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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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Check the appropriate box:

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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)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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LOGO

                                                                                                              

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

March 17, 2016

Dear Grainger Shareholder:

The W.W. Grainger, Inc. 2016 annual meeting of shareholders will be held at our headquarters located at 100 Grainger Parkway, Lake Forest, Illinois (see map overleaf), on Wednesday, April 27, 2016, 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, and to consider and hold an advisory vote on the compensation of our Named Executive Officers. 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 or on other non-routine matters.

Please make sure your shares are voted.

                2016 PROXY STATEMENT W.W. GRAINGER, INC.                      

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LOGO

 

 

W.W. GRAINGER, INC.
2016 Annual Meeting of Shareholders
Wednesday, April 27, 2016—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 27, 2016

The annual meeting of shareholders of W.W. Grainger, Inc. will be held at its headquarters at 100 Grainger Parkway, Lake Forest, Illinois 60045 (see map on previous page), on April 27, 2016, at 10 A.M. (CDT) for the following purposes:

The Board has fixed the close of business on March 7, 2016, as the record date for the meeting. Shareholders may vote either in person or by proxy.

By order of the Board of Directors.

Hugo Dubovoy, Jr.
Corporate Secretary
Lake Forest, Illinois
March 17, 2016

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 27, 2016

Grainger's Proxy Statement and Annual Report on Form 10-K are available in the 2016 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.

                2016 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 Tenure

  15

Board Diversity

  16

Board of Directors and Board Committees

  16

Leadership Structure

  19

Board and Committee Evaluations

  21

Board's Role in Risk Oversight

  21

Director Compensation

  23

Ownership of Grainger Stock

  25

Section 16(a) Beneficial Ownership Reporting Compliance

  27

Report of the Audit Committee of the Board

  28

Audit Fees and Audit Committee Pre-Approval Policies and Procedures

  29

Report of the Compensation Committee of the Board

  30

Fees for Independent Compensation Consultant

  31

Compensation Discussion and Analysis

  32

Summary Compensation Table

  50

Grants of Plan-Based Awards Table

  52

Outstanding Equity Awards at Fiscal Year-End Table

  53

Stock Option Exercises and Stock Vested Table

  54

Pension Benefits Table

  55

Nonqualified Deferred Compensation Table

  55

Other Potential Post-Employment Payments Tables

  59

Equity Compensation Plans

  66

Transactions with Related Persons

  67

Proposal to Ratify the Appointment of Independent Auditor

  68

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

  69

Appendix A—Categorical Standards for Director Independence

  A-1
                2016 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 ten directors

      FOR EACH DIRECTOR NOMINEE       7

Ratification of the appointment of Ernst & Young LLP as independent auditor for the year ending December 31, 2016

    FOR     68

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

      FOR       69
                2016 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 the 2016 annual meeting of shareholders of W.W. Grainger, Inc., an Illinois corporation (Grainger or the Company) to be held on April 27, 2016, 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 proxy statement and other proxy-soliciting materials were first sent or made available to shareholders on or about March 17, 2016.

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 7, 2016, the record date for the meeting, may vote. There were 61,574,328 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, 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 or on the advisory vote on the compensation of Grainger's Named Executive Officers. 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.

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.

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

Does Grainger have majority voting for the election of directors with a resignation policy for directors failing to receive the required majority vote?

Yes. As required under Illinois law, 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. Moreover, in accordance with the Company's Criteria for Membership on the Board of Directors, any director standing for re-election (including the ten nominees standing for election at the Annual Meeting) who fails to receive the required majority vote is expected to tender his or her resignation for consideration by the Board Affairs and Nominating Committee. The Board Affairs and Nominating Committee will consider the resignation and make a recommendation to the Board of Directors of the Company concerning the acceptance or rejection of the resignation. The Board will then take formal action on the Board Affairs and Nominating Committee's recommendation within 90 days after the results of the director election at the annual meeting are certified. Following the Board's decision on the Board Affairs and Nominating Committee's recommendation, the company will publicly disclose the Board's decision.

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 six 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 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 and on the advisory resolution on the compensation of Grainger's Named Executive Officers; otherwise your nominee is not allowed to vote your shares. 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.

                2016 PROXY STATEMENT W.W. GRAINGER, INC.                      3

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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 2015.

Grainger has a very expansive shareholder engagement process. We hosted our annual investor day in November with over 125 investors in attendance and several hundred via webcast. In addition, we presented at 12 investor conferences and met with over 500 firms and over 800 unique investors in 2015. Our investor outreach includes both existing and potential shareholders and we ensure that we meet with at least 80% of our largest investors each year. We also met with 90% of our top 15 active 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. We plan to follow a similar practice in 2016. Management, including the Chairman/Chief Executive Officer, Chief Financial Officer and the Chief Operating Officer, 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 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.

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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 2017 annual meeting?

A shareholder who intends to present a proposal at the next annual meeting of shareholders and who wishes the proposal to be included in our proxy statement for that meeting pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (Exchange Act), must submit the proposal in writing to the Corporate Secretary at the address on the notice of annual meeting accompanying this proxy statement. The proposal must be received no later than November 17, 2016.

Our by-laws require that written notice of proposals intended to be presented by a shareholder at the next annual meeting, but that are not intended for inclusion in our proxy statement for that meeting pursuant to Rule 14a-8, be delivered to the Corporate Secretary at the address on the notice of annual meeting accompanying this proxy statement no earlier than December 28, 2016 and no later than January 27, 2017. Our by-laws also require that written notice of nominees for the election of directors intended to be made by a shareholder at the next annual meeting be delivered to the Corporate Secretary at the address on the notice of annual meeting accompanying this proxy statement by no later than the date set forth in the proxy statement for the preceding annual meeting of shareholders, which in this case is November 17, 2016. To be in proper written form, these notices must set forth the information prescribed in our by-laws. A copy of our 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 the address on the notice of annual meeting accompanying this proxy statement.

                2016 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 2015, 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 2015, Grainger bought products and/or services from, or sold products and/or services to, companies with which Messrs. Santi and Slavik are or were associated as executive officers or otherwise as of December 31, 2015. In no instance did the total amount of the purchases from or sales to any such company during 2015 represent more than 0.232% of the projected consolidated gross revenues of that company for the year or more than 0.311% of the consolidated gross revenues of Grainger for the year.

In addition, as part of its overall 2015 charitable contributions program, Grainger made donations to tax-exempt organizations with which Messrs. Hall, Novich, Roberts, and Santi serve as officers, directors or trustees. In no instance did the total amount of the contributions to such an organization during 2015 represent more than 0.072% 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 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.

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The Board has determined that each of Messrs. Adkins, Anderson, 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 previously were elected by the shareholders at the 2015 annual meeting of shareholders.

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 2015 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.

Ten directors, all current Board members, have been nominated by the Board for election at this year's annual meeting of shareholders. While William K. Hall is also a current Board member, he will not be standing for re-election this year in accordance with the Company's Criteria for Membership on the Board of Directors, which provide that an outside director generally will not be nominated after the age of 72. All directors are elected for a one-year term. Each director will therefore serve until the 2017 annual meeting of shareholders or until his or her successor has been qualified and elected. Details concerning the nominees are provided below.

As required under Illinois law, majority voting applies to all Grainger 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 as of March 2016. Each nominee has provided information on his or her relevant background that includes the nominee's experience for at least the past five years.

Grainger's directors and nominees have varied experience, qualifications, attributes, and skills that assist them in providing guidance and oversight to Grainger's management as it operates the 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 25,800 employees in the United States, Canada, Europe, Asia, and Latin America. With 2015 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, structure and challenges 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, is 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 experience, qualifications, attributes, and skills that led the Board to nominate each individual.

PHOTO

Rodney C. Adkins

Rodney C. Adkins, age 57, 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 Avnet, Inc., where he serves on its audit committee, PPL Corporation, where he serves on its audit committee, and United Parcel Service, Inc., where he chairs the risk committee and is a member of the compensation 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 at three other public companies, in addition to Grainger, and serves on the audit committee of two of them.
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PHOTO

Brian P. Anderson

Brian P. Anderson, age 65, 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 and a member of the audit committee, as well as a director of James Hardie Industries plc 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 and Chairman of The Nemours Foundation, a non-profit children's health organization. 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 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 chief financial officer of one of the two public companies noted above, 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 one other public company. In addition, Mr. Anderson serves as the chairman of the audit committees of two public companies and as a member of the audit committees of two other public companies, including Grainger. See "Audit Committee" below for the Board's determination concerning Mr. Anderson's service on more than three public company audit committees.
                2016 PROXY STATEMENT W.W. GRAINGER, INC.                      9

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PHOTO

V. Ann Hailey

V. Ann Hailey, age 65, 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 Realogy Holdings Corp. where she chairs its audit committee and is a member of its nominating and corporate governance and compensation committees, and TD Ameritrade Holdings, Inc., where she serves on its outside independent directors, audit, and risk committees. 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 brings key financial and operations experience to the Company. In particular, Ms. Hailey possesses broad expertise in finance, strategic planning, branding and marketing, retail goods and sales and distribution on a global scale. Ms. Hailey's positions as a former chief financial officer, her current and prior service on the audit committees of other companies and as Audit Chair of the Cleveland Federal Reserve Bank and her accounting and financial knowledge, also impart significant expertise to the Board, including an understanding of financial statements, corporate finance, accounting and capital markets. Through her experiences at Gilt Groupe Inc. and Famous Yard Sale, Ms. Hailey has added experience in Internet site development and selling as well as new venture management and funding.
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PHOTO

Stuart L. Levenick

Stuart L. Levenick, age 63, 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 governance and executive committee, and Finning International Inc. 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 public 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 previous employer. In addition, he had led his former employer's global human resources function and had responsibility for that company's enterprise risk assessment.

PHOTO

Neil S. Novich

Neil S. Novich, age 61, 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 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 audit committee, the compensation committee, and the compensation and management committee of one or more public companies.
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PHOTO

Michael J. Roberts

Michael J. Roberts, age 65, 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 public multinational 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 previously served on the compensation committees of two other public companies.

PHOTO

Gary L. Rogers

Gary L. Rogers, age 71, 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.
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PHOTO

James T. Ryan

James T. Ryan, age 57, 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 Trustee/Vice Chairman of 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 more than 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.

PHOTO

E. Scott Santi

E. Scott Santi, age 54, is Chairman and Chief Executive Officer of Illinois Tool Works Inc. (ITW), a worldwide manufacturer and marketer of engineered components and industrial systems and consumables. Mr. Santi was elected Chief Executive Officer of ITW in November 2012, after serving as acting Chief Executive Officer since October 2012, and was elected Chairman in May of 2015. 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.
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PHOTO

James D. Slavik

James D. Slavik, age 63, 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 also serves on the Advisory Board for the Cove Fund, a seed capital fund affiliated with UCI Applied Innovation (formerly the Institute for Innovation) at the University of California at Irvine (UCI) and is a Founding Director for UCI Applied Innovation. Mr. Slavik is also a director of the Hoag Hospital Foundation and is a member of its investment and nominating committees. 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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The following table highlights specific experience, qualifications, attributes, and skills that the Board considered for each director. A particular director may possess additional experience, qualifications, attributes, or skills even if not expressly indicated below.

Director Experience, Qualifications, Attributes, and Skills


Adkins

Anderson

Hailey

Hall

Levenick

Novich

Roberts

Rogers

Ryan

Santi

Slavik

Operational

                                           

Experience in the development and implementation of

  ü   ü   ü   ü   ü   ü   ü   ü   ü   ü   ü

operating plans and business strategy

                                           

Finance

                                           

Possess the knowledge and understanding of finance

                                           

and financial reporting processes with experience or

  ü   ü   ü   ü   ü   ü   ü   ü   ü   ü   ü

oversight over the creation or auditing of financial

                                           

reports

                                           

Supply Chain/Logistics

                                           

Experience in supply chain management

                                           

encompassing the planning and management of all

  ü   ü       ü   ü   ü   ü   ü   ü        

activities involved in sourcing and procurement,

                                           

conversion, and all logistics management activities

                                           

Marketing

                                           

Experience in, or experience in a senior management

  ü     ü   ü   ü     ü   ü   ü   ü   ü

position responsible for, managing a sales function

                                           

Human Resources/Compensation

                                           

Experience in, or experience in a senior management
position responsible for, managing human resources/

  ü   ü       ü   ü   ü   ü   ü   ü   ü   ü

compensation

                                           

Leadership
Experience managing at a senior level


 
ü   ü   ü   ü   ü   ü   ü   ü   ü   ü   ü

Governance

                                           

Knowledge of corporate governance matters, including

  ü   ü   ü   ü   ü   ü   ü   ü   ü   ü   ü

through service on other public company boards

                                           

International

                                           

Experience in oversight of a complex global

  ü   ü   ü   ü   ü     ü   ü   ü   ü  

organization

                                           

Risk Assessment & Risk Management
Experience overseeing risk management

  ü   ü   ü   ü   ü   ü   ü   ü   ü   ü   ü

Board Tenure

The Board believes that it has the appropriate mix of relatively new directors and those with longer service to the Company. One longstanding director, Mr. Slavik, is the beneficial owner of approximately 6.2% of the Company's shares as of March 7, 2016. Mr. Slavik's beneficial ownership of Company shares pre-dates Grainger's initial public offering in 1967. As a group, the average tenure of the nominees for election to Grainger's Board of Directors is approximately 12.2 years. The chart below reflects length of service:

 

Years of Service


1-5

6-11

12-17

25+
 

Number of Directors

  1   6   3   1
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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

Seven meetings of the Board were held in 2015. 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 2015 annual meeting of shareholders.

Audit Committee

The Audit Committee of the Board (the Audit Committee) met five times in 2015. 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 listing standards of the NYSE. The Board has also determined that each of Mr. Santi, Chair of the Audit Committee, Mr. Anderson, Mr. Novich, and Ms. Hailey, is an "audit committee financial expert," as that term is defined in the applicable rules of the SEC. Further, in accordance with applicable NYSE listing standards, the Board has considered Mr. Anderson's simultaneous service on the audit committees of more than three public companies, namely the audit committees of Grainger, A.M. Castle & Co., PulteGroup Inc. and James Hardie Industries plc, and has determined that such service will not impair his ability to serve effectively on the Audit Committee.

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 of the Board (the Board Affairs and Nominating Committee) met five times in 2015. 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), and 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

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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.

Compensation Committee

The Compensation Committee of the Board (the Compensation Committee or the Committee) met five times in 2015.

The Committee oversees Grainger's compensation and benefits policies and programs (generally for all employees and specifically with respect to executives), makes executive compensation decisions, and reviews and recommends other compensation 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 SEC and the NYSE.

The 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 Committee develops programs based on its own deliberations. It also considers programs and recommendations from its independent compensation consultant, a variety of other compensation and benefits consultants, and management. After a review of the factors prescribed by the SEC and the NYSE, the Committee determined that Deloitte Consulting is an independent advisor under the rules and regulations and has retained Deloitte Consulting as its independent compensation consultant.

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 Committee meeting. The Committee has sole authority to retain and terminate the

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independent compensation consultant, including sole authority to approve the consultant's fees. At the Committee's direction, the independent compensation consultant:

Members of management (including some of the NEOs) assist the 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 Committee, 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 Committee, in their sole discretion, determine the appropriate compensation design and level.

The Committee grants equity awards (stock options, restricted stock units (RSUs), and performance shares) to officers and other employees under the 2015 Incentive Plan. The Committee has delegated to management 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.

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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 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 their 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 2015, sales transactions were made to approximately 3 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 2015, Grainger purchased products from more than 4,800 key suppliers, and no single supplier represented more than 5 percent of the total purchases.

The 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 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 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, as amended from time to time, of the Audit Committee, Board Affairs and Nominating Committee, and Compensation Committee, which were adopted by the Board.

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, its 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 $145,000. 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. 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.

After the 2015 annual meeting of shareholders, the directors' compensation was adjusted as follows:

All independent directors receive an annual deferred stock unit grant worth $145,000. The number of shares covered by each grant is equal to $145,000 divided by the 200-day average stock price through January 31 (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.

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 to directors relating to their service to Grainger 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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2015 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

  $ 85,000   $ 147,577   $ 0   $ 0   $ 0   $ 7,500   $ 240,077  

Brian P. Anderson

  $ 85,000   $ 147,577   $ 0   $ 0   $ 0   $ 0   $ 232,577  

V. Ann Hailey

  $ 85,000   $ 147,577   $ 0   $ 0   $ 0   $ 0   $ 232,577  

William K. Hall

  $ 85,000   $ 147,577   $ 0   $ 0   $ 0   $ 7,500   $ 240,077  

Stuart L. Levenick

  $ 120,000   $ 147,577   $ 0   $ 0   $ 0   $ 0   $ 267,577  

Neil S. Novich

  $ 85,000   $ 147,577   $ 0   $ 0   $ 0   $ 7,500   $ 240,077  

Michael J. Roberts

  $ 100,000   $ 147,577   $ 0   $ 0   $ 0   $ 0   $ 247,577  

Gary L. Rogers

  $ 85,000   $ 147,577   $ 0   $ 0   $ 0   $ 0   $ 232,577  

James T. Ryan

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

E. Scott Santi

  $ 105,000   $ 147,577   $ 0   $ 0   $ 0   $ 7,500   $ 260,077  

James D. Slavik

  $ 85,000   $ 147,577   $ 0   $ 0   $ 0   $ 7,500   $ 240,077  
1
Represents cash fees received in 2015.

2
Represents the grant date fair value of an award of 590 deferred stock units made on April 29, 2015, 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 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 7, 2016.

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

    3,830,417     0     18,059     3,848,476   6.2%

Rodney C. Adkins

  400   0   984   1,384   *   

Brian P. Anderson

    4,340     0     14,919     19,259   *   

Court D. Carruthers

  0   15,741   0   15,741   *   

V. Ann Hailey

    200     0     9,354     9,554   *   

William K. Hall

  1,468   0   19,118   20,586   *   

Joseph C. High

    4,939     25,135     4,000     34,074   *   

John L. Howard8

  1,127,050   89,749   20,000   1,236,799   2.0%

Ronald L. Jadin9

    20,459     120,653     0     141,112   *   

Stuart L. Levenick

  400   0   15,391   15,791   *   

Donald G. Macpherson

    24,189     83,540     0     107,729   *

Neil S. Novich

  4,605   0   21,915   26,520   *   

Michael J. Roberts

    1,000     0     16,797     17,797   *   

Gary L. Rogers

  310   0   10,856   11,166   *   

James T. Ryan

    147,928     431,965     20,000     599,893   *   

E. Scott Santi

  303   0   4,812   5,115   *   

Directors and Executive Officers as a group10,11

    5,177,652     786,927     185,376     6,149,955   9.6%
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, the 2010 Incentive Plan, and the 2015 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, the 2010 Incentive Plan, and the 2015 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%.
                2016 PROXY STATEMENT W.W. GRAINGER, INC.                      25

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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 2,509,252 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 500,000 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 527,611 shares by March 2014, and then continued with a reduction of 241,759 shares by March 2015, and 266,747 shares by March 2016.

8
Includes 18,406 shares as to which Mr. Howard has sole voting and investment power, and 1,108,644 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 5,756 shares held by Mr. Jadin's wife, as to which Mr. Jadin disclaims voting or investment power.

10
Includes 3,619,426 shares as to which members of the group have shared voting and/or investment power.

11
Excludes 1,045,246 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, 2015, 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
Owned1
  Percentage of
Common Stock
 

Blackrock, Inc.
55 East 52nd Street
New York, NY 10055

    3,386,214 2   5.4 %

Massachusetts Financial Services Company
111 Huntington Avenue
Boston, MA 02199

   
3,843,840

3
 
6.1

%

The Vanguard Group
100 Vanguard Boulevard
Malvern, PA 19355

   
5,213,574

4
 
8.3

%

1
Includes shares beneficially owned by affiliated entities.

2
Includes 2,859,411 shares as to which there is sole voting power and no shares as to which there is shared voting power. Sole dispositive power is claimed.

3
Includes 3,465,846 shares as to which there is sole voting power and no shares as to which there is shared voting power. Sole dispositive power is claimed.

4
Includes 108,802 shares as to which there is sole voting power and 6,000 shares as to which there is shared voting power. Includes 5,097,586 shares as to which there is sole dispositive power and 115,988 shares as to which there is shared dispositive power.
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires our directors and officers and persons who own more than 10% of our common stock to file reports of ownership and changes in ownership with the SEC and the NYSE, and to furnish us with copies of the reports. Specific due dates for these reports are prescribed by SEC rules and we are required to report in this proxy statement any failure by directors, officers, or 10% holders to file such reports on a timely basis. Based on our review of such reports and written representations from our directors and officers, we believe that all such filing requirements were timely met during 2015, with the exception of one late Form 4 for each of our Section 16 officers, namely, Michael Ali, Laura D. Brown, Joseph C. High, John L. Howard, Ronald L. Jadin, William Lomax, Donald G. Macpherson, and James T. Ryan, each relating to the Company's annual stock option grant and resulting from an inadvertent administrative error.

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Report of the Audit Committee of the Board

The Audit Committee 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 SEC and standards of the NYSE. The Audit Committee acts under a charter that is reviewed annually, was last amended by the Board on December 1, 2015, and is available in the Governance section of Grainger's website 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 Auditing Standard 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 fiscal year ended December 31, 2015, as filed with the SEC.

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 2015 and 2014, respectively:

Fee Category
  2015   2014  

Audit

  $ 4,768,897   $ 3,737,073  

Audit-Related

    272,000     193,000  

Tax

    1,529,228     761,555  

Other

    3,000     3,000  

Total Fees

  $ 6,573,125   $ 4,694,628  

Audit. 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. 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. 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.

Other. 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 fee 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 2016 annual meeting of shareholders and in its Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC. The Compensation Committee acts under a charter that is reviewed annually, was last reviewed by the Board on December 9, 2015 and is available in the Governance section of Grainger'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 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 2015:

Type of Fee
  2015  

Executive Compensation Consulting

  $ 121,172  

All Other Consulting

  $ 1,405,056  

Total Fees

  $ 1,526,228  

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 SEC and the NYSE, 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 basic compensation structure did not change in 2015. Highlights for the year include:

This Compensation Discussion and Analysis (CD&A) describes the Company's compensation philosophy and programs generally, and explains the compensation paid to the six most highly compensated executives in 2015—the Named Executive Officers (NEOs).


Named Executive Officers (NEOs) for 2015

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       Chief Operating Officer
John L. Howard     Senior Vice President and General Counsel
Joseph C. High       Senior Vice President and Chief People Officer (CPO)
Court D. Carruthers     Former Senior Vice President and Group President, Americas1
1
Mr. Carruthers resigned from his position with the Company effective as of July 31, 2015 and assisted with the transition of his responsibilities until December 31, 2015.

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's NEO compensation uses the following components:

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, while the ultimate value of the program is linked to stock price performance over 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 3-year performance period—sales growth and 3-year ROIC.     Performance Based     Long-Term

Retirement/Profit Sharing

      Aligns the interests of the employees and shareholders as the Company's annual contribution is based on a formula that incorporates 2 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 encourage profitable growth while protecting shareholders' interests, the Company's compensation programs include the following risk mitigating features:

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 aligns 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 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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These components and the use of performance-based pay are consistent with the mix seen in the comparator group. The tables below show 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       88%       88%       12%       12%
Mr. Jadin       78%       78%       22%       22%
Mr. Macpherson       77%       78%       23%       22%
Mr. Howard       73%       73%       27%       27%
Mr. High       73%       73%       27%       27%


Annual vs. Long-Term Compensation

     
Annual
Compensation



  Long-Term
Compensation
               
NEO

  Company

  Peers

  Company

  Peers
Mr. Ryan       27%       28%       73%       72%
Mr. Jadin       41%       39%       59%       61%
Mr. Macpherson       46%       41%       54%       59%
Mr. Howard       48%       45%       52%       55%
Mr. High       47%       45%       53%       55%

"Performance Based Compensation" consists of the annual incentive plan, long-term incentives, and profit sharing.

"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 profit sharing. Annual profit sharing contributions are based on the Company's short-term performance, distributions are restricted, and full vesting occurs after five 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.

2015 Performance

The Company believes that revenue growth coupled with a focus on ROIC leads to shareholder value creation and uses two metrics to determine performance-based compensation: year over year sales growth and ROIC. In 2015, Company sales were up +0.1% to $9.97 billion and ROIC was 28.5%. Excluding the effect of any acquisitions made during the year, sales growth was –1.3% and ROIC was 29.9%.

 
GRAPHIC
 
GRAPHIC

The Company's compensation structure links pay with Company performance. 2015 financial results did not meet expectations and therefore both the annual bonus payments and long-term performance share program were settled below target:

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The Company is focused on profitable daily sales growth over the short- and long-term. Using ROIC and sales growth for both short-term and long-term incentive awards does not create unreasonable risk because:

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 individual 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

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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 SEC and the NYSE, the Compensation Committee determined that its compensation consultant, Deloitte Consulting, is an independent advisor under the applicable 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 to conduct a risk assessment that is 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 Deloitte Consulting-conducted 2015 risk review were discussed with the Committee.

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.

38               W.W. GRAINGER, INC. 2016 PROXY STATEMENT                      

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5.     Say-on-Pay

At the 2015 annual meeting of shareholders, the advisory vote to approve the compensation of the Company's NEOs received the support of 94% 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.

The Company is required to check with shareholders on the frequency of the say-on-pay vote every six years. In 2011, management recommended and shareholders approved an annual say-on-pay vote. The next frequency vote is scheduled for 2017.

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, 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 0.5 to 2.0 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

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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.

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