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

Remuneration policy

This report sets out the company’s policy on directors’ remuneration that applies to executive directors for 2009 and, so far as practicable, for subsequent years. The committee considers that a successful remuneration policy needs to be sufficiently flexible to take account of future changes in the company’s business environment and in remuneration practice. Future reports, which will continue to be subject to shareholder approval, will describe any changes in this policy.

We want a performance culture that supports our strategy and goals and incentive programmes that directly reward their achievement. Our strategy is primarily centred on organic growth, and we try and produce that by investing consistently in four areas: content, technology and services, international markets and efficiency. One of the most important measures of our strategy is, of course, financial performance. Here, our goal is to produce hardy, consistent growth in three key financial measures — adjusted earnings per share, cash flow and return on invested capital. We believe those are, in concert, good indicators that we are building the long-term value of Pearson. So those measures (or others that contribute to them, such as operating margins and working capital) form the basis of our annual budgets and plans, and the basis for bonuses and long-term incentives.

The committee selects performance conditions for the company’s various performance-related annual or long-term incentive plans that are linked to the company’s strategic objectives set out above and aligned with the interests of shareholders. The committee determines whether or not targets have been met under the company’s various performance-related annual or long-term incentive plans based on relevant internal information and input from external advisers.

In the light of the prevailing economic conditions and the impact of these on the company’s objectives and strategy, the committee reviewed the policy in 2008 particularly with regard to its approach to annual and long-term incentives.

Our starting point continues to be that total remuneration (base compensation plus annual and long term incentives) should reward both short- and long-term results, delivering competitive rewards for target performance, but outstanding rewards for exceptional company performance.

The committee concluded that no fundamental changes were required to the performance measures used in the company’s annual and long-term incentive plans. The committee would however continue to give careful consideration to the weighting of these measures and the targets that applied taking into account the company’s short- and longer-term strategy.