W.W. Grainger (GWW)

Overview of the Compensation Program

The Company's compensation program is based upon a philosophy that is applied to all Company employees—have the best people and provide incentives that encourage them to achieve results that create shareholder value. The Company uses its compensation systems to attract, reward, and retain its employees and to motivate them to grow the business profitably. The compensation program for its NEOs consists of base salary, performance-based annual cash incentives and performance-based long-term incentives, benefits and limited perquisites. By aligning performance-based compensation with revenue growth and return on capital, the Company has linked its incentives to measures driving increases in shareholder return.

        The Company compensation philosophy is to hire and retain the best people and provide incentives that encourage them to achieve financial results that create shareholder value. Demonstrating the Company's long-standing commitment to this compensation philosophy is the Profit Sharing Trust (PST), the sole Company-sponsored retirement vehicle for all U.S.-based employees. The PST aligns the interests of the Company's employees, management, and shareholders as the Company's annual contribution to the PST is based on a formula that incorporates two key drivers of shareholder value—earnings performance and capital employed. The Company contributes a minimum eight percent of payroll to the program and provides employees the opportunity to share in the success of the Company beyond this amount only if a threshold return on capital is achieved. The contribution percentage that each participating employee receives is a function of his or her years of service with the maximum contribution occurring at five or more years of service. The Company's NEOs participate in the PST on the same basis as all other employees. The Company does not maintain a defined benefit pension plan.

        The compensation program for NEOs consists of base salary, performance-based annual cash incentives and performance-based long-term equity incentives, benefits, and limited perquisites. It is designed, as a whole, to attract, reward, motivate, and retain high-quality talent and to provide appropriate cash- and equity-based incentives for achieving the Company's financial goals and strategic objectives. A substantial portion of the executives' pay is directly tied to Company performance. The Company endeavors to accomplish the compensation program's objectives by providing market median total compensation opportunities at target levels of performance. The approach that the Company uses to determine "market" compensation is more fully discussed in the "Compensation Comparator Group" section.

        The Company's compensation philosophy is to hire and retain the best people and provide incentives for them to perform. This is achieved by linking pay with both Company performance and

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individual performance. The table below describes how each compensation element is linked to performance.

        An NEO's compensation includes variable pay components that link a substantial portion of compensation to the Company's performance, the individual's functional and managerial responsibilities and performance, and the creation of long-term shareholder value. These components vary with the Company's performance and include annual cash incentives and long-term equity-based incentives. Variable compensation, as a percentage of total compensation, increases with greater levels of responsibility within the Company. Compensation for the NEOs is generally structured so that the largest component is long-term equity, followed by base salary, and short-term incentive plan compensation. In exercising its judgment in setting the components of total compensation, the Compensation Committee of the Board (the "Compensation Committee" or "Committee") considers competitive pay data but has not established a rigid formula or allocation.

        In setting individual compensation levels, the Compensation Committee selects a compensation comparator group of companies and reviews studies of total compensation paid to executives occupying similar positions with similar duties and responsibilities in those companies. The Committee then considers a variety of reference points, including competitive compensation data at the 25^th, 50^th, and 75^th percentiles, the executive's overall experience, individual and Company performance, replaceability, internal equity, and unique skills in determining an appropriate level of compensation for each individual executive. All elements of compensation are valued and reviewed in evaluating the relative competitiveness of the Company's compensation practices against the comparator group. Target total compensation for the Company's employees and executives is generally set to approximate the market median.

        In addition, the Compensation Committee annually reviews a tally sheet for each NEO to help it understand the potential value of all compensation (both vested and unvested) that may be due an NEO. The tally sheet includes each NEO's current base salary, annual incentive award, and the value of all outstanding equity-based awards, deferrals, benefits, and perquisites, as well as potential payments under retirement and certain change in control situations. Since no NEO has an

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employment contract with the Company that guarantees continued employment, the tally sheets also facilitate the Committee's evaluation of the reasonableness of awards and their likely retention value. The Committee did not make specific adjustments to the compensation programs or any NEO's compensation based on its review of the tally sheets, as it concluded the awards earned or to be provided on termination were consistent with the Company's pay philosophy, Company and individual performance, and market practices.

        The other components of the Company's compensation program for NEOs are substantially similar to those available for most of the Company's managers. This includes the same health and welfare benefits and the same PST contribution methodology. The Company provides a Supplemental Profit Share Plan ("SPSP") solely to maintain an equal percentage of PST contribution to approximately 150 employees, including all NEOs, who would be subject to contribution limits imposed on qualified plans by the Internal Revenue Code. The Company does not provide any other supplemental retirement benefits to its NEOs or other employees.

Overview of the Compensation Program

       The Company's compensation program for its NEOs builds upon a philosophy that is applied to all Company employees—attract the best people and encourage them to achieve the results that create shareholder value. The Company uses its compensation systems to attract, reward, and retain its employees and to motivate them to grow the business profitably. By aligning compensation with growth and return on capital, the Company has linked its incentives with increases in shareholder return.

       Demonstrating the Company's long-standing commitment to this compensation philosophy is the Profit Sharing Trust (PST). All U.S.-based employees participate in the PST as their sole Company-sponsored retirement vehicle. The PST aligns the interests of the Company's employees, management, and shareholders. The Company's annual contribution to the PST is based on a formula that incorporates two key drivers of shareholder value—earnings performance and capital employed. Employees share in the success of the Company only if the business is profitable and only after a threshold return has been provided on invested capital. The contribution percentage that each participating employee receives is a function of his or her years of service. The maximum contribution occurs at five or more years of service. The Company's NEOs participate in the PST on the same basis as all other employees.

       The compensation program for NEOs consists of base salary, annual cash incentive, long-term incentives, benefits, and perquisites. It is designed, as a whole, to attract, reward, motivate, and retain high-quality executive and managerial talent and to provide appropriate cash- and equity-based incentives for achieving the Company's business goals and strategic objectives. A substantial portion of the executives' pay is directly tied to Company performance. The Company endeavors to accomplish the compensation program's objectives by providing total compensation opportunities at target levels of performance at the median of the market.

       An NEO's compensation includes variable pay components that link a substantial portion of compensation to the Company's performance, the individual's functional and managerial responsibilities and performance, and the creation of long-term shareholder value. These variable components include annual cash incentives and long-term equity-based incentives. Variable compensation, as a percentage of total compensation, generally increases with greater levels of responsibility within the Company. Compensation for the NEOs is generally structured so that the largest component is long-term equity, followed by base salaries, and short-term incentive plan compensation. In exercising its judgment in setting the components of total compensation, the Compensation Committee of the Board (Committee) considers competitive pay data but has not established a rigid formula or allocation.

       In setting individual compensation levels, the Committee selects a compensation comparator group of companies and reviews studies of total compensation paid to executives occupying similar positions in those companies. The Committee then considers a variety of reference points, including competitive compensation data at the 25^th, 50^th, and 75^th percentiles, the executive's overall experience, individual and Company performance, replaceability, internal equity, and unique skills in

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determining an appropriate level of compensation for each individual executive. All elements of compensation are valued and reviewed in evaluating the relative competitiveness of the Company's compensation practices against the comparator group. Target total compensation for the Company is generally set to approximate the market median.

       In addition, the Committee annually reviews a tally sheet for each NEO, which includes the current base salary, annual incentive award, and the value of all outstanding equity-based awards, deferrals, benefits, and perquisites, as well as potential payments under retirement and certain change in control situations. The Committee uses the tally sheets to help it understand the value of all compensation (both vested and unvested) that may be due an NEO. Since the NEOs do not have employment contracts with the Company that guarantee continued employment, the tally sheets also facilitate the Committee's evaluation of the reasonableness of awards and their likely retentive impact. The Committee did not make specific adjustments to the compensation program based on its review of the tally sheets, as it concluded the awards earned or provided on termination were consistent with the Committee's pay philosophy, Company and individual performance, and market practices.

       The other components of the Company's compensation program for NEOs are substantially similar to the program available for most of the Company's managers. This includes the same health and welfare benefits as well as the same methodology for determining the percentage contribution in the PST. The Company maintains supplemental retirement plans only to the extent necessary to provide all employees with profit sharing benefits commensurate with current compensation and unaffected by limitations imposed by tax law.

Overview of the Compensation Program

        The Company's compensation program for its NEOs builds upon a philosophy that is applied to all Company employees—creating shareholder value by attracting the best people and encouraging them to perform. The Company uses its compensation systems to attract, reward, and retain its employees and to motivate them to grow the business profitably and to improve shareholder returns.

        Demonstrating the Company's long-standing commitment to this compensation philosophy is the Profit Sharing Trust (PST). The PST aligns the interests of the Company's employees, management and shareholders. The Company's annual contribution to the PST is based on a formula that incorporates two key drivers of shareholder value—earnings performance and capital employed. Employees share in the success of the Company only if the business is profitable and only after a threshold return has been provided on invested capital. All U.S.-based employees participate in the PST as their sole Company sponsored retirement vehicle. The contribution percentage that each participating employee receives is a function of his or her years of service. The maximum contribution occurs at five or more years of service. The Company's NEOs participate in the PST on the same basis as all other employees.

        The compensation program for NEOs consists of base salary, annual cash incentive, long-term incentives, benefits, and perquisites. It is designed, as a whole, to attract, motivate and retain high-quality executive and managerial talent and to provide appropriate incentives, including cash- and equity-based awards, for achieving the Company's business goals and strategic objectives, by tying a substantial portion of the executive's pay to Company performance. The Company endeavors to accomplish these objectives by providing total compensation opportunities, both cash and non-cash, generally reflective of market levels.

        An NEO's compensation includes variable pay components which link a substantial portion of compensation to the Company's performance, the individual's responsibilities and performance, and the creation of long-term shareholder value. These variable components include annual cash incentives and long-term equity-based incentives. Variable compensation, as a percentage of total compensation, generally increases with greater levels of responsibility within the Company. To provide further alignment to long-term creation of shareholder value, a relatively greater weight is placed on long-term variable compensation for the more senior positions.

        In setting individual compensation levels, the Compensation Committee of the Board (Committee) selects a compensation comparator group of companies and reviews studies of total compensation paid to executives occupying similar positions in those companies. The Committee then considers a variety of reference points, including competitive compensation data at the 25^th, 50^th, and 75^th percentiles, the executive's overall experience, individual and Company performance, replaceability, internal equity, and unique skills in determining an appropriate level of compensation. All elements of compensation are valued and reviewed in evaluating the relative competitiveness of the Company's compensation practices against the comparator group. In addition, the Committee annually reviews a tally sheet for each NEO, which includes the current base salary, bonus and the

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value of all outstanding equity-based awards, deferrals, benefits and perquisites, as well as potential payments under retirement and change in control situations.

        The other components of the Company's compensation program for NEOs are substantially similar to the program available for most of the Company's managers. This includes the same health and welfare benefits as well as the same methodology for determining the percentage contribution to the PST. The Company maintains supplemental retirement plans only to the extent necessary to provide all employees with profit sharing benefits commensurate with current compensation and unaffected by limitations imposed by tax law.