities for the executive directors, other than the chief executive, have been expressed as absolute cash amounts. The committee, with the advice of the chief executive, determines the aggregate level of annual incentives and individual incentive opportunities taking into account all relevant factors. These factors may include the profitability of the company, individual roles and responsibilities, market annual incentive levels, and the level of stretch in the performance targets.

In each year’s report on directors’ remuneration, the committee describes any changes to target and maximum incentive opportunities for the chief executive and the other executive directors for the year ahead.

For 2009, there is no change to the annual incentive opportunity for the chief executive which remains at 100% of base salary at target and 150% at maximum.

There is also no change to the average target individual incentive opportunity for the other executive directors which is £396,000 (the same as in 2008 on a like-for-like basis at constant exchange rates). The maximum opportunity remains at twice target (as in 2008).

The annual incentive plans are discretionary and the committee reserves the right to make adjustments to payouts up or down if it believes exceptional factors warrant doing so. The committee may also award individual discretionary incentive payments and did so in 2008 for Will Ethridge in recognition of his contributions in such areas as his leadership efforts on the Google settlement and his oversight of Pearson’s global content management programme. See table 1.

For 2008, total annual incentive opportunities were based on Pearson plc and operating company financial performance and performance against personal objectives as follows:

Name Pearson plc Operating
Marjorie Scardino 100%
David Bell 90% 10%
Will Ethridge 45% 35% 20%
Rona Fairhead 30% 60% 10%
Robin Freestone 90% 10%
John Makinson 30% 60% 10%

2008 performance
Performance in 2008 against the relevant incentive plans was as follows:

Incentive plan Performance measure Performance against incentive plan
Between threshold
and target
target and
Pearson plc Sales     Target  
Underlying growth in adjusted earnings per share at constant exchange rates     Target  
Average working capital to sales ratio   Target    
Operating cash flow       Target
Higher Education and Professional Sales     Target  
Operating profit       Target
Average working capital to sales ratio       Target
Operating cash flow       Target
FT Publishing Sales Target      
Operating profit   Target    
Operating cash flow       Target
Pearson VUE Sales     Target  
Operating profit       Target
Average working capital to sales ratio       Target
Operating cash flow       Target
Penguin Group Sales     Target  
Operating margin   Target    
Average working capital to sales ratio       Target
Operating cash flow       Target

Details of actual payouts for 2008 are set out in table 1.