W.W. Grainger (GWW)

Cash Incentives

        Executive officers and other key managers generally participate in the Management Incentive Program (MIP), which provides for annual cash incentives based on the achievement of specified financial performance measures. For 2005, the MIP was structured to provide a balance between short term and long term results and to align the interests of management with shareholders by providing incentive payments that correspond with long term creation of shareholder value. For 2005, the financial measures used were return on invested capital (ROIC) and year-over-year growth in revenue. These measures were selected as they balance revenue growth with profitability, expense management and asset management and have been consistently applied for the past five years. A minimum ROIC return is required for any bonus payment. Once this hurdle is met, sales growth becomes a more important factor in the bonus calculation. In addition, for 2005 there was an individual performance component worth up to 30% of the target incentive. This component is designed to reward based on an assessment of achievement against specific individual or team goals related to Company objectives.

        Target incentive awards under the MIP and similar programs are based on a review of competitive market practice and range from 10% to 110% of base salary. Actual MIP payments are a product of the executive's incentive target adjusted by the Company's actual results achieved under the financial measures and the assessment of individual performance against specific goals. Incentive awards for officers in charge of business units were primarily based on the performance of the individual unit, although these officers also participated in the Company MIP results with respect to a portion of their total incentive opportunity.

        Results for 2005 of 25.9% ROIC and 9.4% year-over-year growth in sales were both above target. These results translated to an actual incentive multiple that caused the 2005 incentive awards to be greater than the target incentive awards. In addition to these financial measures, the individual performance components were assessed and all officers achieved their objectives.

        The Chairman and Chief Executive Officer and the Group President, Grainger Branded Businesses participated in the Office of the Chairman Incentive Program, a separate shareholder- approved plan providing for incentive bonuses determined by reference to the Company's reported net earnings. Bonuses under this plan were calculated for the year using the same financial measures as MIP incentives for most other executive officers.

        In 2006, the Company intends to continue to use ROIC, year-over-year growth in revenue, and individual performance for its annual incentive program.

Cash Incentives

        Executive officers and other key managers generally participate in the Management Incentive Program (MIP), which provides for cash incentives based on the achievement of specified financial performance measures. For 2004, the MIP was structured to provide a balance between short term and long term results and to align the interests of management with shareholders by providing incentive payments that correspond with long term creation of shareholder value. For 2004, the financial measures used were return on invested capital (ROIC) and year-over-year growth in revenue. These measures were selected as they balance revenue growth with profitability, expense management and asset management. In addition, for 2004 there was an individual performance component worth up to 30% of the target incentive. This component is designed to reward based on an assessment of the individual's achievement against specific goals related to Company objectives.

        Target incentive awards under the MIP and similar programs are based on a review of competitive market practice and range from 10% to 110% of base salary. Actual MIP payments are a product of the incentive target adjusted by the actual results achieved under the financial measures and the assessment of individual performance against specific goals. Incentive awards for officers in charge of business units were primarily based on the performance of the individual unit, although these officers also participated in the Company MIP results with respect to a portion of their total incentive opportunity.

        Results for 2004 were above target on ROIC and year-over-year growth in sales. These results translated to an actual incentive multiple that caused the 2004 incentive awards to be greater than the target incentive awards. In addition to these financial measures, the individual performance components were assessed.

        The Chairman and Chief Executive Officer participated in the Office of the Chairman Incentive Program, a separate shareholder-approved plan providing for incentive bonuses determined by reference to the Company's reported net earnings. Bonuses under this plan were calculated for the year using the same financial measures as MIP incentives for most other executive officers.

        In 2005, the Company intends to continue to use ROIC, year-over-year growth in revenue, and individual performance for its incentive program.