W.W. Grainger (GWW)

MIP Payout = (ROIC Performance Attainment versus Target × Sales Growth Multiplier)

        This framework was selected as it balances sales growth with profitability, efficiency, expense management, and asset management. These measures are consistent with the Company's objective of growing profitably over time, which it believes is closely linked with shareholder value creation. The MIP framework allows the Committee the opportunity annually adjust performance objectives in light of the current economic and competitive environments.

        The MIP framework has been consistently applied for the past eight years, although specific objectives and performance target levels have been modified on a year-by-year basis. Target payout occurs when the Company accomplishes a level of performance, that, while challenging, is realistically achievable. Over the last eight years, the payout has been within 5% of target two times, below this amount three times, and above this amount three times.

        The potential payouts for the 2008 MIP range from 0% to 200% of the target award. Actual payout depends upon the Company's performance and is determined by a two-step process:

        First, the Company must meet its ROIC threshold. If the Company does not achieve the minimum ROIC threshold (set at 16% for 2008), no payment is made. If the Company meets or exceeds the ROIC goal (set at 20% for 2008), the employee will have earned the maximum ROIC payout of 50% of his or her MIP target. Amounts are interpolated as necessary.

        Second, sales growth acts as a multiplier of the ROIC payout. The value of the sales growth multiplier increases as revenue growth increases. If year-over-year sales growth meets the Company's target, the sales multiplier would yield an amount that equals an MIP award of 100% of target. Amounts are interpolated as necessary.

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The 2008 ROIC goal was 20%, which was considered an appropriate long-term level. Exceeding this objective does not create an additional payout, but achieving less than 16% ROIC eliminates the payout entirely. Over the last ten years, ROIC has ranged from a low of 17.1% in 2000 to a high of 29.8% in 2008. In 2008, ROIC was 29.8%, resulting in a payout of 50% of the target MIP opportunity.



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The 2008 sales growth target was 9.0%. Over the last ten years, sales growth has ranged from a low of -4.5% in 2001 to a high of 9.4% in 2005. In 2008, sales growth was 6.7%, resulting in a sales growth multiplier of 1.62.



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The ROIC bonus of 50% multiplied by the sales growth multiplier of 1.62, results in a bonus equal to 81% of target.

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        The executive's target incentive award under the annual incentive program is based on a review of competitive market practice. For 2008, the target annual incentive awards as a percent of base salary were 90%, 100%, 70%, 70%, 70%, 60%, and 50% for Messrs. Keyser, Ryan, Loux, Jadin, Chen, Howard, and Loizzo, respectively. These targets were determined to approximate the market median of the compensation comparator group companies. Actual payments are a product of the executive's incentive target and the Company's actual results achieved against established performance goals. The Company believes that it has set the ROIC and sales growth targets so that they provide the appropriate level of motivation for participants to grow the Company profitably, which in turn should create shareholder value.

        Under the terms of the annual program, the Committee has the discretion to adjust MIP payment amounts to correct for any unusual circumstances, both positive and negative, that might affect ROIC or sales growth. No discretionary adjustments were made in 2008.

        Incentive amounts were paid to Messrs. Keyser, Ryan, Loux, Jadin, Chen and Howard based on the performance targets established for the 2008 MIP and were made under a separate annual incentive program described in the 2005 Incentive Plan. They were designated as "Covered Employees" under the 2005 Incentive Plan, a separate shareholder-approved plan providing for, among other things, annual incentive programs funded through amounts determined by reference to the Company's reported net earnings. This program is designed to ensure that annual incentives are performance-based and fully tax deductible by the Company under Section 162(m) of the Internal Revenue Code. Under the program, the Committee allocates to each participant a portion of an incentive pool, which is funded with 5% of the Company's net earnings and the independent members of the Board have the authority to make specific awards. The sum of the individual participants' percentages may not be greater than 100% of the pool. The 5% funding level and predetermined

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incentive pool allocations were selected to provide the independent members of the Board with sufficient flexibility to calculate an appropriate level of incentives for each executive, while complying with Section 162(m). The independent members of the Board may use their discretion to reduce these amounts but may not increase them. For 2008, the program created a pool of $24 million, of which only $2.9 million or 12% of the total pool was distributed to participants. As it has done in the past, the independent members of the Board used their discretion to reduce amounts to yield payments equal, on a percentage basis, to those made under the 2008 MIP for the Company's managers based on Company performance. Annual incentive amounts for 2008 ranged from 29% to 80% of base salary for the NEOs.

        While ROIC and sales growth will remain the key structural components for the 2009 MIP, the Compensation Committee believes that greater incentive is created by focusing on ROIC and sales growth as stand-alone objectives and making the MIP payout the sum of these results, as opposed to calculating MIP as a function of the two components. These changes will allow a simplified plan design and the creation of more precise targets, further strengthening linkages of pay to performance and the creation of shareholder value.