The Pearson Goals

The operating goals we set at Pearson must meet four criteria. They must be simple, measurable, stretching and consistent. In 1997 we committed to improve the Group’s underlying performance in sales growth, trading margin and cash generation. These performance measures were communicated to everyone who worked at Pearson and still form the basis of our incentive plans around the world. We believe that these measures meet our four criteria. They are easy to understand, not too difficult to calculate, tough to achieve and the same every year.

In addition to these operating goals, we measure the performance of the whole company against three financial benchmarks: EBITDA; adjusted earnings per share; and free cash flow. These measures – which are not so simple but meet the other criteria – are designed to align our objectives with those of our shareholders. For that reason they form the basis of both short and long-term rewards for senior corporate management. The terms are defined later in this section.

Last year, as the numbers and narrative in this report make clear, we didn’t make progress on most of these measures. The recession in advertising and technology markets, which deepened after September 11, meant that underlying sales were no higher than in the previous year. Despite action throughout the Group to reduce costs and conserve cash, the effect of this sales performance rippled through the profit and loss account and cash flow statement, leaving in its wake lower earnings, a lower share price and, for our staff, lower (or no) bonus payments.

But a year of disappointing performance is no reason to soften our commitment to performance targets or to discard any of the specific measures. We have made one presentational change this year, however. As our internet enterprises are increasingly integrated with their related businesses, the identification of internet revenues and costs is becoming more difficult. For 2001 we are reporting on these measures on both a pre-internet and post-internet basis, but from this year onwards we shall be reporting on all our goals after the inclusion of results from internet enterprises. We will continue to report on the performance of individual internet enterprises for which we have set break-even targets until those targets have been reached.

The goals set out on these pages do not represent the sum total of performance measurement at Pearson. Each individual company measures its progress on a wide variety of additional financial and non-financial performance indicators. At the centre, we allocate capital to investments or acquisitions based on an analysis of whether the likely cash flows from the investment will exceed the blended cost of our equity and debt capital. We also vary the weighting we attach to any one of the six goals set out here according to the priorities of the business and the economic climate.