Directors’ remuneration report

Executive Directors

Remuneration philosophy and policy

The context for Reed Elsevier’s remuneration policy and practices is set by the needs of a group of global business divisions, each of which operates internationally by line of business. Furthermore, Reed Elsevier’s market listings in London and Amsterdam combined with the majority of its employees being based in the US provides a particular set of challenges in the design and operation of remuneration policy.

Our remuneration philosophy

Reed Elsevier’s guiding remuneration philosophy for senior executives is based on the following precepts:

• Performance-related compensation; this is underpinned by Reed Elsevier’s demanding performance standards.
• Creation of shareholder value; this is at the heart of our corporate strategy and is vital to meeting our investors’ goals.
• Competitive remuneration opportunity; this helps Reed Elsevier attract and retain the best executive talent from anywhere in the world.
• A balanced mix of remuneration between fixed and variable elements, and short and long term performance.
• Aligning the interests of executive directors with shareholders.

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Our remuneration policy

In line with this guiding philosophy our remuneration policy is described below.

• Reed Elsevier aims to provide a total remuneration package that is able to attract and retain the best executive talent from anywhere in the world, at an appropriate level of cost.
• In reaching decisions on executive remuneration, the Committee takes into account the remuneration arrangements and levels of increase applicable to senior management and Reed Elsevier employees generally.
• The Committee considers the social, governance, and environmental implications of its decisions, particularly when setting and measuring performance objectives and targets, and seeks to ensure that incentives are consistent with the appropriate management of risk.
• Total remuneration of senior executives will be competitive with that of executives in similar positions in comparable companies, which includes global sector peers and companies of similar scale and international complexity.
• Competitiveness is assessed in terms of total remuneration (ie salary, short and long term incentives and benefits).
• The intention is to provide total remuneration that reflects sustained individual and business performance; ie median performance will be rewarded by total remuneration that is positioned around the median of relevant market data and upper quartile performance by upper quartile total remuneration.
• The Committee will consider all available discretion to claw back any payouts made on the basis of materially misstated data. With effect from 2009, the rules of all incentive plans have been amended to provide for specific provisions in this regard.

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How the performance measures in the incentives link
to our business strategy

The Committee believes that the main driver of long term shareholder value is sustained growth in profitability. The primary measure of profitability that is used throughout the business is growth in adjusted earnings per share at constant currencies (Adjusted EPS). This performance measure has therefore been adopted as the key driver of performance in our longer term incentives.

Our Annual Incentive Plan is focused on operational excellence as measured by the critical financial measures of revenue, profit and cash generation. In addition, a significant portion of the annual bonus is dependent on performance against a set of key performance objectives (KPOs), including returns metrics appropriate for each business. These are focused on the delivery of strategic priorities which create the essential platform for sustainable growth. These priorities align with the strategic imperatives described elsewhere in this report.

In our Long Term Incentive Plan we also use Total Shareholder Return (TSR) relative to a focused industry peer group. Significant shareholding requirements are a condition of participation in the LTIP programme and of vesting the awards. This increases alignment of interest between our senior executives and our shareholders.

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The balance between fixed and performance related pay

Around 70% of each executive director’s total remuneration package is linked to performance. The elements of the total remuneration package are described here. The following diagram shows the balance between the fixed and variable elements of the remuneration package assuming that target performance will be achieved in 2009.

To illustrate how our levels of compensation are driven by business performance we have produced the chart below (scale in percent of base salary). This illustrates the way in which remuneration payable to an executive director for 2009 would vary from base salary at minimum up to a theoretical maximum under different performance scenarios. For the purposes of this illustration a number of assumptions have been made in relation to share price growth and vesting/payout levels at the different levels of performance.

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Our approach to market positioning and benchmarking

The market competitiveness of total remuneration (ie salary, short and long term incentives and benefits) is assessed against a range of relevant comparator groups as follows:

• Global peers in the media sector which includes those companies in our TSR comparator group set out here.
• UK listed companies of similar size and international scope (excluding those in the financial services sector).
• US listed companies of similar size and international scope (excluding those in the financial services sector).
• Netherlands listed companies of similar size and international scope.

The competitiveness of our remuneration packages is assessed by the Committee as part of the annual review cycle for pay and performance, in line with the process set out below.

• First, the overall competitiveness of the total remuneration packages is assessed. The appropriate positioning of an individual’s total remuneration against the market is determined based on the Committee’s judgement of individual performance and potential.
• The Committee then considers market data and benchmarks for the different elements of the package including salary, total annual cash and total remuneration.
• If it is determined that a total remuneration competitive gap exists, the Committee believes that this should be addressed via a review of performance linked compensation elements in the first instance.
• Benefits, including medical and retirement benefits, are positioned to reflect local country practice.