W.W. Grainger (GWW)

Chairman and Chief Executive Officer Compensation

        All elements of compensation for the Chairman and Chief Executive Officer, including base salary, bonus and long term incentives, and other benefits, are reviewed and approved solely by independent directors in executive sessions of this Committee or the full Board. The Committee reviews and approves the corporate goals and objectives relevant to the Chairman and Chief Executive Officer's compensation. These goals and objectives include quantitative measures such as sales growth, profitability, and shareholder value, as well as qualitative measures such as strategic execution and overall Company performance. The Committee then evaluates performance in light of those goals and objectives, and, either as a committee or together with the other independent directors (as directed by the Board), determines and approves the Chairman and Chief Executive Officer's compensation level.

        In determining the Chairman and Chief Executive Officer's compensation for 2005, the Committee believes that the goals and objectives set forth above were successfully achieved as demonstrated by leadership that produced favorable sales growth results and returns on invested capital. Additional factors in determining the Chairman and Chief Executive Officer's compensation included the value of compensation paid to chief executive officers at comparable companies as well as the other factors described in the Company's Executive Compensation Policy Section. The Committee believes the Chairman and Chief Executive Officer's compensation was reasonable given his and the Company's performance.

26

COMPANY PERFORMANCE

        This stock price performance graph compares the cumulative total return on an investment in Grainger common stock with the cumulative total return of an investment in each of the S&P 500 Stock Index and a peer group index made up of all the companies, other than Grainger, which constitute the Dow Jones Industrial Suppliers Index. It covers the period commencing December 31, 2000 and ending December 31, 2005. The graph assumes that the value for the investment in Grainger common stock and in each index was $100 on December 31, 2000 and that all dividends were reinvested.

27

PROPOSAL TO RATIFY THE APPOINTMENT OF INDEPENDENT AUDITOR

        The Audit Committee of the Board of Directors has approved, subject to shareholder ratification at the meeting, the appointment of Ernst & Young LLP as Grainger's independent auditor for the year ending December 31, 2006. Representatives of Ernst & Young LLP are expected to be present at the meeting to respond to appropriate questions of shareholders and to make any desired statements. On March 1, 2005, the Audit Committee dismissed Grant Thornton LLP, effective as of the filing of Grainger's annual report on Form 10-K for the year ended December 31, 2004.

        Grant Thornton LLP's reports on Grainger's consolidated financial statements for each of the years ended December 31, 2004 and 2003 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the years ended December 31, 2004 and 2003 and through the date of the appointment of Ernst & Young LLP, there were no disagreements with Grant Thornton LLP on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedure which, if not resolved to Grant Thornton LLP's satisfaction, would have caused Grant Thornton LLP to make reference to the subject matter of the disagreement in connection with its report on Grainger's consolidated financial statements for such years. There were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.

        During the years ended December 31, 2004 and 2003 and prior to the appointment of Ernst & Young LLP, Grainger did not consult Ernst & Young LLP with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on Grainger's consolidated financial statements, or any other matters or reportable events as set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.

        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. Broker non-votes will not affect the outcome of the vote. 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.

28

Appendix A

Chairman and Chief Executive Officer Compensation

        All elements of compensation for the Chairman and Chief Executive Officer, including base salary, bonus and long-term incentives, are reviewed and approved solely by independent directors in executive sessions of this Committee or the full Board. The Committee reviews and approves the corporate goals and objectives relevant to the Chairman and Chief Executive Officer's compensation. These goals and objectives include quantitative measures such as sales growth, profitability, and shareholder value, as well as qualitative measures such as strategic execution and overall Company performance. The Committee then evaluates performance in light of those goals and objectives, and, either as a committee or together with the other independent directors (as directed by the Board), determines and approves the Chairman and Chief Executive Officer's compensation level.

        In determining the Chairman and Chief Executive Officer's compensation for 2004, the Committee believes that the goals and objectives set forth above were successfully achieved as demonstrated by leadership that produced favorable sales growth results and returns on invested capital. Additional factors in determining the Chairman and Chief Executive Officer's compensation included the value of compensation paid to chief executive officers at comparable companies as well as awards paid in past years.

24

COMPANY PERFORMANCE

        This stock price performance graph compares the cumulative total return on an investment in Grainger common stock with the cumulative total return of an investment in each of the S&P 500 Stock Index, a peer group index described below, and the Dow Jones Industrial Services Index (the "Services Index"), supplemented for 2004 as described below. The graph covers the period commencing December 31, 1999 and ending December 31, 2004.

        As of December 31, 2003, Dow Jones discontinued the Services Index previously used by Grainger in its stock performance graph. Grainger has selected as a replacement a peer group index made up of all the companies, other than Grainger, which constitute the Dow Jones Industrial Suppliers Index. The discontinued Services Index had approximately 60 constituent companies, whereas the Dow Jones Industrial Suppliers Index is comprised of a smaller number of companies whose lines of business more closely resemble those of Grainger. Those companies (other than Grainger) are Black Box Corp., Hughes Supply Inc., Kaman Corp., MSC Industrial Direct Co., and Stewart & Stevenson Services Inc.

        Because the Services Index was discontinued, information as to that index for 2004 was calculated by Grainger based on the performance of its constituent companies during 2004.

        The graph assumes that the value for the investment in Grainger common stock and in each index was $100 on December 31,1999 and that all dividends were reinvested.

25

PROPOSAL TO RATIFY THE APPOINTMENT OF INDEPENDENT AUDITORS

        The Audit Committee of the Board of Directors has decided to make a change in Grainger's independent auditors. Subject to shareholder ratification at the meeting, the Audit Committee has appointed Ernst & Young LLP as Grainger's independent auditors for the year ending December 31, 2005. On March 1, 2005, the Audit Committee dismissed Grant Thornton LLP, effective as of the filing of Grainger's annual report on Form 10-K for the year ended December 31, 2004.

        Grant Thornton LLP's reports on Grainger's consolidated financial statements for each of the years ended December 31, 2004 and 2003 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the years ended December 31, 2004 and 2003 and through the date of the appointment of Ernst & Young LLP, there were no disagreements with Grant Thornton LLP on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedure which, if not resolved to Grant Thornton LLP's satisfaction, would have caused Grant Thornton LLP to make reference to the subject matter of the disagreement in connection with its report on Grainger's consolidated financial statements for such years. There were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.

        During the years ended December 31, 2004 and 2003 and prior to the appointment of Ernst & Young LLP, Grainger did not consult Ernst & Young LLP with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on Grainger's consolidated financial statements, or any other matters or reportable events as set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.

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

        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. Broker non-votes will not affect the outcome of the vote. In the event the proposal is not approved, the Board will consider the negative vote as a mandate to appoint other independent auditors for the next year.

        Representatives of Grant Thornton LLP and Ernst & Young LLP are expected to be present at the meeting to respond to appropriate questions of shareholders and to make any desired statements.

26

PROPOSAL TO APPROVE THE 2005 INCENTIVE PLAN

        On February 23, 2005, the Board adopted the 2005 Incentive Plan (the "2005 Plan"), subject to approval of Grainger's shareholders. A copy of the 2005 Plan is attached as Appendix B to this proxy statement. The 2005 Plan will replace Grainger's 1990 Long Term Stock Incentive Plan, 2001 Long Term Stock Incentive Plan, Director Stock Plan, and Office of the Chairman Incentive Plan (the "Prior Plans").

        The Board believes that the 2005 Plan, like the Prior Plans, will be an important part of Grainger's overall compensation program. The 2005 Plan will enable Grainger to attract and retain high-quality executives, managers, employees, and nonemployee directors, and to strengthen the alignment between these individuals and Grainger's shareholders.

        The 2005 Plan incorporates all the features that exist in the Prior Plans. In addition, the 2005 Plan provides new features that will allow greater flexibility, such as performance shares, performance units, and cash-based awards. As with the Prior Plans, all awards can only be made pursuant to the authority of the Board. Importantly, the 2005 Plan does not allow reloads, repricing, stock options issued at a discount to fair market value, or nonqualified stock options or stock appreciation rights to be transferred by a participant for consideration.