Palmer believes the Foxes are reaping the rewards from their former boss's decision making.
Pearson was the manager who led the Foxes into the top flight two seasons ago as Championship winners and the 52-year-old kept them there against the odds last term.
This time last year, Pearson's Leicester were seven points adrift of safety, but 12 months and 91 points later they are top of the Premier League by exactly the same margin.
Claudio Ranieri replaced Pearson in the summer and has rightly taken most of the plaudits for the Foxes transformation by Palmer believes the foundations were laid by the Italian's predecessor - his captain at Sheffield Wednesday.
During a discussion about Premier League budgets, the former England midfielder told The Ref Show: "That (Leicester's low budget) was all started by Nige.
"The first year Nige went in there and they give him a load of money, Nige, to spend, and he spent a lot of money but he said the one thing I didn't have was a team - I didn't have a team spirit.
"And if you remember at the end of the season, they whittled players out and he went with good honest players and he got them fit. That's the one thing (I've noticed) - they are a lot fitter than the majority of sides in the Premier League."
Most of Leicester's current squad was constructed during Pearson's three-and-a-half years at the King Power Stadium, though Ranieri is responsible for the signing of key midfielder N'Golo Kante in August.
Yohan Benalouane (currently on loan at Fiorentina), Gokhan Inler, Demarai Gray and Daniel Amartey were also brought to the club by the 64-year-old.