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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No.          )

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Preliminary Proxy Statement

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Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

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Definitive Proxy Statement

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Definitive Additional Materials

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Soliciting Material under §240.14a-12

 

W.W. Grainger, Inc.

(Name of Registrant as Specified In Its Charter)

 

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LOGO

                                                                                                              

  W.W. GRAINGER, INC.
100 GRAINGER PARKWAY,
LAKE FOREST, ILLINOIS 60045-5201
(847) 535-1000

March 13, 2015

Dear Grainger Shareholder:

The W.W. Grainger, Inc. 2015 annual meeting of shareholders will be held at our headquarters located at 100 Grainger Parkway, Lake Forest, Illinois (see map overleaf), on Wednesday, April 29, 2015, at 10 A.M. (CDT).

At the meeting we will report on our operations and other matters of current interest. We also will present a slate of nominees for election as directors as well as proposals to ratify the appointment of our independent auditor, to consider and hold an advisory vote on the compensation of our Named Executive Officers, and to approve the W.W. Grainger, Inc. 2015 Incentive Plan. The Board of Directors and management cordially invite you to attend.

The formal notice of the annual meeting and the proxy statement follow. Whether or not you plan to attend the meeting, please ensure that your shares are represented by giving us your proxy. You can do so by telephone, by Internet, or by signing and dating the enclosed proxy form and returning it promptly in the envelope provided.

Sincerely,


/s/ J. T. RYAN

James T. Ryan
Chairman of the Board, President
and Chief Executive Officer

 

 

YOUR VOTE IS IMPORTANT

A majority of the outstanding shares entitled to vote on a matter must be represented either in person or by proxy to constitute a quorum for consideration of that matter at the annual meeting of shareholders. If your shares are held by a broker, unless you provide specific voting instructions, your broker will not be able to vote your shares for the election of directors, on the advisory vote related to executive compensation, on the W.W. Grainger, Inc. 2015 Incentive Plan or on other non-routine matters.

Please make sure your shares are voted.

                2015 PROXY STATEMENT W.W. GRAINGER, INC.                      

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LOGO

 

 

W.W. GRAINGER, INC.
2015 Annual Meeting of Shareholders
Wednesday, April 29, 2015—10 A.M. (CDT)
Location: W.W. Grainger, Inc.
100 Grainger Parkway
Lake Forest, Illinois 60045-5201
(847) 535-1000

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LOGO

                                                                                                              

  W.W. GRAINGER, INC.
100 GRAINGER PARKWAY,
LAKE FOREST, ILLINOIS 60045-5201
(847) 535-1000

NOTICE OF

ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD

APRIL 29, 2015

The annual meeting of shareholders of W.W. Grainger, Inc., will be held at its headquarters at 100 Grainger Parkway, Lake Forest, Illinois (see map on previous page), on April 29, 2015, at 10 A.M. (CDT) for the following purposes:

The Board has fixed the close of business on March 2, 2015, as the record date for the meeting. Shareholders may vote either in person or by proxy.

By order of the Board of Directors.

D. L. Rawlinson
Corporate Secretary
Lake Forest, Illinois
March 13, 2015

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 29, 2015

Grainger's Proxy Statement and Annual Report on Form 10-K are available in the 2015 Annual Shareholder Meeting/Proxy Information section of Grainger's website at http://www.grainger.com/investor and also may be obtained free of charge on written request to the Corporate Secretary at Grainger's headquarters, 100 Grainger Parkway, Lake Forest, Illinois 60045-5201.

                2015 PROXY STATEMENT W.W. GRAINGER, INC.                      

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LOGO

W.W. GRAINGER, INC.
100 Grainger Parkway
Lake Forest, Illinois 60045-5201
(847) 535-1000

PROXY STATEMENT

Table of Contents

 
  Page

Annual Meeting Agenda and Voting Recommendations

  1

Introduction

  2

Directors

  6

Recommending Candidates for Board Membership

  6

Director Independence

  6

Annual Election of Directors

  7

Nominees and Director Experience, Qualifications, Attributes, and Skills

  7

Board Diversity

  15

Board of Directors and Board Committees

  15

Leadership Structure

  18

Board and Committee Evaluations

  20

Board's Role in Risk Oversight

  20

Director Compensation

  22

Ownership of Grainger Stock

  24

Section 16(a) Beneficial Ownership Reporting Compliance

  25

Report of the Audit Committee of the Board

  26

Audit Fees and Audit Committee Pre-Approval Policies and Procedures

  27

Report of the Compensation Committee of the Board

  28

Fees for Independent Compensation Consultant

  29

Compensation Discussion and Analysis

  30

Summary Compensation Table

  48

Grants of Plan-Based Awards Table

  50

Outstanding Equity Awards at Fiscal Year-End Table

  51

Stock Option Exercises and Stock Vested Table

  52

Pension Benefits Table

  53

Nonqualified Deferred Compensation Table

  53

Other Potential Post-Employment Payments Tables

  57

Equity Compensation Plans

  63

Transactions with Related Persons

  64

Proposal to Ratify the Appointment of Independent Auditor

  65

Proposal to Consider and Hold an Advisory Vote on the Compensation of Grainger's Named Executive Officers

  66

Proposal to Approve the W.W. Grainger, Inc. 2015 Incentive Plan

  67

Appendix A—Categorical Standards for Director Independence

  A-1

Appendix B—W.W. Grainger, Inc. 2015 Incentive Plan

  B-1
                2015 PROXY STATEMENT W.W. GRAINGER, INC.                      

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Annual Meeting Agenda and Voting Recommendations

Management Proposals


  Board Voting
Recommendation


  Page
Reference
(for more
detail)

Election of 11 directors

      FOR EACH DIRECTOR NOMINEE       7

Ratification of the appointment of Ernst & Young LLP as independent auditor for the year ending December 31, 2015

    FOR     65

Advisory vote on the compensation of Grainger's Named Executive Officers

      FOR       66

Approval of the W.W. Grainger, Inc. 2015 Incentive Plan, under which Grainger may provide equity and other awards to its employees and directors

    FOR     78
                2015 PROXY STATEMENT W.W. GRAINGER, INC.                      1

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Introduction

What is the purpose of this proxy statement?

This proxy statement relates to Grainger's 2015 annual meeting of shareholders to be held on April 29, 2015, and any adjournment of that meeting to a later date. It contains information intended to help you make your voting decisions. We are sending the proxy statement to you because Grainger's Board of Directors is soliciting your proxy to vote your shares at the meeting. The mailing of the proxy statement and other proxy-soliciting materials to you and other shareholders began on or about March 13, 2015.

What matters are scheduled to be presented?

Who is entitled to vote?

Holders of shares of common stock outstanding on Grainger's books at the close of business on March 2, 2015, the record date for the meeting, may vote. There were 67,152,257 shares of common stock outstanding on that date.

If my shares are held in street name can my broker vote for me?

Unless you have given specific voting instructions to your broker, your broker cannot vote your shares on the election of directors, on the advisory vote related to executive compensation, on the approval of the W.W. Grainger, Inc. 2015 Incentive Plan or on any non-routine matters.

What is the difference between holding shares as "shareholder of record" and as "beneficial owner"?

If your shares are registered directly in your name with Grainger's transfer agent, Computershare Trust Company, N.A., you are the shareholder of record with respect to those shares and you have the right to instruct us directly how to vote your shares or to vote in person at the meeting.

If your shares are held in street name by a brokerage firm, bank, or other nominee, you are the beneficial owner of the shares. Your nominee is required to vote your shares according to your direction. If you do not instruct your nominee how you want your shares voted, your shares cannot be voted for the election of directors, on the advisory vote on the compensation of Grainger's Named Executive Officers, or on the approval of the W.W. Grainger, Inc. 2015 Incentive Plan. Please contact your brokerage firm, bank, or other nominee with instructions to vote your shares for the election of directors and on other matters to be considered at the meeting.

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How many votes do I have?

You have the right to cumulative voting in the election of directors. This means that you have a number of votes in the election equal to the number of shares you own multiplied by the number of directors being elected. You can cast those votes for the nominees as you choose. For example, you may cast all your votes for one nominee or you may apportion your votes among two or more nominees.

In any matter other than the election of directors, each of your shares is entitled to one vote.

Does Grainger have majority voting for election of directors?

Yes. Directors are elected by the votes of a majority of the shares represented in person or by proxy at the meeting and entitled to vote.

What voting standard applies to the ratification of the appointment of independent auditor?

Ratification of the appointment of independent auditor requires the affirmative votes of a majority of the shares represented in person or by proxy at the meeting and entitled to vote.

What voting standard applies to the advisory vote on the compensation of the Named Executive Officers?

Although the shareholders' vote is advisory and therefore non-binding, the vote on the compensation of the Named Executive Officers—Grainger's five highest paid officers whose compensation is discussed in the Compensation Discussion and Analysis section of this proxy statement—is determined by the votes of a majority of the shares represented in person or by proxy at the meeting and entitled to vote.

How frequently does Grainger conduct an advisory vote on the compensation of its Named Executive Officers?

The Board of Directors has determined to hold an advisory vote on the compensation of the Named Executive Officers at every annual meeting of shareholders.

What voting standard applies to the approval of the W.W. Grainger, Inc. 2015 Incentive Plan?

Approval of the W.W. Grainger, Inc. 2015 Incentive Plan requires the affirmative votes of a majority of the shares represented in person or by proxy at the meeting and entitled to vote.

What if I don't indicate my voting choices?

If Grainger receives your proxy in time to permit its use at the meeting, your shares will be voted in accordance with the instructions you indicate. If we have received your proxy and you have not indicated otherwise, your shares will be voted as recommended by Grainger's Board. Specifically, your shares will be voted, either individually or cumulatively:

If you are a beneficial owner and the shares you own are held in street name by a brokerage firm, bank, or other nominee you must specifically instruct your nominee how you want your shares voted for the election of directors, on the advisory resolution on the compensation of Grainger's Named Executive Officers, and on the approval of the W.W. Grainger, Inc. 2015 Incentive Plan; otherwise your nominee is not allowed to vote your shares. Please contact your brokerage firm, bank, or other nominee with instructions to

                2015 PROXY STATEMENT W.W. GRAINGER, INC.                      3

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vote your shares for the election of directors and on other matters to be considered at the meeting.

How does discretionary voting apply?

Grainger is not aware of any matter not described in this proxy statement that will be presented for consideration at the meeting. If another matter is properly presented, your shares will be voted on the matter in accordance with the judgment of the person or persons voting the proxy unless your proxy withholds discretionary authority.

May I revoke my proxy?

Yes. You may revoke your proxy at any time before the voting at the meeting. You can do so in one of the following ways:

What does it mean if I receive more than one set of proxy materials?

Receiving multiple sets of proxy-soliciting materials generally means that your Grainger shares are held in different names or in different accounts. You must vote all of the proxy requests to ensure that all your shares are voted.

What constitutes a quorum at the meeting?

A majority of the outstanding shares entitled to vote on a matter, whether present in person or by proxy, constitutes a quorum for consideration of that matter at the meeting. A quorum is necessary for valid action to be taken on the matter. Your shares will be present by proxy and count toward the quorum if you give us your proxy by telephone, by Internet, or by signing, dating, and returning a proxy form.

Describe what types of shareholder engagement occurred in 2014?

Grainger has a very expansive shareholder engagement process. We hosted our annual investor day in November with over 75 investors in attendance and several hundred via webcast. In addition, we presented at 13 investor conferences and met with over 500 firms and over 800 unique investors in 2014. Our investor outreach includes both existing and potential shareholders and we ensure that we meet with at least 85% of our largest investors each year. We also meet with 90% of our top 15 investors between January and April prior to our annual shareholder meeting to answer any questions they may have regarding company strategy, results, governance or executive compensation. Management, including the Chairman/CEO, CFO and the two top operating leaders, actively engages with investors throughout the year, in addition to the investor relations team.

Who pays the costs of soliciting proxies?

Grainger will pay all the costs of soliciting management proxies. Brokerage firms, custodians, nominees, fiduciaries, and other intermediaries are being asked to forward the proxy-soliciting materials to beneficial owners of Grainger common stock and to obtain their authority to give proxies. Grainger will reimburse these intermediaries for their reasonable expenses.

In addition to mailing proxy-soliciting materials, Grainger's directors, officers, and regular employees may solicit proxies personally, by telephone, or by other means. They will not receive additional compensation for these services, other than normal overtime pay, if applicable. Representatives of Grainger's transfer agent may also solicit proxies. Grainger

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additionally has employed D.F. King & Co., Inc. to help solicit proxies and will pay that firm approximately $7,000 for its services, plus reasonable costs and expenses.

Where can I find the voting results?

We will report the voting results on either a Form 10-Q or on a Form 8-K within four business days after the end of our annual meeting.

How do I submit a shareholder proposal or directly nominate a director at the 2016 annual meeting?

If you wish to have a shareholder proposal included in Grainger's proxy-soliciting materials for the 2016 annual meeting of shareholders, please send a notice of intent to submit your proposal at that meeting to the Corporate Secretary at Grainger's headquarters. The notice, including the text of the proposal, must be in writing, signed, and in compliance with the timing and other requirements of the proxy rules of the Securities and Exchange Commission. For a shareholder proposal relating to the 2016 annual meeting to be timely, Grainger must receive the notice no later than November 14, 2015.

Grainger's by-laws require written notice concerning a shareholder submission of a proposal or a shareholder nomination of a person for election as a director at a meeting of shareholders. For a shareholder proposal, certain information about the shareholder and the proposal is required. For the submission of a proposal, the notice must be furnished generally not less than 90 days and not more than 120 days before the anniversary date of the prior year's annual meeting. Likewise, for a shareholder nomination, certain information about the shareholder and the nominee is required. For a nomination to be considered at Grainger's 2016 annual meeting, the notice must be furnished no later than November 14, 2015.

A copy of the by-laws is available in the Governance section of Grainger's website at www.grainger.com/investor or may be obtained free of charge on written request to the Corporate Secretary at Grainger's headquarters, 100 Grainger Parkway, Lake Forest, Illinois 60045-5201.

                2015 PROXY STATEMENT W.W. GRAINGER, INC.                      5

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Directors

Recommending Candidates for Board Membership

The Board Affairs and Nominating Committee recommends candidates for Board membership based on a number of criteria, including ethical standards, judgment, independence and objectivity, strategic perspective, record of accomplishment, business knowledge and experience applicable to Grainger's goals. Suggestions as to candidates are received from members of the Board Affairs and Nominating Committee, other directors, employees, search firms and others, including shareholders.

Any shareholder who would like the Board Affairs and Nominating Committee to consider a candidate for Board membership should send a letter of recommendation containing the name and address of the proposing shareholder and of the proposed candidate and setting forth the business, professional, and educational background of the proposed candidate, as well as a description of any agreement or relationship between the proposing shareholder and proposed candidate. A written consent of the proposed candidate to being identified as a nominee and to serve as a director if elected must also be provided. The communication should be sent by mail or other delivery service to the attention of the Corporate Secretary at Grainger's headquarters.

Director Independence

The Board has adopted "categorical standards" to assist it in making independence determinations of nominees. The categorical standards are intended to help the Board in determining whether certain relationships between nominees and Grainger are "material relationships" for purposes of the New York Stock Exchange (NYSE) independence standards. The categorical standards adopted by the Board have more restrictive thresholds than the NYSE's bright line revenue test for non-independence. The categorical standards adopted by the Board are set forth in Appendix A to this proxy statement and are also available in the Governance section of Grainger's website at www.grainger.com/investor.

In the ordinary course of its operations during 2014, Grainger engaged in various types of transactions with organizations with which Grainger directors are associated in their principal business occupations or otherwise. Specifically, in the ordinary course of its business during 2014, Grainger bought products and/or services from, or sold products and/or services to, companies with which Messrs. Adkins, Hall, Levenick, Santi, and Slavik are or were associated as executive officers or otherwise as of December 31, 2014. In no instance did the total amount of the purchases from or sales to any such company during 2014 represent more than 0.236% of the projected consolidated gross revenues of that company for the year or more than 0.381% of the consolidated gross revenues of Grainger for the year.

In addition, as part of its overall 2014 charitable contributions program, Grainger made donations to tax-exempt organizations with which Messrs. Hall, Novich, and Santi serve as officers, directors or trustees. In no instance did the total amount of the contributions to such an organization during 2014 represent more than 0.062% of that organization's projected total receipts for the year.

The Board considered these transactions and donations in assessing the independence of the directors involved against the NYSE's independence standards and Grainger's categorical standards, and determined that none of the directors had any direct or material indirect interest

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in the transactions and donations. Similar transactions and donations are likely to occur in the future, and are not expected to impair the independence of the directors involved.

The Board has determined that each of Messrs. Adkins, Anderson, Hall, Levenick, Novich, Roberts, Rogers, Santi, and Slavik, and Ms. Hailey has no material relationship with Grainger within the meaning of the NYSE independence standards and Grainger's categorical standards. The other nominee, Mr. Ryan, is a Grainger employee and, accordingly, is not considered "independent." All of the nominees except for Mr. Adkins, who was appointed in July 2014, previously were elected by the shareholders at the 2014 annual meeting of shareholders. The Board Affairs and Nominating Committee identified Mr. Adkins as a potential director with the assistance of a search firm.

Annual Election of Directors

Grainger's directors are elected each year at the annual meeting. As set forth in the Operating Principles for the Board of Directors, Grainger expects all directors and nominees to attend annual meetings. At the 2014 annual meeting, all of the persons serving as directors at the time were in attendance. In addition, all directors attended at least 75% of Board and Committee meetings.

Eleven directors have been nominated for election at this year's annual meeting of shareholders. All directors are elected for a one-year term. Each director will therefore serve until the 2016 annual meeting of shareholders or until his or her successor has been qualified and elected. Details concerning the nominees are provided below.

Majority (rather than plurality) voting applies to Grainger's director elections. Accordingly, directors are elected by the votes of a majority of the shares of Grainger common stock represented in person or by proxy at the meeting and entitled to vote. A shareholder directing to withhold authority for re-election of a director will have the same effect as votes against the election of that director. Assuming a quorum is present, broker non-votes will not affect the outcome of the vote. If any of the nominees for director mentioned below should be unavailable for election, a circumstance that is not expected, the person or persons voting your proxy may exercise discretion to vote for a substitute nominee selected by the Board.

Nominees and Director Experience, Qualifications, Attributes, and Skills

The nominees have provided the following information about themselves, including their ages in March 2015. Each nominee has provided information on their relevant background that includes their experience for at least the past five years.

Grainger's directors and nominees have varied experiences, qualifications, attributes, and skills that assist them in providing guidance and oversight to Grainger's management as it operates business through a network of branches, distribution centers, sales representatives, direct marketing, including catalogs, and a variety of electronic and Internet channels and with more than 23,600 employees in the United States, Canada, Europe, Asia, and Latin America. With 2014 sales of $10 billion and as a leading broad-line distributor of maintenance, repair and operating supplies and other related products and services in North America and operations in Europe, Asia and Latin America, Grainger has a diverse customer base necessitating depth and breadth of product lines and offerings.

The Board has identified experience, qualifications, attributes, and skills that in light of Grainger's business and structure are relevant to service on the Board of Directors. The Board considers nominees who have demonstrated integrity and accomplishment in their business and professional careers and who possess the necessary experience, qualifications, attributes, and skills to contribute to the Board and Grainger. In addition, ongoing director education, whether provided by Grainger or by a third party, are important to service on the Board of Directors. Current nominees have engaged in continuing education and other programs to remain current in their particular areas of expertise as well as to further their understanding of corporate governance and in other matters relevant to Grainger.

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The Board believes the experience, qualifications, attributes, and skills of each nominee qualify the nominee for service on the Board of Directors. Each of the current nominees has significant leadership experience in large, multifaceted organizations. This experience includes developing and executing corporate strategy, overseeing operations, and managing risks in organizations similar in size or complexity to Grainger. The summary provided below is not a comprehensive statement of each nominee's background but is provided to describe the primary experiences, qualifications, attributes, and skills that led the Board to nominate each individual.

PHOTO

Rodney C. Adkins

Rodney C. Adkins, age 56, is President of 3RAM Group LLC, a privately held company specializing in capital investments, business consulting services and property management. Formerly, Mr. Adkins was Senior Vice President of International Business Machines Corporation (IBM), a leading manufacturer of information technologies, having served in that position from 2007 until 2014. In his over 30-year career with IBM, Mr. Adkins held a number of development and management roles, including Senior Vice President of Corporate Strategy from 2013 to 2014, Senior Vice President of Systems and Technology Group from 2009 to 2013, Senior Vice President of Development & Manufacturing from 2007 to 2009, and Vice President of Development of IBM Systems and Technology Group from 2003 to 2007. He is also a director of PPL Corporation and United Parcel Service, Inc. where he serves on the Audit Committee. During the past five years, Mr. Adkins served on the board of directors of Pitney Bowes Inc. Mr. Adkins, an independent director, was first appointed a director of Grainger in July 2014 and is a member of the Compensation Committee and a member of the Board Affairs and Nominating Committee.

Director Qualifications

    §
    Mr. Adkins served as the Senior Vice President of a global information technology and innovation-focused public company and held senior positions responsible for development, management and strategy. Over the course of 30 years with this company, he developed deep product development and brand management experience. He also gained significant experience managing and understanding corporate finance, financial statements and accounting through his many operational roles with the company. Additionally, Mr. Adkins managed the company's supply chain and procurement, giving him direct insight into global trade and supply chains, and the role of distributors in those efforts. Mr. Adkins has extensive experience in corporate governance matters and is a director with two public companies, in addition to Grainger, and serves on the audit committee of one of them.
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PHOTO

Brian P. Anderson

Brian P. Anderson, age 64, is the former Executive Vice President of Finance and Chief Financial Officer of OfficeMax Incorporated, a distributor of business-to-business and retail office products, having served in that position until January 2005. Prior to assuming this position in 2004, Mr. Anderson was Senior Vice President and Chief Financial Officer of Baxter International Inc., a position he assumed in 1998. He is also a director of A. M. Castle & Co., for which he is Chairman of the Board as well as a director of James Hardie Industries SE where he chairs the audit committee and serves on the remuneration committee, and PulteGroup, Inc. where he chairs the audit committee and serves on the nominating and governance committee. He is a director of The Nemours Foundation. Mr. Anderson, an independent director, was first elected a director of Grainger in 1999 and is a member of the Audit Committee, an "audit committee financial expert," and a member of the Board Affairs and Nominating Committee.'

Director Qualifications

    §
    Mr. Anderson served as the chief financial officer (CFO) of two public companies, held finance positions including corporate controller and vice president of audit and was an audit partner at an international public accounting firm. As a result, Mr. Anderson has in-depth knowledge of accounting and finance as well as familiarity in risk management and risk assessment and the application of the Committee of Sponsoring Organizations of the Treadway Commission internal controls framework. In addition, while serving as a CFO of one of the two public companies, Mr. Anderson had primary responsibility for the supply chain and logistics of that company. Mr. Anderson also has in-depth experience in corporate governance matters and is the Chairman of the Board of a public company as well as a member of the governance committee of two other public companies. In addition, Mr. Anderson serves on the audit committee of three public companies, including Grainger.
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PHOTO

V. Ann Hailey

V. Ann Hailey, age 64, is the former President, Chief Executive Officer and Chief Financial Officer of Famous Yard Sale, Inc., an online marketplace for celebrities to connect with their fans by offering items in a virtual yard sale format, having served in that position until March 2014. Formerly, Ms. Hailey served as Chief Financial Officer of Gilt Groupe, an Internet retailer of discount luxury goods from January 2009 until January 2010. Previously she was with Limited Brands, Inc., where she served as Executive Vice President and Chief Financial Officer from 1997 to 2006 and as Executive Vice President, Corporate Development from 2006 to 2007. Prior to joining Limited Brands in 1997, Ms. Hailey was Senior Vice President and Chief Financial Officer of the Pillsbury Company. She is also a director of Avon Products, Inc. and serves on its audit and finance committees, and is a director of Realogy Holdings Corp where she chairs its audit committee and is a member of its nominating and corporate governance committee. During the past five years, Ms. Hailey served on the board of directors of the Federal Reserve Bank of Cleveland. Ms. Hailey, an independent director, was first elected a director of Grainger in 2006 and is a member of the Audit Committee, an "audit committee financial expert," and a member of the Board Affairs and Nominating Committee.

Director Qualifications

    §
    Ms. Hailey has spent her career in consumer businesses and has extensive financial and operations experience. In particular, Ms. Hailey possesses broad expertise in strategic planning, branding and marketing, retail goods and sales and distribution on a global scale. Ms. Hailey's positions as CFO, her current and prior service on the audit committees of other companies and as Audit Chair of the Cleveland Federal Reserve Bank as well as her accounting and financial knowledge, also impart significant expertise to the board, including an understanding of financial statements, corporate finance, accounting and capital markets. Further, as an executive at internet-based businesses, Ms. Hailey has added expertise in internet site development and selling as well as new venture management and funding.
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PHOTO

William K. Hall

William K. Hall, age 71, is a founding partner of Procyon Advisors, LLP and former Chairman of Procyon Technologies, Inc., a privately owned, Chicago-based holding company. Prior to assuming that position in 2000, Mr. Hall was Chairman and Chief Executive Officer of Falcon Building Products, Inc., a manufacturer and distributor of products for residential and commercial construction and home improvement markets. He currently serves on the boards of Actuant Corporation and Stericycle, Inc. and serves on the audit committee of both of those companies. During the past five years, Mr. Hall served on the board of directors of A. M. Castle & Co. Mr. Hall, an independent director, was first elected a director of Grainger in 2005 and is a member of the Audit Committee, an "audit committee financial expert," and a member of the Board Affairs and Nominating Committee.

Director Qualifications

    §
    Mr. Hall has served as a senior executive at five multinational enterprises and as Chief Executive Officer (CEO) of three manufacturing companies. Included in his responsibilities was the management of foreign operations. Mr. Hall also served as the chief marketing officer of a large manufacturing company for over five years. Through his years of service with public and private companies as well as on a university's faculty, Mr. Hall has in-depth experience in finance, strategy, business ethics and governance. In addition, Mr. Hall has extensive experience as a strategic management consultant providing planning services, including analyzing and evaluating company financials and assessing acquisition and divestiture opportunities.

PHOTO

Stuart L. Levenick

Stuart L. Levenick, age 62, is a retired Group President of Caterpillar Inc., a manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. Prior to assuming that position in 2004, Mr. Levenick served as Vice President, Caterpillar Inc., and Chairman of Shin Caterpillar Mitsubishi Ltd. from 2000 to 2004, and as Vice President, Asia Pacific Division, from 2001 to 2004. He is also a director of Entergy Corporation, where he chairs its finance committee and is a member of its audit committee. Mr. Levenick, an independent director, was first appointed a director of Grainger in 2005, and is the Lead Director, Chair of the Board Affairs and Nominating Committee and a member of the Compensation Committee.

Director Qualifications

    §
    Mr. Levenick has served as the president of a multinational manufacturing company and has had extensive international operations experience including positions outside the United States in numerous countries for more than 20 years. Mr. Levenick also had operational responsibility for supply chain and logistics and responsibility for the global parts and product support business as well as global marketing of his present employer. In addition, he has led his employer's global human resources function and had responsibility for that company's enterprise risk assessment.
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PHOTO

Neil S. Novich

Neil S. Novich, age 60, is the former Chairman, President, and Chief Executive Officer and a former director of Ryerson Inc., a major metal distributor and fabricator. Mr. Novich became Ryerson's President and Chief Executive Officer in 1996 and also Chairman in 1999, a position he held through 2007. He is also a director of Analog Devices, Inc., where he chairs the compensation committee, Beacon Roofing Supply, Inc., where he chairs the audit committee, and Hillenbrand, Inc., where he chairs the compensation and management development committee. He is a trustee of The Field Museum of Natural History and Children's Home & Aid, and a member of the Visiting Committee to the Physical Sciences Division, University of Chicago. Mr. Novich, an independent director, was first elected a director of Grainger in 1999 and is a member of the Audit Committee, an "audit committee financial expert," and a member of the Board Affairs and Nominating Committee.

Director Qualifications

    §
    Mr. Novich has served as the CEO and chairman of the board of a public multinational metal distributor and fabricator, where he was deeply engaged in that company's distribution operations on a domestic and international basis, and also in the leadership development and human resources functions. He was also a consultant for a management consulting firm for over 10 years developing strategies for its clients. As a result, Mr. Novich has in-depth operational experience in supply chain, distribution and logistics and experience in developing strategy across a variety of industries. Mr. Novich also serves on the following committees of one or more public companies: the nominating and governance committee, the audit committee, and the compensation committee.

PHOTO

Michael J. Roberts

Michael J. Roberts, age 64, is the Founder of LYFE Kitchen restaurant. Formerly, he was Global President and Chief Operating Officer of McDonald's Corporation from 2004 to 2006. His previous positions at McDonald's Corporation included Chief Executive Officer—McDonald's USA during 2004; President—McDonald's USA from 2001 to 2004; and President, West Division—McDonald's USA from 1997 to 2001. Mr. Roberts is also a director of CenturyLink, Inc., where he serves on its audit committee. During the past five years, Mr. Roberts served on the board of directors of Qwest Communications International, Inc. and Standard Parking Corporation. Mr. Roberts, an independent director, was first appointed a director of Grainger in 2006 and is Chair of the Compensation Committee and a member of the Board Affairs and Nominating Committee.

Director Qualifications

    §
    Mr. Roberts served as president and chief operating officer of a multinational public food-service company and in this capacity had extensive management and profit and loss responsibilities. Further, he was responsible for the marketing and international operations of that company. Mr. Roberts also has significant human resources experience and serves on the compensation committees of two other public companies.
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PHOTO

Gary L. Rogers

Gary L. Rogers, age 70, was Vice Chairman of General Electric Company from 2001 until his retirement in December 2003. Previously, Mr. Rogers was Senior Vice President of General Electric Company and President and Chief Executive Officer of GE Plastics from 1992 to 2001. During the past five years, Mr. Rogers served on the board of directors of Rohm and Haas Company. Mr. Rogers, an independent director, was first appointed a director of Grainger in 2004 and is a member of the Board Affairs and Nominating Committee and the Compensation Committee.

Director Qualifications

    §
    Mr. Rogers served as president and CEO of a global enterprise with products that served multiple industries and with responsibilities including international operations, global supply chain, distribution and logistics. Mr. Rogers also has a background in finance and accounting serving as part of the corporate audit staff and as division chief financial officer for that same enterprise.

PHOTO

James T. Ryan

James T. Ryan, age 56, is Chairman of the Board, President and Chief Executive Officer of Grainger, positions assumed in 2009, 2006 and 2008, respectively. Mr. Ryan became Chief Operating Officer and was appointed to Grainger's Board of Directors in 2007. Prior to that, Mr. Ryan served as Group President, a position assumed in 2004. He has served Grainger in increasingly responsible roles since 1980, including Executive Vice President, Marketing, Sales and Service; President, Grainger.com; Vice President, Information Services; and President, Grainger Parts. He is a trustee of the Museum of Science and Industry and DePaul University. He is also a member of the Civic Committee of the Commercial Club of Chicago, the Economic Club of Chicago, and Business Roundtable.

Director Qualifications

    §
    Mr. Ryan is the Company's Chairman, President and CEO. He has served Grainger in many capacities over his 30 years with the Company including direct responsibility for purchasing and varied management roles in the supply chain operations of the Company. Previously, Mr. Ryan was directly responsible for the sales and marketing of Grainger's United States operations. Mr. Ryan also has extensive experience in strategic planning, development and execution.
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PHOTO

E. Scott Santi

E. Scott Santi, age 53, is President and Chief Executive Officer and a member of the board of directors of Illinois Tool Works Inc. (ITW), a worldwide manufacturer and marketer of engineered components and industrial systems and consumables. Mr. Santi was promoted to his current position in November 2012 after having served as acting Chief Executive Officer since October 2012. Previously, Mr. Santi served as Vice Chairman of ITW from 2008 to 2012, and Executive Vice President from 2004 until 2008. Mr. Santi, an independent director, was first elected a director of Grainger in 2010 and is Chair of the Audit Committee, an "audit committee financial expert," and a member of the Board Affairs and Nominating Committee.

Director Qualifications

    §
    Mr. Santi is the CEO of a public manufacturer and marketer of products. Prior to assuming this position, he served in various management roles for the same company including positions requiring significant operational and financial responsibility. During his tenure he has had extensive international responsibility including operating responsibility for a business with annual international revenues of several billion dollars. Mr. Santi has significant experience with mergers and acquisitions and with integrating acquired companies. He has also had significant strategic marketing responsibilities and human resource experience including compensation policy, leadership development and succession planning.

PHOTO

James D. Slavik

James D. Slavik, age 62, is Chairman and a director of Mark IV Capital, Inc., a private commercial real estate development and investment company that was founded in 1974. Mark IV Capital acquires, invests in, develops and manages commercial real estate projects. Mr. Slavik was named to his current position in 2003, after serving as Mark IV Capital, Inc.'s Chairman and Chief Executive Officer from 1990 to 2003. He is also a director of the Hoag Hospital Foundation. Mr. Slavik, an independent director, was first elected a director of Grainger in 1987 and is a member of the Board Affairs and Nominating Committee and the Compensation Committee.

Director Qualifications

    §
    Mr. Slavik is the chairman of a private commercial real estate development and investment company and was previously that company's CEO. As a result, Mr. Slavik has expansive knowledge in investments, financing and real estate. Mr. Slavik also worked at multiple commercial brokerage companies as an investment properties broker and led the marketing programs for clients' commercial properties.
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Board Diversity

One of the primary objectives of Grainger's corporate governance structure is to have a highly functional Board that properly oversees Grainger's strategies and operations. The Board's Criteria for Membership on the Board of Directors (Criteria) list the various characteristics that the Board Affairs and Nominating Committee should consider in reviewing candidates for the Board. In addition to relevant business experience, qualifications, attributes, skills, and the willingness to become involved with Grainger, the Criteria also enumerate personal characteristics that should be considered, including reputation for ethics and integrity, common sense and judgment, independent and objective thought, and the consideration of diverse opinions.

Regarding diversity, the Criteria specify that consideration shall be given to candidates without regard to race, color, religion, gender or national origin. To ensure that the Board benefits from diverse perspectives, it seeks qualified nominees from a variety of backgrounds, including candidates of gender and racial diversity, and in any retained search for Board candidates, Grainger specifies that the Board is seeking candidates with gender and racial diversity. The Board actively reviews diversity recruiting efforts.

Board of Directors and Board Committees

Five meetings of the Board were held in 2014. Each regular Board meeting included at least one executive session, during which only independent directors were present. In addition, the directors acted once by unanimous written consent during the year.

The Board has three standing committees: Audit, Board Affairs and Nominating, and Compensation. All members of these committees are required to be "independent" directors.

All non-employee directors have been determined to be independent. Committee memberships are shown in the following table:


Independent Directors' Committee Assignments

Name

Audit

Board Affairs and
Nominating


Compensation

Rodney C. Adkins

      Member   Member

Brian P. Anderson

  Member   Member  

V. Ann Hailey

  Member   Member    

William K. Hall

  Member   Member  

Stuart L. Levenick

      Chair   Member

Neil S. Novich

  Member   Member  

Michael J. Roberts

      Member   Chair

Gary L. Rogers

    Member   Member

E. Scott Santi

  Chair   Member    

James D. Slavik

    Member   Member
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Lead Director

The Operating Principles for the Board of Directors and Grainger's by-laws created the leadership position of Lead Director, to be elected annually by and from the Board's independent directors. Mr. Stuart L. Levenick was elected to serve as Lead Director after the April 2014 annual meeting of shareholders.

Audit Committee

The Audit Committee met five times in 2014. The Board has determined that each of the members of the Audit Committee is "independent," as that term is defined in the independence requirements for audit committee members contained in the applicable rules of the Securities and Exchange Commission (SEC) and standards of the New York Stock Exchange (NYSE). The Board has also determined that each of Mr. Santi, Chair of the Audit Committee, Mr. Anderson, Mr. Hall, and Mr. Novich and Ms. Hailey, is an "audit committee financial expert," as that term is defined in the applicable rules of the SEC.

The Audit Committee assists the Board in its oversight responsibility with respect to Grainger's financial reporting process, Grainger's systems of internal accounting and financial controls, the integrity of Grainger's financial statements, Grainger's compliance with legal and regulatory requirements, the qualifications and independence of Grainger's independent auditor, and the performance of Grainger's internal audit function and independent auditor. It also has oversight responsibilities for various aspects of certain employee benefit plans. Additionally included among the responsibilities of the Audit Committee are the appointment, compensation, retention, and oversight of the independent auditor; the establishment of procedures for the treatment of complaints regarding accounting, internal accounting controls, and auditing matters; and the pre-approval of audit and non-audit services to be provided by the independent auditor. The Audit Committee has the further responsibility to review Grainger's risk assessment and risk management process and policies and to oversee compliance with Grainger's Business Conduct Guidelines.

Board Affairs and Nominating Committee

The Board Affairs and Nominating Committee met five times in 2014. The Board has determined that each of the members of the Board Affairs and Nominating Committee is "independent," as that term is defined in the independence requirements for members of nominating committees contained in the applicable standards of the NYSE.

The Board Affairs and Nominating Committee makes recommendations to the Board regarding the makeup of the Board and its committees, establishes specific criteria by which potential directors shall be qualified, identifies potential nominees, makes recommendations concerning director and nominee independence, reviews transactions between Grainger and related persons (as further discussed below) as well as evaluates the overall performance of the Board. It also has primary oversight responsibility for corporate governance, including the responsibility to recommend corporate governance principles, recommend Board committee responsibilities and members, evaluate the Board in the area of corporate governance, including the adequacy of the information supplied to the Board and the Board's performance of its oversight responsibilities relative to the management of Grainger, and to recommend retirement, compensation, and other policies applicable to directors; and oversight responsibility of corporate citizenship activities to advance the interest of shareholders including involvement in the communities Grainger serves and promotion of a sustainable environment. Additional responsibilities of the Board Affairs and Nominating Committee are to make initial assessments regarding major issues or proposals and work with the Compensation Committee to review senior management organization and succession.

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Compensation Committee

The Compensation Committee of the Board met five times in 2014.

The Compensation Committee oversees Grainger's compensation and benefits policies and programs (generally with regard to all employees and specifically with regard to executives), makes executive compensation decisions, and reviews and makes recommendations concerning other compensation related matters to be submitted to the Board and/or shareholders for approval. The general responsibilities of the Committee are to oversee that:

The Board has determined that each of the members of the Compensation Committee is "independent," as that term is defined in the independence requirements for members of compensation committees contained in the applicable standards of the Securities and Exchange Commission (SEC) and the New York Stock Exchange (NYSE).

The Compensation Committee annually reviews and approves corporate goals and objectives relevant to CEO compensation, evaluates CEO performance in light of those financial goals and objectives, and, together with the other independent directors (as directed by the Board), determines and approves the CEO's compensation based on this evaluation, in executive session without members of management present, and approves the compensation paid to the most highly compensated executives, the Named Executive Officers (NEOs).

In overseeing the Company's compensation programs, the Compensation Committee (the Committee) develops programs based on its own deliberations. It also considers alternatives and recommendations from its independent compensation consultant, a variety of other compensation and benefits consultants, and management. Since 2004, the Committee has retained Deloitte Consulting LLP (Deloitte Consulting) as its independent compensation consultant. After a review of the factors prescribed by the Securities and Exchange Commission and the New York Stock Exchange, the Compensation Committee determined that its compensation consultant, Deloitte Consulting, is an independent advisor under the rules and regulations.

The independent compensation consultant is solely hired by and reports directly to the Committee. The Committee's practice is to routinely meet with the independent compensation consultant in executive session, without management present, following each Compensation Committee meeting. The Committee has sole authority to retain and terminate the independent compensation consultant, including sole authority to approve the consultant's fees. At the Committee's direction, the independent compensation consultant:

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The Committee seeks advice from the independent compensation consultant on compensation trends and best practices, as well as in reviewing the Company's programs and policies to ensure they are designed and operate to achieve their purposes and goals. During 2014, the independent compensation consultant performed a number of specific projects, including providing advice on executive compensation trends, reviewing the design of the W.W. Grainger, Inc. 2015 Incentive Plan that is being submitted for shareholder approval, and attending all Compensation Committee meetings and select executive sessions.

Members of management (including some of the NEOs) assist the Compensation Committee in performing its responsibilities by providing recommendations for the design of Grainger's compensation program for its NEOs, other officers, and other employees. Management also recommends salary and award levels, except those related to Mr. Ryan, Chairman of the Board, President and Chief Executive Officer. Mr. Ryan's salary and awards are reviewed by the Compensation Committee, either alone or together with the other independent directors (as directed by the Board), in executive session without members of management present. On issues of compensation, the independent directors of the Compensation Committee, in their sole discretion, determines the appropriate compensation design and level.

The Compensation Committee grants equity awards (stock options, restricted stock units (RSUs), and performance shares) to officers and other employees under the 2010 Incentive Plan. The Committee delegates to management a limited authority to grant stock options and RSUs to non-officer employees. Awards under this authority are granted under the terms and conditions that have been approved by the Committee. The pool of shares available to management under this delegation is refreshed annually by the Committee to 20,000 stock options and 35,000 RSUs. The maximum amount that management is authorized to award to any individual is 5,000 stock options and 2,500 RSUs, and to avoid any perception of manipulated timing, all awards are effective the first business day of the month following the award. Information concerning the grants by management is shared with the Committee at its next meeting. The Committee may terminate this delegation of authority at its discretion.

Leadership Structure

The Board has carefully considered its leadership structure and believes that a combined Chairman/Chief Executive Officer position represents the best leadership structure for Grainger.

The Board has strong governance structures and processes in place to ensure the independence of the Board. These established structures and processes, which are reflected in the Operating Principles for the Board of Directors and the various committee charters, provide for the independent directors to exercise authority so that the Board is effective in overseeing critical matters of strategy, operations, and reporting. Important duties performed by the independent directors, either collectively or through committees made up solely of independent directors, are selecting the Chairman and Chief Executive Officer and evaluating his or her performance and the resulting compensation.

The Board believes that a single individual serving in the combined position of Chairman and Chief Executive Officer provides a useful and effective connection between the Board and

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Company management to help them act with a common understanding and purpose. This structure assists in the timely flow of relevant information that supports effective Board decision-making.

The Board does not believe that separating the role of the Chairman and Chief Executive Officer would result in strengthening Grainger's corporate governance or in creating or enhancing long-term value for our shareholders. While the Board generally believes that splitting the positions is unnecessary and not in the best interest of shareholders, in 2008, as part of a planned leadership succession process, it temporarily separated the two positions. The separation of these functions helped promote an orderly transition in Company leadership. At the end of the transition period, after consideration of Grainger's governance structures, the Board determined it was appropriate to recombine the Chairman and Chief Executive Officer positions.

In deciding that a combined Chairman and Chief Executive Officer position is the appropriate leadership structure for Grainger, the Board also recognized the need for independent leadership and oversight. Since 1995, Grainger's Operating Principles for the Board of Directors have assigned a leadership role to the independent director serving as Chair of the Board Affairs and Nominating Committee. Over time, this director has been responsible for facilitating Board involvement on major issues and/or proposals, reviewing meeting agenda and information to be provided to the Board, consulting with directors, the Chief Executive Officer, and management and presiding at executive sessions of the Board.

In 2010, the Board revised its Operating Principles and by-laws to create the leadership position of Lead Director, to be elected annually by and from the Board's independent directors. Among the duties assigned to the Lead Director is the responsibility for:

The Board believes that given Grainger's corporate governance structures and processes, a combined Chairman and Chief Executive Officer position in conjunction with an independent Lead Director provides effective oversight of management by the Board and results in a high level of management accountability to shareholders.

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Board and Committee Evaluations

The Board and each of its Committees conduct annual reviews to determine their effectiveness and identify opportunities for improvement. All of the Board and Committee evaluations are completed annually and discussed at the December meetings. Every October, each Director completes an evaluation of his or her effectiveness, the effectiveness of the Committees upon which he or she serves, and the effectiveness of the Board. The evaluations focus on a range of questions relating to how the Board and its Committees can improve its key function of maximizing long term shareholder value by being appropriately involved in strategic decisions. The process solicits ideas from Directors about:

In preparation for discussions at the December meetings, the Committee Chairs collect comments from each Committee member, which are discussed with the Lead Director and then discussed with the members of each Committee. The Lead Director also facilitates a discussion of Board evaluations with the full Board.

Board's Role in Risk Oversight

Grainger is a broad-line distributor of maintenance, repair and operating supplies and other related products and services serving businesses and institutions, providing customers with access to more than 1.5 million products. Grainger has a broad and diverse customer base. In 2014, sales transactions were made to approximately 1.2 million customers with no single customer's aggregate purchases representing more than 3 percent of Grainger's total sales. Grainger also has a diverse supplier base. In 2014, Grainger purchased products from more than 2,900 key suppliers, and no single supplier represented more than 5 percent of the total purchases.

Grainger's Board has overall responsibility for risk oversight. Its role is to oversee risk assessment and risk management processes and policies used by Grainger to identify, assess, monitor and address potential financial, compensation, operational, strategic and legal risks on an enterprise-wide basis. The risks monitored include threats to information technology systems and other issues of cyber security. The Audit Committee of the Board also regularly reviews Grainger's risk assessment and risk management processes and policies, including receiving regular reports from the members of Grainger's management who are responsible for risk assessment and risk management on the effectiveness of Grainger's Enterprise Risk Management (ERM) initiatives. As part of its oversight responsibility, the Compensation Committee of the Board assesses the relationship between potential risk created by Grainger's compensation programs and their impact on long-term shareholder value.

Available Information

Grainger has adopted Business Conduct Guidelines for directors, officers, and employees, incorporating the Code of Ethics required by rules of the SEC to be applicable to a company's chief executive officer, chief financial officer, and chief accounting officer or controller, and intends to satisfy any disclosure requirements with respect to the Business Conduct

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Guidelines by posting the information on its website. Grainger also has adopted Operating Principles for the Board of Directors, which represent its corporate governance guidelines.

Grainger's Business Conduct Guidelines and Operating Principles for the Board of Directors are available in the Governance section of Grainger's website at www.grainger.com/investor.

Also available in the Governance section of that website are the charters, adopted by the Board, of the Board's Audit Committee, Board Affairs and Nominating Committee, and Compensation Committee.

All of these documents are also available to shareholders in print, free of charge, upon request to the Corporate Secretary at Grainger's headquarters, 100 Grainger Parkway, Lake Forest, Illinois 60045-5201.

Other Communications with Directors

Grainger has established a process by which shareholders and other interested parties may communicate with the Board, Board committees, and/or individual directors on matters of interest. Such communications should be sent in writing to:

[Name(s) of director(s)]
or
[Non-management directors]
or
[Board of Directors]
W.W. Grainger, Inc.
P.O. Box 856
Skokie, Illinois 60076-0856

If the matter is confidential in nature, please mark the correspondence accordingly. Additional information concerning this process is available in the Governance section of Grainger's website at www.grainger.com/investor.

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Director Compensation

Grainger's ten independent directors each receive an annual cash retainer of $85,000 and an annual deferred stock grant of $125,000. Directors serving as Committee Chairs receive an additional annual cash retainer.

Grainger's ten independent directors (directors) are compensated at a level that approximates median market practice. For 2014, Grainger paid these directors an annual cash retainer of $85,000 each for the year upon election at the annual meeting of shareholders, which covered all regularly scheduled meetings of the Board and its committees. A per-meeting fee of $1,500 would be paid to each attending director if additional meetings are held. In 2014, no additional meetings were held. The Chairs of Board committees and the Lead Director received additional annual retainers. For the Chair of the Audit Committee, the retainer was $20,000; for the Chair of the Compensation Committee, the retainer was $15,000; for the Chair of the Board Affairs and Nominating Committee, the retainer was $10,000; and for the Lead Director, the retainer was $20,000.

All independent directors also receive an annual deferred stock unit grant. The number of shares covered by each grant is equal to $125,000 (based on the 200-day average stock price as of January 31, in the year of the grant, a methodology consistent with the calculation used for equity awards to Grainger executives), rounded up to the next ten-share increment. The deferred stock units are settled in shares upon termination of service as a director. Directors may also defer their annual cash retainers, lead director retainer, committee chair retainers (as applicable), and meeting fees in a deferred stock unit account.

In benchmarking director pay, Grainger uses the same compensation comparator group that is used to benchmark compensation for Grainger's executives as described in the Compensation Discussion and Analysis. The Compensation Committee's independent compensation consultant periodically reviews the comparative information and advises on director compensation.

Stock ownership guidelines applicable to non-employee directors were established in 1998. These guidelines provide that within five years after election, a director must own Grainger common stock and common stock equivalents having a value of at least five times the annual cash retainer fee for serving on the Board. The policy also states that any pledged shares cannot be used to meet the ownership guidelines. All directors are currently in compliance with the ownership guidelines.

Grainger provides travel and reimburses travel expenses relating to their service as a director and reimburses directors for attending continuing education programs. In addition, Grainger matches directors' charitable contributions on a three to one basis up to a maximum company contribution of $7,500 annually and provides discounts on product purchases, both on the same basis as provided to U.S. Grainger employees.

A director who is an employee of Grainger or any Grainger subsidiary does not receive any compensation for serving as a director.

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2014 Director Compensation

Name

 



Fees
Earned
or Paid
in Cash1






Stock
Awards2




Option
Awards





Non-equity
Incentive Plan
Compensation










Change in
Pension Value
and Non-
qualified
Deferred
Compensation
Earnings









All Other
Compensation3



Total
 

Rodney C. Adkins

  $ 63,750   $ 94,506   $ 0   $ 0   $ 0   $ 0   $ 158,256  

Brian P. Anderson

  $ 85,000   $ 125,837   $ 0   $ 0   $ 0   $ 2,250   $ 213,087  

V. Ann Hailey

  $ 85,000   $ 125,837   $ 0   $ 0   $ 0   $ 4,500   $ 215,337  

William K. Hall

  $ 85,000   $ 125,837   $ 0   $ 0   $ 0   $ 7,500   $ 218,337  

Stuart L. Levenick

  $ 115,000   $ 125,837   $ 0   $ 0   $ 0   $ 0   $ 240,837  

Neil S. Novich

  $ 85,000   $ 125,837   $ 0   $ 0   $ 0   $ 7,500   $ 218,337  

Michael J. Roberts

  $ 100,000   $ 125,837   $ 0   $ 0   $ 0   $ 0   $ 225,837  

Gary L. Rogers

  $ 85,000   $ 125,837   $ 0   $ 0   $ 0   $ 0   $ 210,837  

James T. Ryan

  $ 0   $ 0   $ 0   $ 0   $ 0   $ 0   $ 0  

E. Scott Santi

  $ 105,000   $ 125,837   $ 0   $ 0   $ 0   $ 7,500   $ 238,337  

James D. Slavik

  $ 85,000   $ 125,837   $ 0   $ 0   $ 0   $ 7,500   $ 218,337  
1
Represents cash fees received in 2014.

2
Represents the grant date fair value of an award of 490 deferred stock units made on April 30, 2014, with immediate vesting that will be paid upon termination from service, computed in accordance with FASB ASC Topic 718. The stock units were determined by dividing the grant dollar value by the 200-day average stock price as of January 31 in the year of the grant, a methodology consistent with the calculation used for other executive equity awards.

3
Represents amount paid by the Company on behalf of independent directors to charitable organizations as part of the Company's matching gift program.
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Ownership of Grainger Stock

The table below shows how many shares of Grainger common stock the directors, certain executive officers, and all directors and executive officers as a group beneficially owned as of March 2, 2015.

Beneficial ownership is a term broadly defined by the SEC. In general, a person beneficially owns securities if the person, alone or with another, has voting power or investment power (the power to sell) over the securities. Being able to acquire either voting or investment power within 60 days, such as by exercising stock options, also results in beneficial ownership of securities. Unless otherwise indicated in the footnotes following the table, each of the named persons had sole voting and investment power with respect to the indicated number of Grainger shares.

Beneficial Owner



Shares






Stock
Option Shares
Exercisable
Within
60 Days1







Stock
Units2



Total

Percentage
of Common
Stock3

James D. Slavik4,5,6,7
100 Bayview Circle
Suite 4500
Newport Beach, CA 92660

    3,831,253     0     17,089     3,848,342   5.7%

Rodney C. Adkins

  0   0   373   373   *   

Brian P. Anderson

    4,340     0     14,015     18,355   *   

Court D. Carruthers

  22,754   41,799   0   64,553   *   

V. Ann Hailey

    200     0     8,567     8,767   *   

William K. Hall

  1,468   0   17,778   19,246   *   

John L. Howard8

    882,491     88,206     20,000     990,697   1.4%

Ronald L. Jadin9

  19,417   120,563   0   139,980   *   

Stuart L. Levenick

    400     0     14,477     14,877   *   

Donald G. Macpherson

  23,210   73,799   0   97,009   *   

Neil S. Novich

    4,605     0     20,517     25,122   *   

Michael J. Roberts

  1,000   0   15,452   16,452   *   

Gary L. Rogers

    310     0     10,037     10,347   *   

James T. Ryan

  132,903   513,500   40,000   686,403   1.0%

E. Scott Santi

    300     0     4,121     4,421   *   

Directors and Executive Officers
As a group10,11


 
4,937,563   894,514   201,297   6,033,374   8.6%
1
In computing the percentage of shares owned by each person and by the group, these shares were added to the total number of outstanding shares for the separate calculations.

2
Represents the number of stock units credited to the accounts of non-employee directors under the 2005 Incentive Plan, and the 2010 Incentive Plan, and the number of restricted stock units credited to the accounts of executive officers under the 1990 Long Term Stock Incentive Plan, the 2005 Incentive Plan, and the 2010 Incentive Plan. Each stock unit is intended to be the economic equivalent of a share of Grainger common stock. These units are excluded from the computations of percentages of shares owned.

3
An asterisk (*) indicates less than 1%.
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4
Mr. Slavik is known to be the beneficial owner of more than 5% of Grainger's common stock.

5
Includes 2,510,088 shares as to which Mr. Slavik has shared voting and/or investment power.

6
Excludes 1,039,490 shares held by certain of Mr. Slavik's family members, as to which shares Mr. Slavik disclaims voting or investment power.

7
Includes 766,747 shares that are pledged as collateral. In March 2013, when the number of shares beneficially owned by Mr. Slavik that were pledged as collateral was 1,536,117, Mr. Slavik began to implement a plan to reduce the pledged shares attributable to him. At that time, Mr. Slavik committed to the Board of Directors that so long as he remains a director he will not pledge any additional shares, that he will reduce his outstanding pledges by 20% per year, and that within five years of March 2013, by March 2018, he will terminate all of his pledging arrangements. Consistent with this commitment, Mr. Slavik reduced his pledge by 252,804 shares in March 2013, and then continued with a reduction of 238,747 shares in January 2014 and 241,759 shares in January 2015.

8
Includes 877,519 shares as to which Mr. Howard may be deemed to have shared voting and investment power by virtue of his serving as a director of The Grainger Foundation, Inc. The Grainger Foundation was established in 1949 by William Wallace Grainger, the founder of Grainger, and is not affiliated with Grainger.

9
Excludes 5,936 shares held by Mr. Jadin's wife, as to which Mr. Jadin disclaims voting or investment power.

10
Includes 3,389,137 shares as to which members of the group have shared voting and/or investment power.

11
Excludes 1,045,426 shares held by certain family members, as to which shares members of the group disclaim voting or investment power.

The following table sets forth information concerning all other persons known to Grainger to beneficially own more than 5% of Grainger's common stock on December 31, 2014, as reported in Schedules 13D/13G. Schedule 13G filers generally are institutional investors who acquire beneficial ownership of more than 5% of a public company's voting securities in the ordinary course of business without the purpose of changing or influencing control of the company.

Beneficial Owner
  Shares Beneficially Owned*   Percentage of Common Stock  

The Vanguard Group
100 Vanguard Boulevard
Malvern, Pennsylvania 19355

    5,046,051 **   7.40 %

*
Includes shares beneficially owned by affiliated entities.

**
Includes 104,312 shares as to which there is sole voting power and no shares as to which there is shared voting power. Includes 4,944,853 shares as to which there is sole dispositive and 101,198 shares as to which there is shared dispositive power.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires that Grainger's directors, executive officers, and 10% shareholders file with the SEC reports concerning their ownership, and changes in their ownership, of Grainger equity securities. Based on a review of copies of the reports provided to Grainger and representations of those persons, Grainger believes that these filing requirements were met during 2014, except for an administrative error related to Joseph C. High, who filed a late Form 4 reporting the settlement of a grant of restricted stock units and related non-discretionary withholding of shares for tax.

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Report of the Audit Committee of the Board

The Audit Committee of the Board of Directors assists the Board in fulfilling its oversight responsibilities. The Board has determined that each of the members of the Audit Committee is "independent," as that term is defined in the independence requirements for audit committee members contained in the applicable rules of the Securities and Exchange Commission and standards of the New York Stock Exchange. The Audit Committee acts under a charter that is reviewed annually, was last amended by the Board on October 26, 2010, and is available on the Company's Web site at www.grainger.com/investor.

Management is responsible for the Company's internal controls and the financial reporting process and for compliance with applicable laws and regulations. Ernst & Young LLP ("EY"), the Company's independent auditor, was responsible for performing an independent audit of the Company's most recent consolidated financial statements and expressing an opinion on the conformity of those financial statements with accounting principles generally accepted in the United States of America, as well as expressing an opinion on the effectiveness of the Company's internal control over financial reporting. The Audit Committee's responsibility is to monitor and oversee these processes.

In performing these responsibilities, the Audit Committee reviewed and discussed the Company's audited consolidated financial statements and the effectiveness of internal control over financial reporting with management and EY. The Audit Committee discussed with EY matters required to be discussed under Statement on Auditing Standards No. 16 "Communications with Audit Committees" adopted by the Public Company Accounting Oversight Board ("PCAOB"). EY also provided to the Audit Committee the letter and written disclosures required by PCAOB standards concerning EY's independence and the Audit Committee discussed with EY the matter of the firm's independence.

Based on the review and discussions described above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission.

    E. Scott Santi, Chair
Brian P. Anderson
V. Ann Hailey
William K. Hall
Neil S. Novich

 

 

Members of the Audit Committee of the
Board of Directors
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Audit Fees and Audit Committee Pre-Approval Policies and Procedures

The following table sets forth the fees for professional services rendered by Ernst & Young LLP with respect to fiscal years 2014 and 2013, respectively:

Fee Category
  2014   2013  

Audit Fees

    3,737,073   $ 2,988,931  

Audit-Related Fees

    193,000     191,500  

Tax Fees

    761,555     687,974  

All Other Fees

    3,000     3,000  

Total Fees

    4,694,628   $ 3,871,405  

Audit Fees. Consists of fees billed for professional services rendered for the audits of Grainger's annual financial statements and internal control over financial reporting, review of the interim financial statements included in Grainger's quarterly reports on Form 10-Q, and other services normally provided in connection with Grainger's statutory and regulatory filings or engagements.

Audit-Related Fees. Consists of fees billed for professional services rendered for assurance and related services that are reasonably related to the performance of the audit or review of Grainger's financial statements. These services include the audits of Grainger's employee benefit plans and various attest services.

Tax Fees. Consists of fees billed for professional services rendered for tax compliance, tax advice and tax planning. These services include assistance with the preparation of various tax returns.

All Other Fees. Consists of fees billed for all other professional services rendered to Grainger.

Pre-Approval Policy for Audit and Non-Audit Services

The Audit Committee has adopted a policy for the pre-approval of all audit and permitted nonaudit services to be provided by Grainger's independent auditor. Also, specific pre-approval by the Audit Committee is required for any proposed services exceeding pre-approved cost levels.

The Audit Committee may delegate pre-approval authority for audit and non-audit services to one or more of its members, and such authority has been delegated to the Chair of the Audit Committee. The decisions of any member to whom such authority is delegated must be presented to the full Audit Committee at its next scheduled meeting. The Audit Committee periodically reviews reports summarizing all services provided by the independent auditor.

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Report of the Compensation Committee of the Board

The Compensation Committee reviewed and discussed the Compensation Discussion and Analysis with management. Based on such review and discussion, the Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company's proxy statement for its 2015 annual meeting of shareholders and in its Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission. The Compensation Committee acts under a charter that is reviewed annually, was last reviewed by the Board on December 10, 2014 and is available on the Company's website at www.grainger.com/investor.

    Michael J. Roberts, Chairman
Rodney C. Adkins
Stuart L. Levenick
Gary L. Rogers
James D. Slavik

 

 

Members of the Compensation Committee of the Board of Directors
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Fees for Independent Compensation Consultant

The Compensation Committee of the Board has engaged Deloitte Consulting LLP (Deloitte Consulting) as its independent compensation consultant. The following table sets forth the fees for services rendered by Deloitte Consulting and its affiliates with respect to fiscal year 2014:

Type of Fee
  2014  

Executive Compensation Consulting

  $ 136,134  

All Other Consulting

  $ 3,168,114  

Total Fees

  $ 3,304,248  

Executive Compensation Consulting Fees: Consists of fees billed for services provided to advise the Compensation Committee of the Board with respect to executive and director compensation.

All Other Consulting Fees: Consists of fees billed for all other services provided to Grainger. None of these fees are related to compensation matters.

Since 2003, affiliates of Deloitte Consulting have provided other services to Grainger that are unrelated to executive compensation matters. The decision to engage an affiliate of Deloitte Consulting for these other services was made by management. The Board has been informed of this ongoing work and the use of an affiliate of Deloitte Consulting but neither the Board nor the Compensation Committee specifically approved these services. After a review of the factors prescribed by the Securities and Exchange Commission and the New York Stock Exchange, the Compensation Committee determined that its compensation consultant, Deloitte Consulting, was found not to have any conflicts of interest.

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Compensation Discussion and Analysis

Compensation Discussion & Analysis Topics:

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1.     Executive Summary

The overall compensation structure is designed to drive profitable growth leading to shareholder value creation. Employees at all levels of the Company, including its executives, are provided incentives to grow the business (Sales Growth) while achieving attractive investment returns (Return on Invested Capital, or ROIC) for the Company's shareholders. For executives, the compensation program is designed to link pay to performance and is structured to reward both annual and long-term Company performance while not encouraging excessive risk taking.

The Company made relatively minor changes to its compensation programs in 2014. The primary change scheduled for the current year includes the proposed 2015 Incentive Plan that will serve as the single source of all future long term incentive awards. The 2015 Incentive Plan, which is subject to shareholder approval, generally replicates all features of the 2010 Incentive Plan, including:

In addition, the proposed 2015 Incentive Plan incorporates these best practices:

This Compensation Discussion and Analysis (CD&A) describes the Company's compensation philosophy and programs generally, and explains the compensation paid to the five most highly compensated executives—the Named Executive Officers (NEOs). In 2014, the Company had five NEOs.


Named Executive Officers (NEOs) for 2014

Officer

  Title
James T. Ryan       Chairman of the Board, President
and Chief Executive Officer (CEO)
Ronald L. Jadin     Senior Vice President and Chief
Financial Officer (CFO)
Donald G. Macpherson       Senior Vice President and
Group President, Global Supply Chain and
International
Court D. Carruthers     Senior Vice President and
Group President, Americas
John L. Howard       Senior Vice President and
General Counsel

Compensation includes a combination of base salary, short-term incentives, long-term equity incentives including performance shares and stock options, and a performance-based retirement vehicle. These components are combined to provide Company executives with appropriate incentives for profitable long-term growth.

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The Company makes use of the following components for NEO compensation:

Compensation
Element


  Purpose

  Link to Performance

  Fixed/
Performance
Based



  Short/Long
Term

Base Salary

      Establishes a market competitive level and provides an appropriate level of fixed compensation to attract and retain leaders.       Based on individual performance.       Fixed       Short-Term

Annual Incentives (Management Incentive Program)

    Encourages annual results that create shareholder value.     Linked to annual achievement of predetermined Company objectives—sales growth and ROIC.     Performance Based     Short-Term

Stock Options

      Directly links managers' and shareholders' interests by tying long-term incentives to stock appreciation.       The initial grant value (above or below target) is linked to individual performance, however the ultimate value of the program is linked to stock price performance for up to 10 years.       Performance Based       Long-Term

Performance Shares

    Aligns compensation with the Company's business strategy and the long-term creation of shareholder value.     Linked to achieving specific pre- determined Company objectives and stock price over the three-year performance period—sales growth and 3-year ROIC.     Performance Based     Long-Term

Retirement/Profit Sharing Trust (PST)

      Aligns the interests of the employees and shareholders as the Company's annual contribution is based on a formula that incorporates two key drivers of shareholder value—earnings performance and capital employed.       Linked to financial performance—contributions greater than 8% are based on Company performance.       Performance Based       Long-Term

In order to protect shareholders' interests, the Company has the following risk mitigating procedures in place:

Compensation Program vs. Risk Mitigating Action
  Annual
Incentives
  Stock
Options
  Performance
Shares
Balanced Performance Measures (Growth and Profits)   ü   ü   ü
Robust Goal Setting   ü   ü   ü
Retention Ratio   N/A   ü   ü
Clawback Polices   ü   ü   ü
Stock Ownership Requirements   N/A   ü   ü
Awards Capped (Number of Shares)   ü   ü   ü
Compensation Committee Oversight   ü   ü   ü
Internal and Independent External Audit   ü   ü   ü
Restrictions on Hedging and Pledging   N/A   ü   ü

Target total compensation for the Company's employees is generally set to approximate the market median. The weighting of the individual compensation components varies by level, with more senior level executives having a greater emphasis on performance-based long-term compensation—which align management to shareholders. NEO compensation is structured so that the largest component is long-term equity (stock options and performance shares), followed by base salary and the performance-based annual incentives (this detail is shown in the following table). Each NEO's compensation is compared to equivalent positions in a comparator group selected by the Board's Compensation Committee (with assistance from the Committee's independent compensation consultant). NEO base salaries and long-term incentive grants are determined based on many factors including individual performance, responsibilities, and the overall relation to market levels of compensation.

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The Company's compensation is structured to align a substantial portion of NEO pay to the performance of the Company and the use of performance-based pay is consistent with the mix seen in the comparator group. The tables below shows NEO compensation components as a percentage of the total target compensation package.


Performance vs. Fixed Compensation

      Performance
Based
Compensation



  Fixed/Individual
Based
Compensation
               
NEO

  Company

  Peers

  Company

  Peers
Mr. Ryan       89%       88%       11%       12%
Mr. Jadin       79%       78%       21%       22%
Mr. Macpherson       83%       79%       17%       21%
Mr. Carruthers       84%       79%       16%       21%
Mr. Howard       73%       73%       27%       27%


Annual vs. Long-Term Compensation

     
Annual
Compensation



  Long-Term
Compensation
               
NEO

  Company

  Peers

  Company

  Peers
Mr. Ryan       26%       28%       74%       72%
Mr. Jadin       39%       39%       61%       61%
Mr. Macpherson       31%       39%       69%       61%
Mr. Carruthers       29%       39%       71%       61%
Mr. Howard       47%       45%       53%       55%

"Performance Based Compensation" consists of the annual incentive plan, long-term incentives, and the Profit Sharing Trust (PST).

"Fixed/Individual Based Compensation" consists of base salary.

"Annual Compensation" consists of base salary and the annual incentive plan.

"Long-term Compensation" consists of stock options, performance shares, and the PST. Annual PST contributions are based on short-term performance and grow over time, distributions are restricted, and full vesting occurs after six years of service, making this component a long-term benefit.

"Peers" was determined from the comparator group in the 2014 Aon Hewitt Compensation Study as described further within Topic 7.

2014 Performance

The Company believes that revenue growth coupled with a focus on ROIC leads to shareholder value creation. Therefore, the two metrics used to determine performance-based compensation are year over year sales growth and ROIC. In 2014, Company sales were $9.96 billion (daily sales growth of 5.3% over 2013) and ROIC was 31.3%.

 
GRAPHIC
 
GRAPHIC

The Company's 2014 financial performance resulted in strong alignment between management compensation and company performance.

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The Company is focused on profitable daily sales growth over the short- and long-term. Any potential risk created by using ROIC and sales growth for both short-term and long-term incentive awards is mitigated by:

2.     Compensation Philosophy, Plans and Practices

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Overall, the Company's compensation program is designed to be straightforward and understandable to its employees and shareholders, and to drive long-term shareholder value creation by aligning compensation with both individual and Company performance.

3.     Compensation Committee of the Board

The Compensation Committee oversees the Company's compensation and benefit programs for all officers and employees. The Committee is responsible for ensuring that the Company's compensation practices provide appropriate incentives to increase long-term shareholder value, reflect the highest level of integrity, and protect the interests of shareholders. One of its responsibilities is to make certain that a competitive compensation structure is in place that will attract, reward, and retain employees and to motivate them to grow the business profitably. The Committee is also charged with ensuring that compensation, especially for executives, is linked to both personal and Company performance, and ensuring that compensation policies and practices for all employees do not include incentives to take inappropriate risk.

In setting individual compensation levels, the Compensation Committee selects a compensation comparator group of companies and reviews studies of total compensation paid to executives in those comparator group companies with similar duties and responsibilities. The Committee then considers a variety of reference points, including competitive compensation data at the 25th, 50th, and 75th percentiles, individual and Company performance, the executive's overall experience, replaceability, internal equity, unique skills, and management's recommendation to determine appropriate compensation for each executive. All elements of compensation are valued and reviewed in evaluating the relative competitiveness of the Company's compensation practices against the comparator group. Target total compensation for the Company's employees and executives as a whole (including the NEOs) is generally set to approximate the market median.

The Compensation Committee reviews at least annually a tally sheet for each NEO to evaluate the potential value of all compensation. The tally sheet includes each NEO's current

                2015 PROXY STATEMENT W.W. GRAINGER, INC.                      35

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base salary, annual incentive award, and the value of all outstanding equity-based awards (both vested and unvested), deferrals, benefits, and perquisites, as well as potential payments under retirement and certain change in control situations. Since no NEO has an employment agreement with the Company that guarantees continued employment, the tally sheets also facilitate the Committee's evaluation of the reasonableness of awards and their likely retention value.

Under its charter, the Compensation Committee makes executive compensation decisions and recommends actions to the Board of Directors and to shareholders (for example, related to the advisory Say-on-Pay vote or equity plan proposals), as appropriate.

In discharging its responsibilities, the Committee regularly consults with independent advisors, compensation consultants, and the Company's management. After a review of the factors prescribed by the Securities and Exchange Commission and the New York Stock Exchange, the Compensation Committee determined that its compensation consultant, Deloitte Consulting, is an independent advisor under the rules and regulations. The Compensation Committee's charter can be found in the Governance section of Grainger's website at www.grainger.com/investor.

4.     Risk Assessment

The incentive compensation programs include risk-mitigating components, such as:

Since 2009, the Committee has engaged its independent compensation consultant (Deloitte Consulting) to conduct a third-party risk assessment that would be completed every three years. For the interim years, the Company conducts an annual internal risk review based on practices and methodologies recommended by the Committee's independent compensation consultant. The results of the Company-conducted 2014 risk review were discussed with the Committee and Deloitte Consulting. Deloitte Consulting will conduct an external risk review in 2015.

Based on the risk review and the Committee's discussions, the Committee does not believe that the Company's compensation policies and practices are reasonably likely to have a material adverse effect on the Company.

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5.     Say-on-Pay

At the 2014 annual meeting of shareholders, the advisory vote to approve the compensation of the Company's NEOs received the support of 98% of the shareholders voting on the proposal. The Compensation Committee has considered these results and believes that they confirm the appropriateness of the Company's current executive compensation policies and practices. The Company routinely discusses its compensation philosophy with its shareholders as part of investor relations activities.

6.     Role of Management

Members of management assist the Compensation Committee by routinely recommending programs that management believes will provide the appropriate level of compensation and incentives consistent with the Company's compensation philosophy. Consistent with this process, management works with advisors from Aon Hewitt to develop market information and recommends adjustments in base salaries, annual incentive targets, and long-term incentive awards to be reviewed by the Compensation Committee and approved by the Board. For NEOs other than Mr. Ryan, the recommendations also include the structure and targets of short-term and long-term incentive programs, as well as changes to programs required for regulatory compliance. These recommendations are reviewed and approved by the CEO before they are presented to the Compensation Committee. Mr. Ryan's compensation is reviewed by the Compensation Committee in conjunction with its independent compensation consultant, either alone or together with other independent directors (as directed by the Board), in executive session without members of management present.

7.     Compensation Comparator Group

Every other year, the Compensation Committee determines a compensation comparator group of companies and undertakes a study of total compensation paid to executives occupying similar positions with similar duties and responsibilities in the comparator companies. All elements of compensation are valued and considered when determining the relative competitiveness of the Company's compensation practices. A comparator group compensation study was conducted in 2014 (2014 Compensation Study).

The 2014 comparator group consists of 22 businesses that are relatively similar in complexity and size to the Company and represent the types of major companies with which the Company historically competes for executive talent. The companies that were selected for the 2014 Compensation Study are generally within a range of half of Grainger's annual revenue to a maximum of two times Grainger's annual revenue. The competitive market for executive talent includes companies both within and outside the same industry or sector as the Company. Most of the Company's publicly-traded direct competitors tend to be too small in sales or scope of operations for direct compensation comparisons with the Company. Including a broader range of companies provides a more representative depiction of the Company's competitive market for talent. Therefore, companies used for compensation comparison purposes differ from those in the industry indices used in the Company Performance Graph in Part II, Item 5 of the Company's most recent Annual Report on Form 10-K.

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Management played a minimal role in selecting the 2014 compensation comparator group, as the Committee relied on Aon Hewitt for survey and market data and its independent compensation consultant (Deloitte Consulting) for assistance. The role of management in selecting the comparator group was limited to providing general comments on the relevance of each industry represented by the comparator companies.

Listed below is the 2014 Compensation Study comparator group and the 2013 revenues and enterprise values for each company.

Company Name




2013 Revenue
($mil)




2013 Enterprise Value*
($mil)
 

Air Products & Chemicals Inc.

  $ 10,180   $ 28,568  

AutoZone, Inc.

  $ 9,148   $ 18,763  

Ball Corp

  $ 8,468   $ 11,013  

The Clorox Co

  $ 5,623   $ 13,084  

Cummins Inc.

  $ 17,301   $ 25,735  

Dover Corp

  $ 8,730   $ 18,570  

Eastman Chemical Co

  $ 9,350   $ 16,709  

Eaton Corporation plc

  $ 22,046   $ 44,600  

Genuine Parts Co

  $ 14,078   $ 13,364  

Illinois Tool Works Inc.

  $ 14,135   $ 39,442  

Ingersoll-Rand Plc

  $ 12,351   $ 20,281  

Mattel Inc

  $ 6,485   $ 17,424  

Meadwestvaco Corp

  $ 5,389   $ 8,236  

Owens-Illinois, Inc.

  $ 6,967   $ 9,515  

Parker-Hannifin Corporation

  $ 13,016   $ 15,588  

PPG Industries Inc.

  $ 15,108   $ 28,347  

Rockwell Automation Inc.

  $ 6,352   $ 14,557  

Ross Stores Inc.

  $ 9,721   $ 12,741  

Textron Inc.

  $ 12,104   $ 13,153  

The Mosaic Company

  $ 8,170   $ 17,843  

The Sherwin-Williams Co

  $ 10,186   $ 19,489  

WESCO International Inc.

  $ 7,513   $ 5,504  

    

             

25th %ile

  $ 7,678   $ 13,102  

Median

  $ 9,536   $ 17,067  

75th %ile

  $ 12,849   $ 20,083  

    

             

W.W. Grainger, Inc.

  $ 9,438   $ 17,821  

W.W. Grainger, Inc. Percentile Rank

    49 %   57 %
*
Enterprise Value is calculated as market capitalization plus debt, minority interest and preferred shares, minus total cash and cash equivalents.

The Compensation Committee reviews the Compensation Study in conjunction with a tally sheet listing the potential value of all compensation available for the NEOs. The

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Compensation Committee concluded that the earned and potential awards for 2014 were consistent with the Company's pay philosophy, Company and individual performance, and market practices. Based on this review and the strong support from shareholders on our Say-on-Pay proposal, the Committee did not make specific adjustments to the design of the Company's compensation programs.

8.     Base Salaries

Annual base salary adjustments are considered and implemented to reflect individual performance, contribution and experience, and to maintain market competitiveness. The 2014 Compensation Study showed that, on average, the Company's base salaries for NEOs were approximately 4% above the market median.

Base salary increases for the NEOs, with the exception of Mr. Ryan, are reviewed and approved by the CEO before they are presented to the Compensation Committee. In approving recommendations, the Committee reviews these recommendations in conjunction with its independent compensation consultant.

The compensation awarded to Mr. Ryan is determined by the Board with assistance from the Compensation Committee and its independent compensation consultant. The Compensation Committee reviews and approves the corporate goals and objectives relevant to Mr. Ryan's compensation and evaluates his performance in light of those goals and objectives. Together with the other independent directors (as directed by the Board), the Compensation Committee determines and approves Mr. Ryan's compensation level based on this evaluation, in executive session without members of management present.

Following the annual performance management review process (which is similar to the process in which all employees participate), base salaries are reviewed and adjusted (if appropriate) to reflect individual and Company performance, base salaries for comparable positions from market studies, experience, tenure, and internal equity.

Based on the above mentioned process, on April 1, 2014, Mr. Ryan's base salary was increased to $1,129,000 (+2.0%). In addition, the following base salary adjustments were made for the other NEOs: Mr. Jadin's base salary was increased to $688,500 (+2.0%); Mr. Macpherson's base salary was increased to $663,000 (+2.0%); Mr. Carruthers' base salary was increased to CAD 676,000 (+4.0%); Mr. Howard's base salary was increased to $642,600 (+2.0%).

9.     Annual Incentives

NEOs are eligible to receive short-term cash-based incentives on the achievement of specified annual Company-wide financial performance measures set forth in the Company Management Incentive Program (MIP). The Company structures the MIP to motivate performance that balances short-term and long-term results and aligns the interests of management with shareholders.

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Each NEO's target incentive award under the annual incentive program is based on a review of competitive market practice and is designed to approximate a market value that is generally at the median of the comparator group. The following table displays the 2014 MIP target (program and payment) applicable to each NEO.

 
  Name

  2014 Target
Incentive %
(as a % of base
salary)




  Program

  Actual Payment
%
(as a % of the
target)




 
 
  James T. Ryan       125%       Company       74%    
 
  Ronald L. Jadin     85%     Company     74%    
 
  Donald G. Macpherson       85%       Company       74%    
 
  Court D. Carruthers     85%     Company     74%    
 
  John L. Howard       75%       Company       74%    
 

The Compensation Committee and management perform a thorough analysis in setting financial measures and goals for the Company MIP to ensure the program appropriately balances the Company's objectives, is aligned with long-term shareholder interest, and has appropriate and effective risk-mitigating components. While the measures and goals are clearly aligned with the Company's strategy, they also account for current economic conditions. The combination of sales growth and ROIC performance, as well as threshold, target, and maximum payment levels, serves to mitigate risk to the Company's shareholders.

The Company believes the design of the annual incentive program creates shareholder value and encourages performance by focusing on profitable sales growth and ROIC. The basic framework of the MIP has been in place for over ten years, although specific objectives and performance target levels have been modified on a year-by-year basis. This framework was selected to align with Company strategy and to balance sales growth with profitability, efficiency, expense management, and asset management. These measures are consistent with the Company's objective of growing profitably over time, which it believes is closely linked with shareholder value creation. The MIP framework allows the Compensation Committee the annual opportunity to adjust performance objectives in light of the current economic and competitive environment. Sales growth and ROIC remained the key structural components for the 2014 MIP. ROIC reflects how effectively management uses Company assets and is generally defined by the Company as pre-tax operating earnings divided by net working assets. Year-over-year daily sales growth is determined by year-over-year results. Acquisitions and divestitures are not included in the calculation of daily sales growth or ROIC. The total MIP payment is calculated as follows:

MIP Payment = (Sales Growth Performance + ROIC Performance)

The 2014 Company MIP was based on the Company's ROIC and year-over-year daily sales growth. The Company determined the payment earned for ROIC and the payment earned for sales growth, and the two amounts were added together.

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The following table shows various payout scenarios the performance and payout curve that was established at the beginning of the year:


2014 Management Incentive Program


ROIC
Performance



 
% Payout*
 
<18.0%           0%  
24.0%     25%  
29.9%         50%  
31.3%**     56%  
>32.3%         60%  

 

Daily Sales
Growth
Performance



 
% Payout*
 
<4.0%         0%  
5.3%**     18%  
5.9%         25%  
7.7%     50%  
9.6%         100%  
>11.5%     150%  
*
Payouts are interpolated on a straight-line basis.

**
For the year 2014, ROIC was 31.3% and sales growth was 5.3%. Based on these results, Company MIP paid at 74% of target.

The Company believes that it establishes the sales growth and ROIC targets to provide an appropriate level of motivation. Under the terms of the annual incentive program, the Committee has the discretion to adjust MIP payment amounts to correct for any unusual circumstances, both positive and negative, that might affect ROIC or sales growth. No discretionary adjustments were made in 2014.

Incentive amounts paid to Messrs. Ryan, Jadin, Macpherson, Carruthers, and Howard were based on the performance targets established for the 2014 MIP and were made under a separate annual incentive program described in the 2010 Incentive Plan. This program is designed to ensure that annual incentives are performance-based and fully tax deductible by the Company under Section 162(m) of the Internal Revenue Code. Under the program, the Committee allocates a portion of an incentive pool to each participant. The pool is funded with 5% of the Company's net earnings and the independent members of the Board have the authority to make specific awards. The sum of the individual participants' percentages may not be greater than 100% of the pool. The independent members of the Board may use their discretion to reduce these amounts but may not increase them. Consistent with prior years, the independent members of the Board used their discretion to reduce the amounts to yield payments equal to those that would have made using the same financial target and measures as the 2014 MIP.

Consistent with current practices, the 2015 MIP will continue to utilize daily sales growth along with ROIC as performance measures and all NEOs will be aligned to the Company MIP.

10.  Long-Term Incentives

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The Company's long-term incentives for NEOs consist of stock options and performance shares and are provided under shareholder-approved incentive plans. In 2014, the Company structured awards such that stock options represent approximately 70% of the total value of long-term incentive compensation and performance shares represent approximately 30% of the total value. Providing a mix of different types of equity awards is consistent with market practice for senior executives. The 70/30 (stock options/performance share) mix provides incentives to drive shareholder value creation and the three year vesting schedule aids in executive retention.

The target number of shares provided for stock options and performance share awards is designed to approximate an economic value that targets the median of the compensation comparator group for comparable jobs. The Compensation Committee annually establishes the target value of the award based on the executive's position. The actual award may be adjusted up or down to reflect individual performance. The value is converted to shares using the 200-day average stock price as of January 31 in the year of grant. The use of the 200-day average to calculate the number of shares is intended to smooth stock price volatility that can distort the number of shares awarded.


NEO Long-Term Incentives

Award

  Weight

  Vesting & Term

  Performance Measure
Stock Options       70%       3-year cliff vesting;
10 year term
      Grant allocated based on individual performance, long-term value based on appreciation in stock price.
Performance Shares     30%     3-year cliff vesting contingent on performance     Sales growth measured in year 3 of the performance cycle, with 3-year average ROIC.

Stock Options

The Company's stock options provide the right to purchase Company stock at a specified price over a ten-year term with three-year cliff vesting. They are intended to directly link management's and shareholders' interests by tying a substantial portion of long-term incentives to stock price appreciation. The ten-year term is designed to focus the NEOs on long-term value creation. Three-year cliff vesting encourages meaningful retention before an executive can realize any value created by stock price appreciation. In 2014, stock options were awarded at an exercise price equal to the closing price of the Company's common stock reported for the business day before the grant. Beginning in 2015, stock options will be awarded at an exercise price equal to the closing price of the Company's common stock reported on the business day of the grant. Stock option repricing is not permitted under any of the Company's equity incentive plans.

Performance Shares

The Company's performance share program provides the NEOs and other executives with a potential share payout depending on sales growth (including the impact of acquisitions / divestitures) and ROIC achievement over a three-year cycle. The actual number of shares paid to an NEO can range from 0 to 200% of the target number of performance shares awarded. The Compensation Committee (with the assistance of its independent compensation consultant) and management perform a thorough analysis in setting the financial measures and goals for a three-year performance cycle that begins January 1 of the first year. The sales

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growth component is measured at the end of the cycle's third year and the ROIC component is measured at the end of the third year based on the three-year average. These measurement dates reinforce a long term focus. Dividend equivalents are not paid on performance shares. Due to the three-year cycle that each award covers, the Company has three performance share cycles ongoing at all times.

2012-2014 Performance Share Cycle

For the 2012-2014 performance share cycle, the 2013 sales target of $10.3 billion was established when 2011 sales were $8.1 billion. The Company's net sales in 2013 determined the number of shares conditionally earned, while vesting remains dependent on meeting a three-year average ROIC hurdle of 18%. The payout of the target performance share awards for this program cycle was made according to the following table:

 
  2013 Total Company
Sales


  Payout as a
Percent of Target
 
  <$8.4B           0%
 
    $8.4B       50%
 
      $9.4B*           77%*
 
  $10.3B       100%
 
  $10.8B     200%
 

* In 2013, sales were $9.4 billion and the participants conditionally earned 77% of their target. The Compensation Committee determined that the award vested because the Company's average ROIC for the three year period 2012-2014 was greater than 18%.

2013-2015 Performance Share Cycle

For the 2013-2015 performance share cycle, the sales growth measure was changed from sales in the second year to sales in the third year. The 2015 sales target of $11.3 billion was established when 2012 sales were $9.0 billion. The Company's net sales in 2015 will determine the number of shares earned, while vesting remains dependent on meeting a three year average ROIC hurdle of 18%. The payout of the target performance share awards for this program cycle will be made according to the following table:

 
  2015 Total Company
Sales


  Payout as a
Percent of Target
 
  <$9.5B           0%
 
    $9.5B       50%
 
  $11.3B       100%
 
  $11.9B     200%
 

Sales of $11.3 billion in 2015 are required for participants to earn 100% of target award assuming the average ROIC for the three year period 2013-2015 is greater than 18%. This award will remain at risk through 2015.

2014-2016 Performance Share Cycle

For the 2014-2016 performance share cycle, the 2016 sales target of $11.9 billion was established when 2013 sales were $9.4 billion. The Company's net sales in 2016 will determine the number of shares earned, while vesting remains dependent on meeting a

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three year average ROIC hurdle of 18%. The payout of the target performance share awards for this program cycle will be made according to the following table:

 
  2016 Total Company
Sales


  Payout as a
Percent of Target
 
  <$10.0B           0%
 
    $10.0B       50%
 
    $11.9B       100%
 
    $12.6B     200%
 

The Compensation Committee selected these performance measures because they balance sales growth with long-term profitability, expense management, and asset management and align with objectives established in the annual incentive program. The Committee may use different sales growth and ROIC objectives and targets from year to year to maximize alignment with then-current business objectives and to reflect economic conditions.

Performance Vested Restricted Stock Units

The Company's performance vested restricted stock units (PRSUs) were new for 2014 and used for retention and promotions. They provide a potential share payout depending on ROIC achievement over a three year cycle. The ROIC performance objective is the same as that used in the Performance Share Programs. The actual number of PRSUs paid to an NEO is either 0% or 100% of the grant number awarded, based on achievement of the ROIC goal. Dividend equivalents are not paid on PRSUs.

Effective January 1, 2014, the Company granted Mr. Macpherson and Mr. Carruthers 3,894 shares of PRSUs and granted Mr. Jadin and Mr. Howard 779 shares. All PRSUs have 3-year cliff vesting.

To make the PRSUs consistent with the Company's existing Performance Share program design, an 18% threshold level of average ROIC performance over a three year period (2014-2016) must be achieved in order for the PRSUs to vest. If this threshold is achieved, 100% of the PRSUs will be settled into shares; if this threshold is not achieved, all of the PRSUs will be forfeited.

Award Agreements / Non-competition / Clawbacks

In 2010 the Company added additional clawback policies that would address a material restatement of reported earnings and fraud (see the "Compensation Recoupment Policy" section for additional details). In addition to and in connection with their long-term incentive awards, the NEOs and all other recipients are required to sign an agreement containing confidentiality and non-competition obligations designed to protect the Company's confidential and proprietary information and to preserve the Company's competitive advantages. Under these clawback agreements, should an executive violate his or her confidentiality or non-compete obligations, any award is automatically forfeited. The agreements also require, in certain circumstances, that an executive who has breached the confidentiality and non-compete agreements return vested shares and/or gains from disposition of shares to the Company.

11.  Stock Ownership Guidelines

The Company continues to believe that requiring executive ownership of Company stock creates alignment between executives and shareholders and encourages executives to act to

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