W.W. Grainger (GWW)

MIP Payout = (ROIC Performance × Sales Growth Multiplier) + Individual Performance

        This framework was selected as it balances sales growth with profitability, efficiency, expense management and asset management and encourages achievement of individual objectives. 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 to annually adjust performance objectives in light of the current economic and competitive environments. The MIP framework also enables the Company to set goals and adjust performance targets for its individual business units.

        The MIP framework has been consistently applied for the past six years, although specific target levels have been modified on a year-by-year basis.

        The potential payouts for the 2006 MIP range from 0% to 200% of the target incentive award. The Company performance component has a range of 0% to 170% and the individual performance component has a range of 0% to 30%. The Company must first meet its ROIC threshold before any of the Company performance portion can be paid. Once the ROIC threshold is achieved, sales growth can leverage the Company performance component. The individual performance component is based on the executive's achievement of specified goals.

        If the Company does not achieve an ROIC of 16% or more, no Company performance component would be awarded. An ROIC of 16% would yield a 25% ROIC Payout and at 20% ROIC, a 50% ROIC Payout. If the Company achieves between 16% and 20% ROIC, the ROIC Payout would be adjusted prorata. Sales growth results are then applied. If the Company does not grow its sales by

23

at least 3%, the Company performance payout would equal the ROIC payout. Sales growth of 12% would result in the ROIC Payout being increased 3.4 times which, assuming the ROIC goal has been met, would yield a Company performance payout of 170% of the target incentive award.

•

The 2006 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 associated with both ROIC and sales growth. Over the last ten years, ROIC has ranged from a low of 17.1% in 2000 to a high of 26.4% in 2006.



•

The 2006 sales growth target was 9%. Over the last ten years, sales growth has ranged from a low of -4.5% in 2001 to a high (due to the acquisition of Acklands—Grainger Inc.) of 16.9% in 1997.

        The MIP payout tables for 2006 were structured as follows:

Example of 2006 MIP Payout

(1)

Amounts are interpolated, as necessary.

        The executive's target incentive award under the annual incentive program is based on a review of competitive market practice. For 2006, the target annual incentive awards as a percent of base salary were 110%, 70%, 80%, 60% and 50% for Messrs. Keyser, Loux, Ryan, Chen, and Howard, respectively. Actual 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.

24

        Assessments of the individual performance components were conducted by the NEOs' individual managers, except for Messrs. Keyser and Ryan, each of whose individual performance was assessed by the Board of Directors in executive session without those officers present. NEOs achieved all of their individual objectives in 2006, resulting in each receiving a full 30% of their individual performance targets. Under the terms of the annual program, the Committee has the discretion to adjust MIP payment amounts to correct for any unusual items or circumstances, both positive and negative, that might impact ROIC or sales growth. No discretionary adjustments were made in 2006.

        Incentive amounts determined consistently with the Company's MIP performance are made to Messrs. Keyser, Loux, and Ryan under a separate bonus 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, incentive bonus programs funded through amounts determined by reference to the Company's reported net earnings. This program is designed to ensure that annual incentives are 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. The sum of the individual participants' percentages may not be greater than 100% of the pool. The Committee may use its discretion to reduce these amounts but may not increase them. For 2006, the program created a pool of $19 million, of which only $1.9 million or 10% of the total pool was distributed to participants. As it has done in the past, the Committee used its discretion to reduce amounts to yield payments equal, on a percentage basis, to those made under the MIP for the other NEOs, coupled with specific individual performance goals.

        Based on the amounts of total compensation listed in the Summary Compensation Table (below), annual variable compensation represented from 24% to 29% of total compensation for the NEOs in fiscal year 2006. This is consistent with practices in the Company's compensation comparator group.

        Actual results for 2006 were 26.4% ROIC (which is above the MIP target) and 6.5% year-over-year growth in sales (which is below the MIP target). These results translated into annual incentive amounts for 2006 that ranged from 48% to 105% of base salary for the NEOs and represented 95% of the individual target opportunities (including the individual performance component).

        The Company will continue to use the same MIP framework for 2007. The Company believes that it has set the ROIC and sales growth targets to provide the appropriate level of motivation for participants to create long-term shareholder value.