: personnel committee report :

Pearson wants to be the best company to work for in the world and we have made further progress towards this goal in the past year. The personnel committee has been particularly pleased to see that this progress has been recognised in several surveys on both sides of the Atlantic which have singled Pearson out as a leader in its sector.

The personnel committee plays an important part in developing pay and benefits packages to help the company fulfil this goal. 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.

The committee reviewed the company’s approach to management development in the course of the year and welcomed the increased emphasis now being placed on this at all levels. The review concluded that the objectives set in 1999 had been largely met. These were 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. The committee was also pleased to see the increased investment in training and development being made within the company.

The company’s objective 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 four years in increasing the number of its people who own shares or are saving to acquire them. The company has also developed bonus and share ownership plans for executives which underline the fact that employees and shareholders have a common interest in success.

The company operates a profit sharing plan under which all employees (except executive directors) can, at the discretion of the board, receive a cash bonus and Pearson shares based upon the company’s overall profitability. For the past three years, all employees worldwide have been able to acquire 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 executive-type share option plans to approaching 4,000 this year compared with 185 in 1996.

In 2000, Pearson made one-off awards under a special share option programme which the board adopted and introduced on the recommendation of the committee to deal with competitive and employee retention issues in our internet and internet-related businesses.

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 Financial Services Authority 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 2000 related to the company’s stated goals of increasing earnings per share, revenue growth, margin improvement and cash generation. Performance is measured separately for each element and for executive directors for 2000 the thresholds before bonus became payable were increases of 10% in adjusted earnings per share and 7.5% in underlying sales and a cash conversion ratio of 80%. Based on performance against these measures, executive directors received a bonus of 85.9% of salary (out of a potential maximum of 100%).

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 2000. 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 and the company’s adjusted earnings per share increases in real terms by at least 3% per annum, will be matched by the company on a gross basis of one share for every two held after three years and another one for two originally held (i.e. a total of one-for-one) after five years. Details of directors’ matching awards are set out in tables 3 and 4 on pages 52 and 53 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.

Proposals for new long-term incentive arrangements are being put to shareholders at the AGM. Details of these have been set out in a separate circular to shareholders dated 27 March 2001. These arrangements have been designed to enable us to continue to recruit and retain the ablest managers worldwide and to ensure that their performance-related rewards are competitive in the markets in which we operate. As a result, we will be able to provide more focused reward opportunities for a wider group of managers, and to have greater flexibility in designing individual remuneration packages.

Details of Pearson’s existing long-term incentive plans are set out below.

i Reward plan The Pearson Reward Plan has had 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). Two awards have been made under this plan and the grants to executive directors are shown in tables 3, 4 and 5 on pages 52, 53 and 54 of this report.

In the circular to shareholders dated 30 March 1999, it was stated that the minimum rate of growth in free cash flow per share before any vesting of PEIs granted in 1999 took place would be very stretching and would require average growth greater than 10% per annum in excess of 1998 free cash flow. The committee has monitored free cash flow performance over the period and has concluded that the exceptionally high free cash flow for 1998 arising from a cash conversion performance of 102% made a double-digit increase target from the 1998 base unrealistic in the context of the plan. As a consequence, the committee has re-calibrated the targets for the 1999 to 2001 performance period based on the free cash flow for 1998 that would have derived from a good, but more normal, level of cash conversion. The minimum average growth rate of 10% per annum from this revised base remains.

Executive directors and managers covered by the reward plan were not eligible for grants of conventional share options in any year in which they received an award under the reward plan.

ii Executive and special share option plans Options at market value at the date of grant have been granted to eligible employees not covered by the reward plan. Under the executive share option plan, awards are within the individual and overall limits authorised by shareholders. The exercise of options under this plan is subject to a real increase in the company’s adjusted earnings per share of at least 3% per annum over a three-year period.

In the case of the special share option plan applied in 2000, no new shares will be issued to satisfy awards and executive directors were not eligible to participate in it.

iii 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.

There is one outstanding award under this plan, 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 2000, non-executive directors have received an annual fee of £35,000 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. £10,000 of the total fee, or all of the fee in the case of Rana Talwar, is payable in the form of Pearson shares which the non-executive directors have committed to retain for the period of their directorships.

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 $5,100 to the Pearson Inc. funded, approved, defined contribution 401(k) arrangement and $17,400 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.

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 51 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 2000. Her base salary increased by 2.2% from £465,000. Her total remuneration, including pension contributions, amounted to £1,081,182. For Marjorie Scardino, David Bell and John Makinson, ‘other’ emoluments include company car and health care benefits. Also included in ‘other’ emoluments for Marjorie Scardino is £34,660 in respect of housing costs.

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 2000. As members of the UK plan, David Bell and John Makinson have the option to pay Additional Voluntary Contributions (AVCs). They did not pay any AVCs in 2000.

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 in the case John Makinson). 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. Children’s pensions may also be payable to dependent 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 and David Bell 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 appointment, if later.
# Amounts include shares acquired by individuals under the annual bonus share matching plan.
‡ The number of shares shown represents the maximum number of shares, including accumulated share dividends on incentive share plan shares but not on reward plan shares, which may vest, subject to the performance conditions being fulfilled.
† 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 • The number of shares as at 31 December 2000 reflects a rights issue of equity shares during 2000.

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 239,625 Pearson ordinary shares of 25p each at 31 December 2000 and also at 5 March 2001.

Note : On 2 January 2001 Lord Burns, Gill Lewis and Vernon Sankey each acquired 93 shares in the company. On that date, Reuben Mark and Rana Talwar acquired 121 shares and 425 shares respectively. The shares were acquired as part of their directors’ fees.

Interests of directors in listed subsidiaries

At 31 December 2000 Marjorie Scardino, David Bell and John Makinson each held 1,000 shares in Recoletos Compañía Editorial, S.A., all purchased on 2 November 2000. Lord Stevenson held 8,660 shares purchased on 7 December 2000.

* The number of shares shown represents the maximum number of shares, including accumulated share dividends on incentive share plan shares but not on reward plan shares, which may vest, subject to the performance conditions being fulfilled.

Note :The number of shares reflects a rights issue of equity shares during 2000 as shown.

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

Note : The original subscription price has been adjusted (except where this was not permitted) to reflect a rights issue of equity shares during 2000 as shown.

Note :The option prices and market prices have been rounded up to the nearest whole penny.

Note : Shares under option on 31 December 2000 are designated as: a executive options; b Save for Shares options; c premium priced options; and * where the options are exercisable.

Total combined gain on exercise of the options for all directors during 2000 amounted to £402,953. 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. The market price on 29 December 2000 was 1590p per share and the range during the year was 1465.2p to 2301.8p (rights adjusted). 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.