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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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Filed by a Party other than the Registrant o

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 16, 2017

Dear Grainger Shareholder:

The 2017 annual meeting of shareholders of W.W. Grainger, Inc. will be held at our headquarters located at 100 Grainger Parkway, Lake Forest, Illinois 60045 (see map overleaf), on Wednesday, April 26, 2017, at 10 A.M. (CDT).

At the meeting, we will report on our operations and other matters of current interest. Shareholders will also vote on the matters set forth in the accompanying Notice of Annual Meeting and Proxy Statement and any other matters properly brought before the meeting. The Board of Directors and management cordially invite you to attend.

Please take the time to carefully read the Notice of Annual Meeting and Proxy Statement that 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.

We look forward to seeing you at the meeting.

Sincerely,


/s/ J. T. RYAN


 

/s/ D.G. MACPHERSON

James T. Ryan
Chairman of the Board
  D.G. Macpherson
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 votes related to executive compensation or on other non-routine matters.

Please make sure your shares are voted.

    

 

2017 PROXY STATEMENT

 

W.W. GRAINGER, INC.

 

 


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LOGO

 

 

W.W. GRAINGER, INC.
2017 Annual Meeting of Shareholders
Wednesday, April 26, 2017—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 26, 2017

Dear Grainger Shareholder:

The 2017 annual meeting of shareholders of W.W. Grainger, Inc. will be held at our headquarters at 100 Grainger Parkway, Lake Forest, Illinois 60045 (see map on previous page), on April 26, 2017, at 10 A.M. (CDT) for the following purposes:

The Board has fixed the close of business on March 6, 2017, as the record date for determining shareholders entitled to vote at 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 16, 2017

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 26, 2017

Grainger's Proxy Statement and Annual Report on Form 10-K are available in the 2017 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.

    

 

2017 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

  7

Recommending Candidates for Board Membership

  7

Director Independence

  7

Annual Election of Directors

  8

Nominees and Director Experience, Qualifications, Attributes and Skills

  8

Board Tenure

  16

Board Diversity

  17

Board of Directors and Board Committees

  17

Leadership Structure

  20

Board and Committee Evaluations

  22

Board's Role in Risk Oversight

  23

Director Compensation

  25

Ownership of Grainger Stock

  27

Section 16(a) Beneficial Ownership Reporting Compliance

  29

Report of the Audit Committee of the Board

  30

Audit Fees and Audit Committee Pre-Approval Policies and Procedures

  31

Proposal to Ratify the Appointment of Independent Auditor

  32

Report of the Compensation Committee of the Board

  33

Fees for Independent Compensation Consultant

  34

Compensation Discussion and Analysis

  35

Summary Compensation Table

  53

Grants of Plan-Based Awards Table

  54

Outstanding Equity Awards at Fiscal Year-End Table

  55

Stock Option Exercises and Stock Vested Table

  56

Pension Benefits Table

  56

Nonqualified Deferred Compensation Table

  57

Other Potential Post-Employment Payments Tables

  60

Equity Compensation Plans

  67

Transactions with Related Persons

  68

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

  69

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

  70

Appendix A—Categorical Standards for Director Independence

  A-1

    

 

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Annual Meeting Agenda and Voting Recommendations

Management Proposals


  Board Voting
Recommendation


  Page
Reference
(for more
detail)

Election of 10 directors

      FOR EACH DIRECTOR NOMINEE       7

Ratification of the appointment of Ernst & Young LLP as independent auditor for the year ending December 31, 2017

    FOR     32

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

      FOR       69

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

    ONE YEAR     70

    

 

2017 PROXY STATEMENT

 

W.W. GRAINGER, INC.

 

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Introduction

What is the purpose of this proxy statement?

This proxy statement relates to the 2017 annual meeting of shareholders of W.W. Grainger, Inc., an Illinois corporation (Grainger or the Company) to be held on April 26, 2017, and any adjournment of that meeting to a later date. It contains information intended to help you make your voting decisions. We are sending this proxy statement to you because Grainger's Board of Directors is soliciting your proxy to vote your shares at the meeting. This proxy statement and other proxy-soliciting materials were first sent or made available to shareholders on or about March 16, 2017.

What matters are scheduled to be presented at the 2017 annual meeting of shareholders?

Who is entitled to vote?

Holders of shares of common stock outstanding on Grainger's books at the close of business on March 6, 2017, the record date for the meeting, may vote. There were 58,719,653 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 votes 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, on the advisory vote on the compensation of Grainger's Named Executive Officers or on the frequency of 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.

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How many votes do I have?

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

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

Does Grainger have majority voting for 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 10 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 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 the independent auditor?

Ratification of the appointment of the 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.

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

If a majority of the votes are not cast for one of the options for the frequency of the advisory vote (one year, two years, or three years), the Board of Directors will consider the option that receives the highest number of votes cast as the shareholders' preferred choice; however, this vote is advisory only and is not binding.

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 (Say on Pay) at every annual meeting of shareholders. Shareholders have the opportunity to cast an advisory vote on the frequency of Say on Pay votes at least every six years. There will be an advisory vote on the frequency of the Say on Pay vote at this year's annual meeting. Assuming that shareholders vote to approve annual Say on Pay advisory votes, the next advisory vote to approve the compensation of the Named Executive Officers will occur at the 2018 annual meeting. The next advisory vote on the frequency of the Say on Pay vote following this year's annual meeting will occur at Grainger's 2023 annual meeting.

    

 

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What if I don't indicate my voting choices?

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

If you are a beneficial owner and the shares you own are held in street name by a brokerage firm, bank, or other nominee you must specifically instruct your nominee how you want your shares voted for the election of directors, on the advisory resolution on the compensation of Grainger's Named Executive Officers, and on the frequency of the shareholder advisory votes 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.

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 sign, date and return all proxy forms to ensure that all of 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 2016.

Grainger has a very expansive shareholder engagement process. We hosted our annual investor day in November with more than 90 investors and analysts in attendance and several

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hundred listening via webcast. In addition, we presented at 11 investor conferences and met with 500 unique firms and more than 850 unique investors in 2016. 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 investors, excluding index and exchange traded funds, between January and April prior to our 2016 annual meeting of shareholders to answer their questions regarding Company strategy, results, governance, executive compensation and other topics. We plan to follow a similar practice in 2017. Further, management, including our Chief Executive Officer and Chief Financial 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.

Where can I find the voting results?

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

What is the deadline for receipt of shareholder proposals for inclusion in the 2018 annual meeting proxy statement?

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 materials 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 by Grainger no later than November 16, 2017, and must comply with the applicable SEC rules and other requirements prescribed in our by-laws.

What is the procedure for nomination of directors at the 2018 annual meeting of shareholders using Grainger's proxy access by-laws?

A qualifying shareholder, or a group of up to 20 qualifying shareholders, owning 3% or more of the Company's outstanding shares of common stock continuously for at least three years may nominate and include in Grainger's proxy statement and proxy card qualifying director nominees constituting up to the greater of two directors or 20% of the directors then serving on the Board, provided that the shareholder(s) and nominee(s) satisfy the requirements specified in our by-laws.

What is the procedure for other nominations of directors or proposals to transact business at the 2018 annual meeting of shareholders?

A shareholder entitled to vote for the election of directors at an annual meeting and who is a shareholder of record on:

    

 

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may directly nominate persons for director, or make proposals of other business to be brought before the annual meeting, by providing proper timely written notice to the Corporate Secretary at the address on the notice of annual meeting accompanying this proxy statement.

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 of the Exchange Act, be delivered no earlier than December 27, 2017, and no later than January 26, 2018.

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 by no later than the date with respect to submission of shareholder proposals under Rule 14a-8 of the Exchange Act as set forth in the proxy statement for the preceding annual meeting of shareholders, which in this case is November 16, 2017.

To be in proper written form, these notices must include certain information required by our by-laws, including information about the shareholder, any beneficial owner on whose behalf the nomination or proposal is being made, their respective affiliates or associates or others acting in concert with them, and any proposed director nominee.

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.

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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 2016, 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 2016, 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, 2016. In no instance did the total amount of the purchases from or sales to any such company during 2016 represent more than 0.241% of the projected consolidated gross revenues of that company for the year or more than 0.325% of the consolidated gross revenues of Grainger for the year.

In addition, as part of its overall 2016 charitable contributions program, Grainger made donations to tax-exempt organizations with which Messrs. Novich and Santi serve as officers, directors or trustees. In no instance did the total amount of the contributions to such an organization during 2016 represent more than 0.0526% 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 indirect material 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, 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 nominees, Messrs. Ryan and Macpherson, are Grainger employees and, accordingly, are not considered "independent." Mr. Rogers, who is not standing for re-election at the annual meeting, has also been determined by the Board to have no material relationship with Grainger within the meaning of the NYSE independence standards and Grainger's categorical standards.

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 2016 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 Gary L. Rogers 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 2018 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 2017. 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 highly integrated distribution centers, websites and branches and with more than 25,600 employees in the United States, Canada, Europe, Asia, and Latin America. With 2016 sales of $10.1 billion and as a broad line distributor of maintenance, repair and operating (MRO) supplies and other related products and services used by businesses and institutions primarily in the United States and Canada, with a presence also 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 58, 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. Mr. Adkins was also a director of Pitney Bowes Inc. from 2007 to 2013, where he served on its audit committee and executive compensation committee. 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 66, 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 James Hardie Industries plc where he chairs the audit committee and serves on the remuneration committee, PulteGroup, Inc. where he chairs the audit committee and serves on the nominating and governance committee, and Stericycle, Inc. where he serves on the audit committee. He is a director and Chairman of The Nemours Foundation, a non-profit children's health organization, and a member of the Governing Board of the Center for Audit Quality's (CAQ) Governing Board. Mr. Anderson was also a director of A.M. Castle & Co. from 2005 to 2016, where he served as Chairman of the Board and Chairman of its audit committee. 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.

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V. Ann Hailey

V. Ann Hailey, age 66, spent 10 years with L Brands, Inc. (formerly Limited Brands, Inc.), a retail apparel, personal care and beauty products company, where she served as Executive Vice President and Chief Financial Officer from 1997 to 2006, as Executive Vice President of Corporate Development from 2006 to 2007 and as a board member from 2001 to 2006. Prior to joining L Brands, Ms. Hailey spent 13 years at PepsiCo, Inc. in various leadership positions, including Vice President, Headquarters Finance, Pepsi-Cola Company and Vice President, Finance and Chief Financial Officer of Pepsi-Cola Fountain Beverage and USA Divisions. She most recently served from July 2012 to March 2014 as President, Chief Executive Officer and Chief Financial Officer of Famous Yard Sale, Inc., an online marketplace for celebrities offering items in a virtual yard sale format, and as Chief Financial Officer of Gilt Groupe, Inc., an Internet retailer of discount luxury goods, from January 2009 until January 2010. Ms. Hailey has also held leadership roles at Pillsbury Company and RJR Nabisco Foods, Inc. Ms. Hailey serves as a director of Realogy Holdings Corp., where she chairs its audit committee and is a member of its nominating and corporate governance committee. She also serves as a director of TD Ameritrade Holdings, Inc., where she serves on several board committees, including its audit and risk committees. She was formerly a director of Avon Products, Inc. from 2008 to 2016, where she served on its audit and finance committees, and the Federal Reserve Bank of Cleveland, where she served as the chair of its audit committee. 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 Federal Reserve Bank of Cleveland 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 64, 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 the Lead Director of Entergy Corporation, where he also chairs its finance committee and is a member of its governance and executive committee, and Finning International Inc., where he is a member of its audit committee and safety, environment and social responsibility committee. Mr. Levenick, an independent director, was first appointed a director of Grainger in 2005, and is the Lead Director, Chair of the Board Affairs and Nominating Committee and a member of the Compensation Committee.

Director Qualifications

    §
    Mr. Levenick has served as the president of a division 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

D.G. Macpherson

D.G. Macpherson, age 49, is Chief Executive Officer of Grainger, a position assumed in October 2016 at which time he was also appointed to the Board. Previously, he served as Chief Operating Officer of Grainger from August 2015 through September 2016. Prior to these roles, Mr. Macpherson was Senior Vice President and Group President, Global Supply Chain and International, where he led the development of corporate strategy and continuous improvement, the global supply chain organization, the Company's single channel online business model and international operations in Asia and Europe. Prior to that, Mr. Macpherson was Senior Vice President and President, Global Supply Chain and Corporate Strategy. Mr. Macpherson joined Grainger in 2008 from The Boston Consulting Group, a global management consulting firm, where he was a partner and managing director from 2002 to 2008.

Director Qualifications

    §
    Mr. Macpherson is the Company's Chief Executive Officer and former Chief Operating Officer. He has served Grainger in many capacities over his nearly 10 years with the Company, including developing Company strategy, overseeing the launch of Grainger's U.S. single channel business, Zoro Tools, Inc., building the Company's supply chain capabilities globally and realigning the U.S. business to create greater value for customers of all sizes. Mr. Macpherson also has extensive experience in strategic planning, development and execution. Mr. Macpherson joined Grainger in 2008 after working closely with Grainger for six years as a partner and managing director at The Boston Consulting Group, where he was a member of the Industrial Goods Leadership Team.

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Neil S. Novich

Neil S. Novich, age 62, 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 compensation committee and previously chaired 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 chief executive officer 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 chairs the compensation committees of three public companies, having previously chaired the audit committee of one of those companies.

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Michael J. Roberts

Michael J. Roberts, age 66, is the former Global President and Chief Operating Officer of McDonald's Corporation from 2004 to 2006. His previous positions at McDonald's Corporation include 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 compensation committee. Mr. Roberts previously served on the board of directors of Qwest Communications International, Inc. (prior to its acquisition by CenturyLink) from August 2009 to April 2011, where he served on the compensation and human resources committee, and SP Plus Corporation (formerly, Standard Parking Corporation) from April 2010 to June 2013, where he served on the audit, compensation and executive committees. 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 and the audit committee of one of those companies.

    

 

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James T. Ryan

James T. Ryan, age 58, is Grainger's Chairman of the Board, a role he has held since April 2009. Mr. Ryan served as President and Chief Executive Officer of Grainger from June 2008 through September 2016. He served as Chief Operating Officer from 2007 to 2008 and was appointed to the Board of Directors in February 2007. Prior to these roles, Mr. Ryan served as Group President, responsible for the Company's businesses operating under the Grainger brand in the United States. 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. Mr. Ryan is the Vice Chair of the Board of Trustees of DePaul University, Co-Chair of the Business Advisory Council for the Farmer School of Business at Miami University, Oxford, Ohio, and is a member of the Civic Committee of the Commercial Club of Chicago, the Economic Club of Chicago and the National Association of Wholesaler-Distributors.

Director Qualifications

    §
    Mr. Ryan is the Company's former President and Chief Executive Officer. 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.

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E. Scott Santi

E. Scott Santi, age 55, 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 chief executive officer 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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James D. Slavik

James D. Slavik, age 64, 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 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 chief executive officer. 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

Levenick

Macpherson

Novich

Roberts

Ryan

Santi

Slavik

Operational

                                       

Experience in the development and implementation of

  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

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        

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

position responsible for, managing a sales function

                                       

Human Resources/Compensation

                                       

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

  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

Governance

                                       

Knowledge of corporate governance matters, including

  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  

organization

                                       

Risk Assessment & Risk Management
Experience overseeing risk management

  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 6.5% of the Company's shares as of March 6, 2017. 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 years. The chart below reflects length of service:

 

Years of Service


0-5

6-11

12-18

25+
 

Number of Directors

  2   5   2   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

Five meetings of the Board were held in 2016. Each Board meeting included at least one executive session, during which only independent directors were present.

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    

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 appointed to serve as Lead Director after the April 2016 annual meeting of shareholders.

Audit Committee

The Audit Committee of the Board (the Audit Committee) met six times in 2016. 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, PulteGroup Inc., James Hardie Industries plc, and Stericycle, Inc., 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 2016. 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 2016.

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.

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 rules and regulations, the Committee determined that Deloitte Consulting is independent 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 Named Executive Officers) assist the Committee in performing its responsibilities by providing recommendations for the design of Grainger's compensation program for its Named Executive Officers, other officers, and other employees. Management also recommends salary and award levels, except those related to Mr. Ryan, Chairman of the Board, and Mr. Macpherson, Chief Executive Officer. Messrs. Ryan and Macpherson's salaries 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 Chairman and Chief Executive Officer 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 shareholder-approved 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 has been 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 real or perceived 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 long-term leadership structure for Grainger. In the Board's view, having a single individual serving as both the Chairman and Chief Executive Officer assists in the timely flow of relevant information which supports effective Board decision-making and provides a useful connection between the Board and management so that Board actions are appropriately executed. The Board's Lead Director structure helps assure these functions are properly performed. The Board does not believe that permanently separating the role of the Chairman and Chief Executive Officer would result

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in strengthening Grainger's corporate governance or in creating or enhancing long-term value for our shareholders.

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 Board 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, include selecting the Chairman and Chief Executive Officer and evaluating his or her performance and the resulting compensation.

While the Board generally believes that splitting the roles of Chairman and Chief Executive Officer is unnecessary and not in the best interest of shareholders, effective October 1, 2016, as part of a planned succession process, the Company temporarily separated the two positions naming Mr. Macpherson Chief Executive Officer, with Mr. Ryan continuing to serve as Chairman of the Board. Concurrently with his appointment as Chief Executive Officer, Mr. Macpherson was also appointed to the Board. Prior steps in the succession planning included promoting Mr. Macpherson to Chief Operating Officer in August 2015. In that role, Mr. Macpherson was responsible for the Company's day-to-day operations and reported to Mr. Ryan. Previously, Mr. Macpherson had served the Company in various roles as a Senior Vice President and Group President since 2008.

The Board believes that Mr. Ryan's continued service as Board Chairman has enabled the Company to execute a smooth transition of the Chief Executive Officer role, while ensuring that the Board and Mr. Macpherson have retained Mr. Ryan and his significant knowledge of the Company's operations, strategy, people and resources during the succession process.

In deciding that a combined Chairman and Chief Executive Officer position is the appropriate long-term 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:

    

 

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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.

Board, Committee and Director Evaluations

Each year, the Board conducts a three-part evaluation process coordinated by the Lead Director and the Committee Chairs. The evaluation framework is constituted of the following.

Full Board Evaluation.    Each director completes a questionnaire designed to evaluate overall Board effectiveness and identify opportunities for improvement. The full Board evaluation seeks to determine how the Board can improve its key function of maximizing long term shareholder value and considers a number of factors, including, among others, the following:

Committee Evaluations.    Each director completes a questionnaire designed to evaluate overall effectiveness and identify opportunities for improvement with respect to each Committee in which he or she serves. The Committee evaluations consider a number of factors, including, among others, the following:

Director Self-Assessments.    Each director completes a self-assessment designed to evaluate the performance and effectiveness of the director. The director self-assessments consider a number of factors, including, among others, the following:

These questionnaires ask directors to assign ratings to how the Board performs and seek feedback on more open-ended topics, including Board and Committee processes and effectiveness. The evaluation framework and process is reviewed periodically with an outside corporate governance expert, including as to opportunities to enhance Board effectiveness.

The results of the evaluations are compiled anonymously and include responses and comments. The results of the completed Board evaluations and individual director self-assessments are furnished to the Lead Director, while the results of the completed evaluations for the Committees are furnished to the corresponding Committee Chairs, and then discussed at the Board and Committee meetings, respectively.

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Following discussion of the reports at the Board and respective Committee meetings, the Lead Director and the Committee Chairs develop plans for any items that may warrant additional action.

The information gained through this process helps inform the content of educational presentations to the Board as well as the skills sets desirable in director searches conducted by the Board from time to time. As a result of the Board's 2016 evaluation process and related follow-up, the Board identified the need for director candidates with proven track records of strategic thinking and experience in eCommerce.

Board's Role in Risk Oversight

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.

Succession Planning and Management Development

Our Board recognizes that it has an important duty to ensure senior leadership continuity by overseeing the development of executive talent and planning for the efficient succession of the Chief Executive Officer and other key leadership positions. Our Board has delegated primary oversight responsibility for succession planning and management development to the Board Affairs and Nominating Committee. The Committee reports on its activities to the full Board, which routinely addresses succession planning during executive sessions.

Our Board generally conducts an in-depth review of senior leader development and succession planning, including emergency succession scenarios, at least once a year. This review addresses the Company's management development initiatives, assesses senior management resources, and identifies individuals who should be considered as potential future senior executives. To ensure that the succession planning and management development process supports and enhances Grainger's strategic objectives, the Board and the Board Affairs and Nominating Committee also regularly consult with the Chairman of the Board and Chief Executive Officer on the Company's organizational needs, the leadership potential and related development plans for key managers, and plans for future developments and emergency situations.

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 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.

    

 

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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 non-employee 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 non-employee 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 comparator group as well as comparative information and advises on director compensation.

The directors' compensation program, which was last adjusted in 2015, consisted of the following:

All non-employee 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. The pledging of Company shares by directors or executive officers is prohibited by Company policy (see further details under the "Hedging and Pledging Prohibition" section). No directors have pledged any of the shares beneficially owned by them and all directors are currently in compliance with the ownership guidelines.

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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Table of Contents

2016 Director Compensation

 

Name

 



Fees
Earned
or Paid
in Cash1






Stock
Awards2




All Other
Compensation3



Total
 
 

Rodney C. Adkins

  $ 85,000   $ 154,651   $ 0   $ 239,651  
 

Brian P. Anderson

  $ 85,000   $ 154,651   $ 2,250   $ 241,901  
 

V. Ann Hailey

  $ 85,000   $ 154,651   $ 0   $ 239,651  
 

Stuart L. Levenick

  $ 120,000   $ 154,651   $ 0   $ 274,651  
 

Neil S. Novich

  $ 85,000   $ 154,651   $ 7,500   $ 247,151  
 

Michael J. Roberts

  $ 100,000   $ 154,651   $ 0   $ 254,651  
 

Gary L. Rogers

  $ 85,000   $ 154,651   $ 0   $ 239,651  
 

E. Scott Santi

  $ 105,000   $ 154,651   $ 7,500   $ 267,151  
 

James D. Slavik

  $ 85,000   $ 154,651   $ 7,500   $ 247,151  
1
Represents cash fees received in 2016.

2
Represents the grant date fair value of an award of 660 deferred stock units made on April 27, 2016, 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 with respect to donations made and matched in 2016.

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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 6, 2017.

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
100 Bayview Circle
Suite 4500
Newport Beach, CA 92660

    3,830,417     0     19,112     3,849,529     6.5 %

Rodney C. Adkins

  400   0   1,679   2,079   *     

Brian P. Anderson

    4,340     0     15,906     20,246     *     

V. Ann Hailey

  200   0   10,224   10,424   *     

Joseph C. High

    6,038     26,695     0     32,733     *     

John L. Howard7

  897,670   86,109   20,000   1,003,779   1.7 %

Ronald L. Jadin8

    20,459     103,737     0     124,196     *     

Stuart L. Levenick

  400   0   16,388   16,788   *     

D.G. Macpherson

    27,447     95,806     0     123,253     *     

Neil S. Novich

  4,605   0   23,420   28,025   *     

Paige K. Robbins

    1,729     11,087     8,713     21,529     *     

Michael J. Roberts

  1,000   0   18,259   19,259   *     

Gary L. Rogers

    310     0     11,758     12,068     *     

James T. Ryan

  143,478   423,523   20,000   587,001   1.0 %   

E. Scott Santi

    303     0     5,587     5,890     *     

Directors and Executive Officers as a group9,10

  4,946,531   767,919   179,292   5,893,742   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 and the number of restricted stock units credited to the accounts of executive officers. 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%.

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.

    

 

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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 18,406 shares as to which Mr. Howard has sole voting and investment power, and 879,264 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.

8
Excludes 5,546 shares held by Mr. Jadin's wife, as to which Mr. Jadin disclaims voting or investment power.

9
Includes 3,390,046 shares as to which members of the group have shared voting and/or investment power.

10
Excludes 1,045,036 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, 2016, 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

    3,418,523 2   5.7 %

Longview Partners (Guernsey) Limited
PO Box 559
Mill Court
La Charroterie
St Peter Port
Guernsey GY1 6JG

   
2,989,184

3
 
5.1

%

MBC Investments Corporation
c/o The Bank of New York Mellon Corporation
225 Liberty Street
New York, NY 10286

   
3,106,063

4
 
5.2

%

State Street Corporation
State Street Financial Center
One Lincoln Street
Boston, MA 02111

   
3,247,812

5
 
5.5

%

The Vanguard Group
100 Vanguard Boulevard
Malvern, PA 19355

   
5,245,242

6
 
8.8

%

1
Includes shares beneficially owned by affiliated entities.

2
Includes 2,842,404 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 1,874,053 shares as to which there is shared voting power and no shares as to which there is sole voting power. Shared dispositive power is claimed.

4
Includes 2,447,220 shares as to which there is sole voting power and no shares as to which there is shared voting power. Includes 2,526,591 shares as to which there is sole dispositive power and 579,472 shares as to which there is shared dispositive power.

5
Includes 3,247,812 shares as to which there is shared voting power and no shares as to which there is sole voting power. Shared dispositive power is claimed.

6
Includes 86,867 shares as to which there is sole voting power and 10,718 shares as to which there is shared voting power. Includes 5,148,471 shares as to which there is sole dispositive power and 96,771 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 2016, except for two Forms 4 that were filed late with respect to two 2015 sales by James D. Slavik to certain family trusts of equity interests in an entity through which he beneficially owns shares of Grainger common stock.

    

 

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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 corporate governance 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 on 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 ("Ernst & Young"), 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 Ernst & Young. The Audit Committee discussed with Ernst & Young matters required to be discussed under Statement on Auditing Standards No. 1301 "Communications with Audit Committees" adopted by the Public Company Accounting Oversight Board ("PCAOB"). Ernst & Young also provided to the Audit Committee the letter and written disclosures required by PCAOB standards concerning Ernst & Young's independence and the Audit Committee discussed with Ernst & Young 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, 2016, as filed with the SEC.

E. Scott Santi, Chair
Brian P. Anderson
V. Ann Hailey
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 with respect to fiscal years 2016 and 2015, respectively:

Fee Category
  2016   2015  

Audit Fees

  $ 5,695,900   $ 5,028,197  

Audit-Related Fees

    192,400     187,000  

Tax Fees

    1,302,627     1,529,228  

All Other Fees

    43,000     3,000  

Total Fees

  $ 7,233,927   $ 6,747,425  

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

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

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

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

Pre-Approval Policy for Audit and Non-Audit Services

The Audit Committee has adopted a policy for the pre-approval of all audit and permitted non-audit services to be provided to Grainger by its independent auditor and is responsible for the review and approval of any fees associated with those services. Also, specific pre-approval by the Audit Committee is required for any proposed services exceeding pre-approved fee levels.

Pre-approvals for categories of services are granted at the start of each fiscal year and are applicable for 12 months from the date of pre-approval. In considering these pre-approvals, the Audit Committee reviews detailed supporting documentation from the independent auditor for each proposed service to be provided. Unused pre-approval amounts are not carried forward to the next year.

The Company's Controller monitors services provided by the independent auditor and overall compliance with the pre-approval policy. The Corporate Controller reports periodically to the Audit Committee about the status of outstanding engagements, including actual services provided and associated fees, and must promptly report any noncompliance with the pre-approval policy to the Chairman of the Audit Committee.

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 may not delegate to management its responsibilities to pre-approve services performed by the Company's independent auditor. The Audit Committee periodically reviews reports summarizing all services provided by the independent auditor.

    

 

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Proposal to Ratify the Appointment of Independent Auditor

The Audit Committee is directly responsible for the appointment, compensation, retention and oversight of the independent external audit firm that performs audit services. In considering Ernst & Young's appointment for the 2017 fiscal year, the Committee reviewed the firm's qualifications and competencies, including the following factors:

Ernst & Young has been retained as the Company's independent auditor continuously since 2005. In order to ensure continuing auditor independence, the Committee periodically considers whether there should be a regular rotation of the independent auditor. The Audit Committee ensures that the mandated rotation of Ernst & Young's personnel occurs routinely and the Audit Committee and its Chairman are directly involved in the selection of Ernst & Young's lead engagement partner.

The Audit Committee and the Board of Directors believe that the continued retention of Ernst & Young to serve as the Company's independent auditor for the year ending December 31, 2017 is in the best interests of the Company and its shareholders, and the Board is asking shareholders to ratify this appointment. Representatives of Ernst & Young are expected to be present at the meeting to respond to appropriate questions of shareholders and to make any desired statements.

The Board recommends a vote FOR the proposal to ratify the appointment of independent auditor.

Approval of the proposal requires the affirmative votes of a majority of the shares of Grainger common stock represented in person or by proxy at the meeting and entitled to vote. Abstentions will have the same effect as votes against the proposal. In the event the proposal is not approved, the Board will consider the negative vote as a mandate to appoint another independent auditor for the next year.

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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 2017 annual meeting of shareholders and in its Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC. The Compensation Committee acts under a charter that is reviewed annually, was last reviewed by the Board on December 13, 2016, 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 2016:

Type of Fee
  2016  

Executive Compensation Consulting

  $ 237,666  

All Other Consulting

  $ 711,375  

Total Fees

  $ 949,041  

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 rules and regulations, the Compensation Committee determined that its compensation consultant, Deloitte Consulting, did not have any conflicts of interest.

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Compensation Discussion and Analysis

Introduction

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 2016—the Named Executive Officers (NEOs).


Named Executive Officers (NEOs) for 2016

Officer

  Title
James T. Ryan       Chairman of the Board
D.G. Macpherson     Chief Executive Officer (CEO)
Ronald L. Jadin       Senior Vice President and Chief
Financial Officer (CFO)
John L. Howard     Senior Vice President and General Counsel
Joseph C. High       Senior Vice President and Chief People Officer (CPO)
Paige K. Robbins     Senior Vice President, Global Supply Chain, Branch Network and Company Strategy

The titles in the table above reflect positions held by the NEOs as of the end of 2016. These titles remain unchanged as of the date of this proxy statement. As explained under "Leadership Changes" below, between January 1, 2016 and September 30, 2016, Mr. Ryan served as the Company's Chairman, President and CEO, while Mr. Macpherson served as the Company's Chief Operating Officer (COO).

Leadership Changes

Long term CEO succession planning is crucial to the stability of the business and a key responsibility of the Board. Effective October 1, 2016, as part of a planned succession process, the Company named Mr. Macpherson CEO, with Mr. Ryan continuing to serve as Chairman of the Board. Concurrent with his appointment as CEO, Mr. Macpherson was also appointed to the Board.

Prior steps in the succession planning included promoting Mr. Macpherson to COO in August 2015. In that role, Mr. Macpherson was responsible for the Company's day-to-day operations and reported to Mr. Ryan. Previously, Mr. Macpherson had served the Company as Senior Vice President and Group President, Global Supply Chain and International since 2013; Senior Vice President and President, Global Supply Chain and Corporate Strategy, a position assumed in 2012; and Senior Vice President, Global Supply Chain, a position assumed in 2008.

The Board believes that Mr. Ryan's continued service as Chairman of the Board has enabled the Company to execute a smooth transition of the CEO role, while ensuring that the Board and Mr. Macpherson have retained Mr. Ryan and his significant knowledge of the Company's operations, strategy, people and resources during the succession process.

    

 

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Table of Contents

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 2016. Highlights include:

NEO 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 and 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 prior to exercise.       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 (sales growth and 3-year ROIC) and stock price over the 3-year performance period.     Performance Based     Long-Term

Retirement/Profit Sharing

      Aligns the interests of the employees and shareholders as the Company's annual contribution is based on ROIC.       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 Review   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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Table of Contents

These components and the use of performance-based pay are consistent with the mix seen in the comparator group. The tables below show 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. Macpherson       88%       88%       12%       12%
Mr. Jadin       79%       78%       21%       22%
Mr. Howard       75%       74%       25%       26%
Mr. High       74%       73%       26%       27%