Executive Directors

The total remuneration package

Long Term Incentive Plan (LTIP)

The LTIP rewards value creation via the delivery of sustained earnings growth and superior returns for shareholders.

How the LTIP works

Executive directors are eligible to receive an annual award of performance shares with a target value of up to 135% of salary. The vesting of the award is subject to performance against two measures: Adjusted EPS growth and relative TSR performance over the same three-year performance period. The awards are subject to meeting shareholding requirements and to the executive agreeing to be bound by strict non-compete provisions.

EPS measure

No payout is made under the LTIP unless Reed Elsevier achieves compound Adjusted EPS growth of at least 10% per annum. This is irrespective of the associated TSR performance. Maximum vesting (under the EPS component) is achieved for compound growth of 14% per annum or higher.

TSR measure

The award earned under the EPS component may be increased or decreased by TSR performance measured against a group of industry peers over three years:

• If TSR performance is below median, this will reduce the target award.
• The maximum uplift to the target award will be applied if TSR performance places Reed Elsevier at or above the upper quartile of the comparator group.

The combined effect of the two performance measures is shown in the following table, which sets out the potential vesting as a percentage of the initial target award:

LTIP vesting schedule

The TSR comparator group is made up of global industry peers. The comparators applicable to the outstanding LTIP awards and the 2009 award are set out below.

TSR comparators*

	2009 Award	2008 Award	2007 Award	2006 Award
ChoicePoint
DMGT
Dow Jones
Dun & Bradstreet
Emap
Experian
Fair Issac
Informa
John Wiley & Sons
Lagardere Groupe
McGraw-Hill
Pearson
Reuters Group
Taylor Nelson Sofres
The Thomson Corp
Thomson Reuters
United Business Media
VNU
Wolters Kluwer
WPP Group

* Reflects the composition of the comparator group as at the date of grant.

The Committee considers the above performance conditions to be tougher than normal UK practice because the TSR element can enhance the reward to participants if, but only if, the Adjusted EPS test has first been achieved, as explained above.

The Committee has full discretion to reduce or cancel awards granted to participants based on its assessment as to whether the Adjusted EPS and TSR performance fairly reflects the progress of the business having regard to underlying revenue growth, cash generation, return on capital employed and any significant changes in currency and inflation, as well as individual performance.

To the extent that the underlying shares vest, notional dividends are paid out as a cash bonus at the end of the three-year performance period.

Operation of the LTIP

Numerous mergers and acquisitions have impacted the comparator group companies during the performance cycle. The Committee applies a fair and consistent basis to determine the relative TSR performance of each company for these purposes. Companies which are taken over within six months after the start of a performance period are excluded from the comparator group. For those that are subject to a transaction more than six months into a performance period, any transaction-related share price premium is eliminated and the TSR prior to the transaction is indexed forward using the daily average share price movement for the remaining companies in the peer group.

The averaging period applied for TSR measurement purposes is six months prior to the start of the financial year in which the award is made and the final six months of the third financial year of the performance period.

The TSR of each comparator company is calculated in the currency of its primary listing.

Reed Elsevier’s TSR is taken as a simple average of the TSR of Reed Elsevier PLC and Reed Elsevier NV.

In the event of a change of control, the performance test applied under the LTIP will be based on an assessment by the Committee of progress against the Adjusted EPS and TSR targets at the time the change of control occurs (subject to any rollover that may apply).

Details of LTIP target awards made during 2008 are set out in the share tables in Share based awards. No LTIP awards vested during 2008.

Vesting of 2006 LTIP awards

The 2006 LTIP award will formally vest on 27 February 2009, based on the Committee’s assessment of Adjusted EPS and TSR performance. At the date of this report, the Committee agreed the following performance in relation to each measure.

Compound Adjusted EPS growth over the three-year performance period was an exceptionally strong 12.5% p.a. This figure represents the simple average of the compound growth in the Adjusted EPS of Reed Elsevier PLC and Reed Elsevier NV disclosed in the financial highlights sections of the 2006, 2007 and 2008 annual reports. The performance for 2008 was the strongest Adjusted EPS growth in a decade. The Committee has determined, with assistance from the Audit Committee, that the compound Adjusted EPS performance of 12.5% p.a. is a fair reflection of the quality of earnings and the progress of the business having regard to underlying revenue growth, cash generation, and return on capital. In reaching this determination, the Committee had due regard to the impact of the strategic initiatives during the period designed to enhance long term shareholder returns, including the divestment of Harcourt Education, the acquisition of ChoicePoint, the share repurchase programme and the significant organisational restructuring.

TSR performance over the same three-year period was assessed by the Committee’s external advisor, Towers Perrin, in accordance with a pre-defined methodology, which included specific rules governing companies which de-listed as a result of industry consolidation. The Committee confirmed that the operation of these rules was appropriate and in line with the Committee’s intentions. The report from Towers Perrin showed Reed Elsevier to have attained a 76.4th percentile ranking against the peer group of global competitors.

Based on performance against the combined Adjusted EPS and TSR measures, the target awards under the 2006-08 cycle of the LTIP will therefore be subject to the maximum performance uplift of 189% in accordance with the vesting schedule. The Committee believes that this overall level of vesting is fully justified by the exceptionally strong earnings growth and comparative returns to shareholders achieved over the performance period.

The table below sets out the number of shares in Reed Elsevier PLC (PLC) and Reed Elsevier NV (NV) that will vest in respect of each director (and former directors) together with the notional dividends accrued during the performance period on the shares due to vest.

The aggregate notional dividends per Reed Elsevier PLC and NV ordinary share are £0.500 and €1.212 respectively. These reflect the dividends paid in 2006, 2007 and 2008 and exclude the special distribution made in January 2008 following the sale of Harcourt Education.

The vested awards will be disclosed in the share tables of the 2009 remuneration report.

Andrew Prozes had previously waived his right to participate in the 2009 and 2010 cycles of the LTIP. The Committee has determined that his increased scope of responsibility following the acquisition of ChoicePoint during 2008 justifies an award under future cycles of this plan.

LTIP shareholding requirement

The shareholding requirement for the Reed Elsevier Chief Executive Officer is three times salary and for other executive directors two times salary. Executive directors have five years to build up their shareholding to the required level. The shareholding requirement must be met in order to vest the designated LTIP awards and once met, is a condition of ongoing participation in the LTIP.

Details of directors’ shareholdings, as at 31 December 2008, are set out here. As at 31 December 2008, those directors who were granted an LTIP award in 2006, and who are subject to ongoing shareholding requirements, well exceeded their requirement in order to vest this award in February 2009.