AIT DEF 14A Report ended Oct. 29, 2019

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

SCHEDULE 14A

(RULE 14a-101)

SCHEDULE 14A INFORMATION

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APPLIED INDUSTRIAL TECHNOLOGIES, INC.

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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

TUESDAY, OCTOBER 29, 2019 9:00 A.M. EASTERN TIME HEADQUARTERS OF APPLIED INDUSTRIAL TECHNOLOGIES, INC. 1 Applied Plaza East 36th Street and Euclid Avenue Cleveland, Ohio, 44115 (216) 426-4000 www.applied.com				HOW TO VOTE Your vote is important! Whether or not you expect to attend the meeting, please promptly vote via the Internet, by phone, or by executing and returning the enclosed proxy card in the postage-paid envelope provided. Voting early will help avoid additional solicitation costs.
TO THE SHAREHOLDERS OF APPLIED INDUSTRIAL TECHNOLOGIES, INC.: We are pleased to invite you to our 2019 annual meeting of shareholders. The meeting will be at our headquarters, 1 Applied Plaza, East 36th Street and Euclid Avenue, Cleveland, Ohio, 44115, on Tuesday, October 29, 2019, at 9:00 a.m. Eastern Time. The meeting will be held for the following purposes: 1 .  To elect three directors 2 .  To approve, through a nonbinding advisory vote, the compensation of Applied’s named executive officers as disclosed in the attached proxy statement 3 .  To approve the 2019 Long-Term Performance Plan 4 .  To ratify the Audit Committee’s appointment of independent auditors for the fiscal year ending June 30, 2020				VOTING FOR REGISTERED AND RETIREMENT SAVINGS PLAN HOLDERS:
						By Internet Using Your Tablet or Smart Phone Scan the QR code on your proxy card to vote with your mobile device
						By Phone Call 1-800-652-VOTE (8683) in the U.S. or Canada to vote
						By Internet Using Your Computer Visit www.investorvote.com/AIT
						By Mail Cast your ballot, sign your proxy card, and return by free post
Shareholders of record at the close of business on August 30, 2019, are entitled to vote at the meeting. The transfer books will not be closed. A list of shareholders as of the record date will be available for examination at the meeting.				IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SHAREHOLDER MEETING TO BE HELD ON OCTOBER 29, 2019.
The attached proxy statement describes the business of the meeting and provides information about our corporate governance. Fred D. Bauer Vice President-General Counsel & Secretary September 13, 2019				The Proxy Statement and 2019 Annual Report to Shareholders are available at WWW.APPLIED.COM/ACCESS-PROXY

Table of Contents

TABLE OF CONTENTS

Applied Industrial Technologies 2019 Proxy Statement		1

Proxy Statement Highlights

PROXY STATEMENT HIGHLIGHTS

The highlights below include information that you will find elsewhere in this proxy statement. The highlights do not contain all of the information that you should consider, and you should read the entire proxy statement carefully before voting. Information regarding the logistics of the annual meeting is provided beginning on page 4.

Proposals and Board Recommendations

The Board of Directors makes the following voting recommendations to shareholders for the annual meeting:

Proposal		Board’s Voting Recommendation		Page
Item 1: Election of Directors		FOR each Nominee			6
Item 2: Advisory (Nonbinding) Vote to Approve Executive Compensation		FOR			51
Item 3: Vote to Approve 2019 Long-Term Performance Plan		FOR			53
Item 4: Vote to Ratify Appointment of Independent Auditors		FOR			57

Director Nominees

Nominee		Age		Director Since		Principal Occupation		Independent
Mary Dean Hall		62		2019		Senior Vice President, Chief Financial Officer and Treasurer, Quaker Houghton		Yes
Dan P. Komnenovich		67		2012		Former President and Chief Executive Officer, Aviall, Inc.		Yes
Joe A. Raver		53		2017		President and Chief Executive Officer, Hillenbrand, Inc.		Yes

Additional information about the nominees and the other continuing directors is provided on pages 6-11.

Corporate Governance Highlights

Independence		· The Chairman of our Board of Directors is an independent director. · All of the directors are independent, except for our Chief Executive Officer. · The independent directors meet regularly in private executive sessions without management. · The Board’s Audit Committee, Corporate Governance Committee, and Executive Organization & Compensation Committee are each composed solely of independent directors.
Board Oversight of Risk Management		· The Board, as a whole and through its committees, oversees and monitors risk management. In this role, the Board is responsible for determining that the risk management processes designed and implemented by management are adequate and functioning as designed.
Stock Ownership Guidelines		· We expect each non-employee director to own, within five years after joining the Board, Applied shares valued at a minimum of five times the annual retainer fees. · Executive officers are expected not to dispose of stock unless their “owned” shares’ market value equals or exceeds the following annual base salary multiples immediately after the disposition: 5x for the CEO, 3x for other executive officers.
Board Evaluations and Refreshment		· Our Board and its key committees perform annual self-evaluations. · The evaluations contribute to efforts to ensure that the Board continues to be composed of members with diverse experiences, attributes, and skills. · Most recently, following a search conducted by the Corporate Governance Committee, the Board elected Madhuri A. Andrews and Mary Dean Hall as new independent directors.

Additional information about our corporate governance is provided on pages 12-15.

2		Applied Industrial Technologies 2019 Proxy Statement

Proxy Statement Highlights

Approval of the Compensation of the Named Executive Officers

We provide shareholders the opportunity to approve, through a nonbinding, advisory vote, the compensation of our named executive officers as disclosed in our proxy statement, including, among other things, our executive compensation objectives, policies, and practices. The proposal is described on pages 51-52.

Approval of 2019 Long-Term Performance Plan

The Board’s Executive Organization & Compensation Committee has adopted, subject to shareholder approval, the Applied Industrial Technologies, Inc. 2019 Long-Term Performance Plan. If approved by the shareholders, the Plan will replace our 2015 Long-Term Performance Plan, which was approved by shareholders at the 2015 annual meeting. The proposal is described on pages 53-57 and the Plan is attached as an Appendix to this proxy statement.

Ratification of Appointment of Independent Auditors

Subject to shareholder ratification, the Board’s Audit Committee appointed Deloitte & Touche LLP to serve as independent auditors for the fiscal year ending June 30, 2020. The committee made the appointment after evaluating the firm and its performance. We seek the shareholders’ ratification of the appointment as described on pages 57-58.

Applied Industrial Technologies 2019 Proxy Statement		3

Introduction and Voting Information

INTRODUCTION AND VOTING INFORMATION

In this statement, “we,” “our,” “us,” and “Applied” refer to Applied Industrial Technologies, Inc., an Ohio corporation. Our common stock, without par value, is listed on the New York Stock Exchange with the ticker symbol “AIT.”

4		Applied Industrial Technologies 2019 Proxy Statement

Introduction and Voting Information

Applied Industrial Technologies 2019 Proxy Statement		5

Election of Directors

ITEM 1: ELECTION OF DIRECTORS

Applied’s Code of Regulations divides our Board into three classes. The directors in each class are elected for three-year terms so that the term of one class expires at each annual meeting. At the 2019 annual meeting, the shareholders will elect directors for a three-year term expiring in 2022 or until their successors have been elected and qualified. Pursuant to Ohio law, the properly nominated candidates receiving the greatest number of votes will be elected.

The Corporate Governance Committee recommended, and the Board nominated, three incumbents for election as directors: Mary Dean Hall, Dan P. Komnenovich, and Joe A. Raver. Mr. Komnenovich was most recently elected at the 2016 annual meeting while Mr. Raver was elected by the Board in August 2017. Their terms expire this year and the Board renominated them following the Corporate Governance Committee’s review and evaluation of their performance. Ms. Hall was elected by the Board in August 2019. Edith Kelly-Green, who has served since 2002, will retire from the Board when her term ends at the annual meeting in October. Directors serving terms expiring in 2020 and 2021 will continue in office, except that Dr. Jerry Sue Thornton, who has served since 1994, will also retire at the annual meeting.

The proxies named on the proxy card accompanying the materials sent to shareholders of record intend to vote for the three nominees unless authority is withheld. If a nominee becomes unavailable to serve, the proxies will have authority to vote for any other person or persons who may be properly nominated and/or to reduce the number of directors. We are not aware of an existing circumstance that would cause a nominee to be unavailable to serve.

The Board of Directors recommends you vote FOR the director nominees.

Following is background information about the nominees and the continuing directors. Unless otherwise stated, the individuals have held the positions indicated for at least the last five years. We also include a summary of reasons our Board concluded that the director or nominee should serve as a director, considering our business and governance structure. The summaries are not comprehensive, but describe the primary experiences, attributes, and skills that the Board believes qualify the individuals to continue as directors. In addition to the qualifications referred to below, we believe each individual has a reputation for integrity, honesty, and high ethical standards, and has demonstrated strong business judgment.

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Election of Directors

Nominees for Election as Directors with Terms Expiring in 2022

		Mary Dean Hall Senior Vice President, Chief Financial Officer and Treasurer, Quaker Houghton Age: 62 Director since: August 2019						Dan P. Komnenovich Former President and Chief Executive Officer, Aviall, Inc. Age: 67 Director since: 2012 Committees: ● Audit ● Corporate Governance
Business Experience: Ms. Hall has served as Senior Vice President, Chief Financial Officer and Treasurer of Quaker Houghton (NYSE: KWR) (formerly known as Quaker Chemical Corporation) since August 2019 and had served as Vice President, Chief Financial Officer and Treasurer prior to then, since November 2015. Quaker Houghton is the global leader in industrial process fluids for the primary metals and metalworking markets. Before then, she served in various finance and treasury roles of increasing responsibility with Eastman Chemical Company (NYSE: EMN), a global manufacturer of advanced materials, specialty chemicals, plastics, and fibers, most recently as Vice President and Treasurer. Qualifications: Ms. Hall brings to Applied a well-rounded background in public company accounting and reporting, financial planning and analysis, tax, treasury, corporate development/M&A, investor relations, and enterprise risk management. In addition, her career began in the banking industry, where she developed expertise in M&A, capital markets, and financing. Ms. Hall’s skills and experience in these areas position her to be an important contributor to Applied’s Board.						Business Experience: Until retiring in 2013, Mr. Komnenovich was President and Chief Executive Officer of Aviall, Inc., a wholly owned subsidiary of The Boeing Company (NYSE: BA). Aviall is one of the world’s largest providers of new aviation parts and related aftermarket operations. It also provides maintenance for aviation batteries, wheels, and brakes, as well as hose assembly, kitting, and paint-mixing services, and offers a complete set of supply chain and logistics services, including order processing, stocking and fulfillment, automated inventory management, and reverse logistics to OEMs and customers. Qualifications: Mr. Komnenovich led a global multibillion dollar distribution company which grew significantly during his service as a senior executive. He brings to our Board extensive experience with distribution sales, marketing, operations, supply chain management, and logistics. Earlier in his career, Mr. Komnenovich was a Certified Public Accountant and served in finance and accounting roles with various companies.

Applied Industrial Technologies 2019 Proxy Statement		7

Election of Directors

Nominees for Election as Directors with Terms Expiring in 2022 (continued)						Continuing Directors with Terms Expiring in 2020
		Joe A. Raver President and Chief Executive Officer, Hillenbrand, Inc. Age: 53 Director since: 2017 Committees: ● Audit ● Corporate Governance						Robert J. Pagano, Jr. Chief Executive Officer and President, Watts Water Technologies, Inc. Age: 56 Director since: 2017 Committees: ● Audit ● Executive Organization & Compensation
Business Experience: Mr. Raver has served as President and Chief Executive Officer of Hillenbrand, Inc. (NYSE: HI) since 2013. Hillenbrand is a diversified industrial company with multiple brands that serve a range of industries across the globe. The company’s Process Equipment Group provides compounding, extrusion and material handling; size reduction; screening and separating, and flow control products and services for a range of manufacturing and other industrial processes. Other Directorship in Previous 5 Years : Hillenbrand, Inc. Qualifications: Mr. Raver brings to Applied’s Board his broad management experience as a sitting chief executive officer and director of a NYSE-listed global manufacturing company serving industrial markets worldwide. In addition, his career includes extensive leadership and operations experience in diverse business settings.						Business Experience: Mr. Pagano has served as Chief Executive Officer and President of Watts Water Technologies, Inc. (NYSE: WTS) since 2014. Watts Water Technologies, Inc. is a global supplier of products and solutions that manage and conserve the flow of fluids and energy into, through, and out of buildings in the residential and commercial markets. He also served as interim Chief Financial Officer from October 2014 to April 2015 and from April to July 2018. Mr. Pagano began his career with an international public accounting firm and he is a Certified Public Accountant. Other Directorship in Previous 5 Years : Watts Water Technologies, Inc. Qualifications: Mr. Pagano brings to Applied’s Board his broad management experience as a sitting chief executive officer and director of a NYSE-listed global manufacturing company. In addition, his career includes extensive leadership and operations experience, working with distributors to serve industrial markets throughout the world, as well as a strong background in finance and accounting.

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Election of Directors

Continuing Directors with Terms Expiring in 2020 (continued)

		Neil A. Schrimsher President & Chief Executive Officer, Applied Industrial Technologies, Inc. Age: 55 Director since: 2011 Committee: · Executive						Peter C. Wallace Former Chief Executive Officer, Gardner Denver, Inc. Age: 65 Director since: 2005 Chairman since: 2014 Committees: · Executive Organization & Compensation · Executive
Business Experience: Mr. Schrimsher joined Applied as our Chief Executive Officer in 2011 and was also elected President in 2013. Before joining Applied, Mr. Schrimsher was Executive Vice President of Cooper Industries plc (formerly NYSE: CBE), a global electrical products manufacturer, where he led Cooper’s Electrical Products Group and headed numerous domestic and international growth initiatives. Other Directorship in Previous 5 Years : Patterson Companies, Inc. (NASDAQ: PDCO) Qualifications: As the only Applied executive to serve on the Board, Mr. Schrimsher contributes a deep understanding of the company’s businesses, markets, and competitive landscape. From his prior employment, Mr. Schrimsher brought to Applied and its Board broad leadership experience, including management of worldwide operations, distribution management, strategic planning and analysis, manufacturing, engineering, supply chain management, and sourcing.						Business Experience: Mr. Wallace most recently was Chief Executive Officer of Gardner Denver, Inc. (NYSE: GDI) from 2014 until retiring in December 2015. Gardner Denver is a worldwide manufacturer of highly engineered products, including compressors, liquid ring pumps, and blowers for various industrial, medical, environmental, transportation, and process applications, pumps used in the petroleum and industrial market segments, and other fluid transfer equipment. Prior to joining Gardner Denver, Mr. Wallace was President and Chief Executive Officer, and a director, of Robbins & Myers, Inc. (formerly NYSE: RBN), from 2004 until it was acquired in 2013 by National Oilwell Varco, Inc. Robbins & Myers was a leading designer, manufacturer, and marketer of highly engineered, application-critical equipment and systems for energy, chemical, pharmaceutical, and industrial markets worldwide. Other Directorships in Previous 5 Years: Curtiss-Wright Corporation (NYSE: CW; since 2016), Rogers Corporation (NYSE: ROG) Qualifications: Mr. Wallace has a wide and varied background as a senior executive in global industrial equipment manufacturing. He brings to the Board the perspective of someone familiar with all facets of worldwide business operations, including the experience of leading a NYSE-listed company. Mr. Wallace’s career includes positions with global responsibilities for equipment manufacturers with product lines that Applied (and others) represented as a distributor in the fluid power and power transmission component fields. In those roles, he developed significant knowledge about Applied’s industry, including the dynamics of the relationships between industrial product manufacturers and their distributors. These experiences and knowledge, along with his service on other NYSE-listed company boards, enhance Mr. Wallace’s contributions and value to our Board.

Applied Industrial Technologies 2019 Proxy Statement		9

Election of Directors

Continuing Directors with Terms Expiring in 2021

		Madhuri A. Andrews Senior Vice President, Chief Digital and Information Officer, Jacobs Engineering Group Inc. Age: 52 Director since: August 2019						Peter A. Dorsman Former Executive Vice President, Services, NCR Corporation Age: 64 Director since: 2002 Committees : · Corporate Governance · Executive  Organization & Compensation · Executive
Business Experience: Ms. Andrews has served as Senior Vice President, Chief Digital and Information Officer for Jacobs Engineering Group Inc. (NYSE: JEC) since June 2019 and had been Senior Vice President and Chief Information Officer from August 2018 to June 2019. Jacobs Engineering Group is one of the largest technical professional services firms in the world, providing a diverse range of technical, professional, and construction services to a large number of industrial, commercial, and governmental clients. From January 2015 to August 2018, she was Chief Information Officer at DynCorp International LLC, a global aviation, logistics, intelligence, and field operations service provider. Prior to then, she was Senior Vice President and Chief Information Officer at CompuCom Systems, Inc., an information technology managed services company. Qualifications: Ms. Andrews is a business-focused technology executive with broad experience leading business and information technology transformation as well as global digital strategies for major firms across a variety of industries. She has led operational business continuity and technology-related transformation projects for organizations through acquisitions and divestitures, achieving synergies and eliminating stranded costs. Ms. Andrews also has practical experience optimizing and integrating governance, risk, and compliance (GRC) frameworks, processes, and technologies in complex regulatory and industry environments. Her skills and experience in these areas position her to be an important contributor to Applied’s Board.						Business Experience: Mr. Dorsman retired from NCR Corporation (NYSE: NCR) in 2014. NCR is a global technology company providing assisted and self-service solutions and comprehensive support services that address the needs of retail, financial, hospitality, technology, and telecommunication organizations throughout the world. As Executive Vice President, Services, Mr. Dorsman led NCR Services, a leading global provider of outsourced and managed service offerings. He was also responsible for customer experience, continuous improvement, and quality throughout NCR, serving as Chief Quality Officer during this period. Prior to then, he served as NCR’s Executive Vice President, Industry Solutions Group and Global Operations, and as Senior Vice President, Global Operations. Other Directorship in Previous 5 Years: HD Supply Holdings, Inc. (NASDAQ: HDS; since 2017) Qualifications: Mr. Dorsman has broad experience in marketing, sales, strategy, and operations. At NCR, a multibillion dollar company, he led 11,000 service professionals serving customers in over 90 countries. He also led NCR’s efforts to provide consistent, world-class service delivery, products, and solutions. With his diverse background and expertise, he contributes insights about many aspects of our business operations and initiatives.

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Election of Directors

Continuing Directors with Terms Expiring in 2021 (continued)
		Vincent K. Petrella Executive Vice President, Chief Financial Officer and Treasurer, Lincoln Electric Holdings, Inc. Age: 59 Director since: 2012 Committees: · Audit · Executive Organization & Compensation · Executive
Business Experience: Mr. Petrella is Executive Vice President, Chief Financial Officer and Treasurer of Lincoln Electric Holdings, Inc. (NASDAQ: LECO). Lincoln Electric engages in the design, manufacture, and sale of welding, cutting, and brazing products worldwide. Qualifications: As one of Lincoln Electric’s top executives, Mr. Petrella has helped lead the company’s global expansion over the last decade. His leadership and operating experience, and his knowledge of industrial distribution in North America and abroad, make him a key contributor to discussions about Applied’s strategy. In addition, Mr. Petrella’s finance and accounting background (before joining Lincoln Electric he was a Certified Public Accountant with an international public accounting firm) and his service as Chief Financial Officer for a multi-billion dollar public company make him a valued member of the Board and chairman of the Audit Committee.

Applied Industrial Technologies 2019 Proxy Statement		11

Corporate Governance

CORPORATE GOVERNANCE

Corporate Governance Documents

Applied’s Internet address is www.applied.com . The following corporate governance documents are available free of charge via hyperlink from the website’s investor relations area:

·

Code of Business Ethics,

·

Board of Directors Governance Principles and Practices,

·

Director Independence Standards, and

·

Charters for the Audit, Corporate Governance, and Executive Organization & Compensation Committees of our Board.

Director Independence

Under the NYSE corporate governance listing standards, a majority of Applied’s directors must satisfy the NYSE criteria for independence. In addition to having to satisfy stated minimum requirements, no director qualifies under the standards unless the Board affirmatively determines the director has no material relationship with Applied. In assessing a relationship’s materiality, the Board has adopted categorical standards, which may be found via hyperlink from our website’s investor relations area.

The Board has determined that all directors other than Mr. Schrimsher, our President & Chief Executive Officer, meet these independence standards.

Director Attendance at Meetings

During the fiscal year ended June 30, 2019, the Board held five meetings. Each incumbent director attended at least 75% of the total number of meetings of the Board and the committees on which the director served.

Applied expects directors to attend the annual meeting of shareholders, just as they are expected to attend Board meetings. All the directors attended last year’s annual meeting.

Meetings of Non-Management Directors

At the Board’s regular meetings, the non-management directors meet in executive sessions without management. Mr. Wallace, the Board’s independent Chairman, calls and presides at the sessions. On the independent directors’ behalf, the Chairman provides feedback to management from the sessions, collaborates with management in developing Board meeting schedules and agendas, and performs other duties as determined by the Board or the Corporate Governance Committee.

Board Leadership Structure

The Board periodically evaluates its leadership structure under circumstances existing at the time. In 2011, the Board concluded it would be in the best interests of Applied and its shareholders to separate the positions of Chairman and Chief Executive Officer (“CEO”) and to have an independent director serve as Chairman. Mr. Wallace currently serves as Chairman.

The Board believes its current leadership structure best serves the Board’s oversight of management, the Board’s carrying out of its responsibilities on the shareholders’ behalf, and Applied’s overall corporate governance. The Board also believes the separation of the roles allows the CEO to focus his efforts on operating and managing the company.

Committees

The Board’s Audit, Corporate Governance, and Executive Organization & Compensation Committees are composed solely of independent directors, as defined in NYSE listing standards and Applied’s categorical standards, and, in the case of the Audit Committee, under federal securities laws.

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Corporate Governance

The committee members’ names and number of meetings held in fiscal 2019 follow:

Ms. Andrews and Ms. Hall joined the Board in August 2019 and have not yet been appointed to committees.

We describe the committees below. Their charters, posted via hyperlink from the investor relations area of Applied’s website, contain more detailed descriptions. The Board also has a standing Executive Committee which, during intervals between Board meetings and subject to the Board’s control and direction, possesses and may exercise the Board’s powers. The Executive Committee, whose members include the Chairman, the CEO, and the committee chairs, met once in fiscal 2019.

Audit Committee. The Audit Committee assists the Board in fulfilling its oversight responsibility with respect to the integrity of Applied’s accounting, auditing, and reporting processes. The committee appoints, determines the compensation of, evaluates, and oversees the work of the independent auditor, reviews the auditor’s independence, and approves non-audit work to be performed by the auditor. The committee also reviews, with management and the auditor, annual and quarterly financial statements, the scope of the independent and internal audit programs, audit results, and the adequacy of Applied’s internal accounting and financial controls.

The Board has determined that each Audit Committee member is independent for purposes of section 10A of the Securities Exchange Act of 1934 and that Ms. Kelly-Green and Messrs. Petrella, Komnenovich, and Pagano are “audit committee financial experts,” as defined in Item 407(d)(5) of Securities and Exchange Commission (“SEC”) Regulation S-K.

The Audit Committee’s report is on page 58 of this proxy statement.

Corporate Governance Committee. The Corporate Governance Committee assists the Board by reviewing and evaluating potential director nominees, Board and CEO performance, Board governance, director compensation, compliance with laws, public policy matters, and other issues. The committee also administers long-term incentive awards to directors under the 2015 Long-Term Performance Plan.

Executive Organization & Compensation Committee. The Executive Organization & Compensation Committee monitors and oversees Applied’s management succession planning and leadership development processes, nominates candidates for the slate of officers to be elected by the Board, and reviews, evaluates, and approves executive officers’ compensation and benefits. The committee also administers incentive awards to executives under the 2015 Long-Term Performance Plan, including the annual Management Incentive Plan. Pay Governance LLC serves as the committee’s independent executive compensation consultant.

In approving executive officers’ compensation and benefits, the committee bases its decisions on a number of considerations, including the following: the committee’s own reasoned judgment; peer group and market survey information; recommendations provided by the independent consultant; and recommendations from Applied’s CEO as to the other executive officers’ compensation and benefits.

For more information on the committee, please read, beginning on page 19, the “Compensation Discussion and Analysis” portion of this proxy statement.

Applied Industrial Technologies 2019 Proxy Statement		13

Corporate Governance

Board’s Role in Risk Oversight

Risk is inherent in every enterprise, and Applied faces many risks of varying size and intensity. While management is responsible for day-to-day management of those risks, the Board, as a whole and through its committees, oversees and monitors risk management. In this role, the Board is responsible for determining that the risk management processes designed and implemented by management are adequate and functioning as designed.

The Board believes that robust communication with management is essential for risk management oversight. Senior management attends quarterly Board meetings and responds to directors’ questions or concerns about risk management and other matters. At these meetings, management regularly presents to the Board on strategic matters involving our operations, and the directors and management engage in dialogue about the company’s strategies, challenges, risks, and opportunities. Each year, management reports more broadly on the company’s enterprise risk management process. The non-management directors also meet regularly in executive session without management to discuss a variety of topics, including risk.

While the Board is ultimately responsible for risk oversight, the committees assist the Board in the areas described below, with each committee chair presenting reports to the Board regarding the committee’s deliberations and actions.

·

The Audit Committee assists with respect to risk management in the areas of financial reporting, internal controls, and compliance with legal and regulatory requirements.

·

The Executive Organization & Compensation Committee assists with respect to management of risks related to executive succession and retention, and arising from our executive compensation policies and programs.

·

The Corporate Governance Committee assists with respect to management of risks associated with Board organization and membership, and other corporate governance matters, as well as company culture and ethical compliance.

We have assessed the risks arising from Applied’s compensation policies and practices for employees, including the executive officers. The findings were reviewed with the Executive Organization & Compensation Committee. Based on the assessment, we believe our compensation policies and practices do not encourage excessive risk-taking and are not reasonably likely to have a material adverse effect on Applied.

Communications with Board of Directors

Shareholders and other interested parties may communicate with a director by writing to that individual c/o Applied’s Secretary at 1 Applied Plaza, Cleveland, Ohio 44115. In addition, they may contact the non-management directors or key Board committees by e-mail, anonymously if desired, through a form located in the investor relations area of Applied’s website at www.applied.com. The Board has instructed Applied’s Secretary to review the communications and to exercise judgment not to forward correspondence such as routine business inquiries and complaints, business solicitations, and frivolous communications. The Secretary delivers summary reports on the nature of all of the communications to the Audit Committee and the Corporate Governance Committee.

Director Nominations

In identifying and evaluating director candidates, the Corporate Governance Committee first considers Applied’s developing needs and desired characteristics of a new director, as determined from time to time by the committee. The committee then considers various candidate attributes, including the following: business, strategic, and financial skills; independence, integrity, and time availability; diversity of gender, race, and other personal characteristics; and overall experience in the context of the Board’s needs. From time to time, the committee engages a professional search firm, to which it pays a fee, to assist in identifying and evaluating potential nominees; most recently, such a firm assisted the committee with the selection of Ms. Andrews and Ms. Hall.

The committee will also consider qualified director candidates recommended by shareholders. Shareholders can submit recommendations by writing to Applied’s Secretary at 1 Applied Plaza, Cleveland, Ohio 44115. For consideration by the committee in the annual director nominating process, shareholders must submit recommendations at least 120 days prior to the anniversary of the date on which our proxy statement was released to

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Corporate Governance

shareholders in connection with the previous year’s annual meeting. Shareholders must include appropriate detail regarding the shareholder’s identity and the candidate’s business, professional, and educational background, diversity considerations, and independence. The committee does not intend to evaluate candidates proposed by shareholders differently than other candidates.

Transactions with Related Persons

Applied’s Code of Business Ethics expresses the principle that situations presenting a conflict of interest must be avoided. In furtherance of this principle, the Board has adopted a written policy, administered by the Corporate Governance Committee, for the review and approval, or ratification, of transactions with related persons.

The related party transaction policy applies to a proposed transaction in which Applied is a participant, the aggregate amount involved exceeds $50,000 in a fiscal year, and a director, executive officer or significant shareholder, or an immediate family member of such a person, has a direct or indirect material interest. The policy provides that the Corporate Governance Committee will consider, among other things, whether the transaction is on terms no less favorable than those provided to unaffiliated third parties under similar circumstances, and the extent of the related person’s interest. No director may participate in discussion or approval of a transaction for which the director is a related person.

Warren E. Hoffner, our Vice President, General Manager – Fluid Power & Flow Control, is an executive officer. Mr. Hoffner joined the company in 1996 when we acquired a distribution business owned by him and his father. Two related party lease arrangements have survived from the acquisition and been renewed from time to time: (1) we lease a building from a company owned 50% by Mr. Hoffner’s father (who retired at the time of the acquisition) at a current rental rate of $147,000 per year, with a term expiring in 2026; and (2) we lease a second building from Mr. Hoffner’s father at a current rental rate of $121,524 per year, also with a term expiring in 2026. Applied management, using a third-party broker, negotiates the rental rates and other lease terms and we consider them to be market competitive. Following a review, the Corporate Governance Committee ratified the lease transactions.

Applied Industrial Technologies 2019 Proxy Statement		15

Director Compensation

DIRECTOR COMPENSATION

Only non-employee directors receive compensation for service as directors. Mr. Schrimsher, our President & Chief Executive Officer, does not receive additional compensation for serving as a director.

Compensation Review

The Corporate Governance Committee reviews director compensation annually. The committee seeks to provide competitive compensation to assist with director retention and recruitment. If the committee believes a change is warranted to remain competitive considering the size and nature of our business, then the committee makes a recommendation to the Board of Directors.

The committee bases its recommendations on a number of considerations including market data on director compensation, as reported in other companies’ SEC filings, advice from outside experts, and the committee’s own reasoned judgment. In general, the committee targets median director compensation levels for comparably sized companies in similar industries, considering also the time commitments required of directors. A majority of the directors must approve a change.

Management assists the committee by preparing analyses at its request, but does not play a role in determining or recommending the amount or form of director compensation.

The 2019 Long-Term Performance Plan, proposed for shareholder approval at the annual meeting, places a $750,000 limit per annum on director compensation (cash and equity), consistent with evolving best practices.

Components of Compensation Program

The director compensation program’s primary components, effective January 1, 2019, follow:

Quarterly Retainers.

Position		Quarterly Retainer ($)
Each Non-Employee Director		23,750
Board Chairman		Additional 17,500
Audit Committee Chair		Additional 5,000
Corporate Governance Committee Chair		Additional 3,125
Executive Org. & Comp. Committee Chair		Additional 3,750

Long-Term Incentives. Annually, the Corporate Governance Committee considers long-term incentive awards to directors. In 2019, the committee awarded each director 1,875 restricted shares under the 2015 Long-Term Performance Plan. The shares’ targeted value represented a little more than half of each director’s total compensation (excluding retainers paid to directors with extra duties), approximating typical practices of other companies. The shares vest one year after the grant date, subject to conditions as to forfeiture and acceleration of vesting.

Other Benefits. Applied reimburses directors for travel expenses for attending meetings, as well as for attending director education seminars and conferences. The directors also participate in our travel accident insurance plan. Contributory health care coverage is available to directors who joined the Board before 2011; Mr. Wallace is the only director who participated in 2019.

Stock Ownership Guideline

Applied expects each non-employee director to own, within five years after joining the Board, Applied shares (not including unexercised stock options) valued at a minimum of five times the annual retainer fees, or $475,000. The Board believes this ownership guideline is consistent with the practices of peers and other companies, and is a good governance practice. Directors may hold the shares directly or indirectly.

16		Applied Industrial Technologies 2019 Proxy Statement

Director Compensation

At June 30, 2019, each director owned shares valued in excess of the $475,000 guideline except for Messrs. Pagano and Raver, who joined the Board in August 2017. Ms. Andrews and Ms. Hall joined the Board in August 2019.

Director Compensation — Fiscal Year 2019

The following table shows information about non-employee director compensation in 2019. Ms. Andrews and Ms. Hall joined the Board after the end of the fiscal year.

Name		Fees Earned or Paid in Cash ($)				Stock Awards ($) (1)				Option Awards ($) (2)		All Other Compensation ($)				Total ($)
Peter A. Dorsman			103,750				115,744			0			0			219,494
L. Thomas Hiltz (3)			42,500				0			0			0			42,500
Edith Kelly-Green			101,250				115,744			0			0			216,994
Dan P. Komnenovich			90,000				115,744			0			0			205,744
Robert J. Pagano			90,000				115,744			0			0			205,744
Vincent K. Petrella			108,750				115,744			0			0			224,494
Joe A. Raver			90,000				115,744			0			0			205,744
Dr. Jerry Sue Thornton			90,000				115,744			0			0			205,744
Peter C. Wallace			150,000				115,744			0			14,282	(4)		280,026

(1)

At June 30, 2019, each non-employee director held 1,875 restricted shares that vest in January 2020. Applied pays dividends on restricted stock at the same rate paid to all shareholders and the directors hold voting rights for the shares. The amounts in the table represent the awards’ grant date fair value computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Stock Compensation (“FASB ASC Topic 718”).

(2)	At June 30, 2019, the following directors held the corresponding numbers of stock options from previous years’ awards: Mr. Dorsman, 17,950; Ms. Kelly-Green, 17,950; Mr. Petrella, 9,510; Dr. Thornton, 17,950; and Mr. Wallace, 13,513.

(3)	Mr. Hiltz retired from the Board in October 2018.

(4)	Reflects the value of health care benefits.

Applied Industrial Technologies 2019 Proxy Statement		17

Beneficial Ownership

HOLDINGS OF MAJOR SHAREHOLDERS,

OFFICERS, AND DIRECTORS

The following table shows beneficial ownership of Applied common stock, at June 30, 2019, by (i) persons believed by us to own beneficially more than 5% of Applied’s outstanding shares, based on our review of SEC filings, (ii) all directors and nominees, (iii) the executive officers named in the Summary Compensation Table on page 35, and (iv) all directors, nominees, and executive officers (at June 30, 2019) as a group.

Name of Beneficial Owner		Shares Beneficially Owned on June 30, 2019 (1)				Percent of Class (%) (2)
BlackRock, Inc. 55 East 52nd Street, New York, New York 10055			6,362,725	(3)		16.5
The Vanguard Group, Inc. P.O. Box 2600, Valley Forge, Pennsylvania 19482-2600			4,024,998	(4)		10.4
JPMorgan Chase & Co. 383 Madison Avenue, New York, New York 10017			2,543,172	(5)		6.6
Madhuri A. Andrews (6)			0
Fred D. Bauer			143,377
Peter A. Dorsman			62,926
Mary Dean Hall (6)			0
Warren E. Hoffner			78,432
Edith Kelly-Green			39,473
Dan P. Komnenovich			19,305
Kurt W. Loring			62,158
Robert J. Pagano, Jr.			4,272
Vincent K. Petrella			23,390
Joe A. Raver			5,857
Neil A. Schrimsher			441,633			1.1
Dr. Jerry Sue Thornton			90,274
Peter C. Wallace			51,592
David K. Wells			26,301
All Directors, Nominees, and Executive Officers as a Group (15 Individuals)			1,048,990	(7)		2.7

(1)

We determined beneficial ownership in accordance with SEC rules; however, the holders may disclaim beneficial ownership. Except as otherwise indicated, the beneficial owner has sole voting and dispositive power over the shares. The directors’ and named executive officers’ totals include shares that could be acquired within 60 days after June 30, 2019, by exercising vested stock options and stock-settled stock appreciation rights (“SARs”): Mr. Bauer, 60,025; Mr. Dorsman, 17,950; Mr. Hoffner, 69,225; Ms. Kelly-Green, 17,950; Mr. Loring, 55,525; Mr. Petrella, 9,510; Mr. Schrimsher, 350,550; Dr. Thornton, 17,950; Mr. Wallace, 13,513; and Mr. Wells, 24,475. The totals also include shares held in nonqualified deferred compensation plan accounts for which the beneficial owner has voting, but not dispositive power: Mr. Dorsman, 37,734; Dr. Thornton, 1,291; and Mr. Wallace, 13,147. Except for Ms. Andrews and Ms. Hall, each non-employee director’s total also includes 1,875 restricted shares, for which the director has voting but not dispositive power. The executive officers’ totals do not include unvested restricted stock unit holdings.

(2)	Does not show percent of class if less than 1%.

(3)	BlackRock, Inc. reported its ownership, including shares beneficially owned by affiliated entities, in a Schedule 13G filed with the SEC on January 24, 2019, indicating it had sole voting power for 6,167,607 shares and no voting power for the remaining shares.

(4)

The Vanguard Group, Inc. reported its ownership, including shares beneficially owned by affiliated entities, in a Form 13F filed with the SEC on August 14, 2019, indicating it had sole voting and shared dispositive power for 79,729 shares, shared voting and dispositive power for 5,616 shares, and no voting but sole dispositive power for 3,935,150 shares.

(5)

JPMorgan Chase & Co. reported its ownership, including shares beneficially owned by affiliated entities, in a Form 13F filed with the SEC on August 7, 2019, indicating it had sole voting and shared dispositive power for 2,320,941 shares, and no voting but shared dispositive power for 222,231 shares.

(6)	Elected to Board in August 2019.

(7)	Includes 636,673 shares that could be acquired by the individuals within 60 days after June 30, 2019, by exercising vested stock options and SARs. In determining ownership percentage, these stock option and SAR shares are added to both the denominator and the numerator.

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Executive Compensation

EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Introduction

This Compensation Discussion and Analysis section (“CD&A”) provides details about the compensation program for Applied’s executive officers. It describes the company’s compensation philosophy and objectives, roles and responsibilities in making compensation decisions, the components of compensation, and the reasons for compensation adjustments, incentive payments, and long-term incentive grants made in fiscal year 2019.

This discussion and analysis should be read in conjunction with the Summary Compensation Table on page 35 and the additional tables and narrative disclosure that follow it.

As required by SEC rules, the proxy statement includes disclosures regarding the compensation of the following executive officers (the “named executive officers” or “NEOs”):

Unless otherwise noted, references to years in the “Executive Compensation” section of this proxy statement mean Applied’s fiscal years ended on June 30.

2019 Compensation Program Highlights

The Board’s Executive Organization & Compensation Committee (the “Committee”) seeks to align overall compensation with performance in order to maximize Applied’s long-term shareholder return. With this objective, and after considering competitive market data and subjective factors, the Committee took the following actions in 2019 relative to the primary pay elements:

Base Salary and Target Annual Incentive Pay

·

The Committee approved adjustments to the NEOs’ base salaries of less than 4%, except for Mr. Hoffner, whose responsibilities substantially broadened to include our newly acquired specialty flow control business. Mr. Schrimsher earned a 2.9% increase.

·

The Committee held the NEOs’ annual incentive targets, as a percentage of salary, at the same levels as in 2018.

Long-Term Incentives

·

Emphasizing performance in Applied’s incentive plans, the Committee awarded approximately 50% of each NEO’s targeted long-term incentive value in performance shares, tied to key company metrics.

·

Stock-settled stock appreciation rights (“SARs”) and restricted stock units (“RSUs”) each made up approximately 25% of the targeted long-term incentive value. Accordingly, all long-term incentives were equity-based.

·

The Committee approved single-digit percentage adjustments to annual long-term incentive target values, except for Mr. Hoffner, who earned a larger adjustment to reflect his increased responsibilities.

The actions maintained the NEOs’ total targeted compensation at levels approximating market medians, consistent with Applied’s pay philosophy.

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Executive Compensation

Company performance in 2019 included record sales, net income, and earnings before interest, tax, depreciation, and amortization (“EBITDA”). Results benefited from a full fiscal year’s contribution from FCX Performance, Inc. (“FCX”), acquired in January 2018, and from sustained operational discipline:

(1)

The Committee believed that the 2019 financial results, which were unfavorably impacted by a noncash long-lived intangible asset impairment charge, a related deferred tax asset valuation allowance, and certain related restructuring charges, but also favorably impacted by unplanned tax benefits, did not reflect the company’s underlying operating performance and management’s achievements for the year. Following a review, the Committee determined to exclude these items from the achievement calculations under the NEOs’ incentive plans. The “2019 Adjusted” column reflects results net of those exclusions.

(2)

EBITDA is calculated, for purposes of the NEOs’ incentive plans, by adding to operating income (i) depreciation and amortization of property, (ii) amortization of stock options and SARs, and (iii) goodwill and intangibles amortization and impairment.

(3)

ROA is calculated, for purposes of the NEOs’ incentive plans, by dividing annual net income by average monthly assets for the year.

Because results, adjusted as described above, fell short of goals for the year, the NEOs earned annual incentive pay at an average of 69.4% of their individual target values.

Shares banked for 2019 under the three-year performance share programs, described in detail on pages 29-31, are shown below:

Total shareholder return, considering the change in our stock price and reinvested dividends, fell 11% in 2019, but this followed total returns of 21%, 33%, and 17% in 2018, 2017, and 2016, respectively. The company returned $58.4 million of cash to shareholders through dividends and share repurchases during the year.

We believe that our compensation decisions, as described in this CD&A, reflect a balanced and responsible pay approach. We also value shareholder opinion and, in performing its duties, the Committee considers the outcome of the annual advisory vote to approve the NEOs’ compensation. This vote is intended to provide an overall assessment of our executive compensation program rather than to focus on specific compensation items. We are pleased to have earned the shareholders’ affirmation last year, with 98% of the shares cast voting in favor; as a result, the Committee made no material changes to the program.

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Executive Compensation

Compensation Practices Highlights

We regularly review evolving best practices in executive compensation. Below are some of the more significant best practices we have adopted and practices we avoid:

What We Do		What We Don’t Do
Pay for performance: in 2019, an average of 71% of the targeted primary compensation for the NEOs (80% for our CEO) was tied to performance. Committee members meet independence requirements under SEC rules and NYSE listing standards. The Committee uses an independent compensation consultant . Balanced approach to compensation , combining fixed and variable, short-term and long-term, cash and equity, and performance and time-based shares. Pay philosophy targets market median compensation among distribution industry companies. Diverse incentive goals without steep payout cliffs. Equity award vesting periods encourage consistent behavior and reward long-term, sustained performance. Change in control agreements and equity plan include “double trigger” provisions for cash payment and equity vesting. Limited perquisites and other benefits. Significant stock ownership guidelines for executive officers and directors, with requirement of holding net shares from equity awards until guideline is met. Provisions in plans and award terms to claw back compensation under defined circumstances.		No payment of dividend equivalents on performance shares until earned. No granting of stock options or SARs with an exercise price less than fair market value at grant. No repricing or replacing of underwater stock options or SARs. No hedging of Applied stock is permitted. No payment of guaranteed, above-market, or preferential interest or earnings on deferred compensation. No change in control agreements other than those with four executive officers. No excise tax gross-up provisions in change in control agreements entered into after 2011, including our CEO’s agreement. No defined benefit pension plan, except for a legacy SERP frozen in 2012. No excessive risk-taking, based on annual compensation risk assessment.

Compensation Philosophy and Objectives

Applied’s primary goal in compensating our executive officers is maximizing long-term shareholder return. In pursuing this goal, we seek to design and to maintain a program that will accomplish the following:

·

Attract and retain qualified and motivated executives by providing compensation that, at target performance, is competitive with a peer group of distribution industry companies,

·

Incent executives to achieve goals, and to take appropriate risks, consistent with Applied’s business strategies, and

·

Reward executives for results they influence that contribute to long-term shareholder value.

Applied is an industrial distributor in a mature market, with many companies offering the same or substantially similar products and services. In this environment, attracting and retaining talented key employees is critical to success. For this reason, while we aim to design the executive compensation program to support the successful execution of our strategy, we also examine our program’s competitiveness with other distributors’ programs. In addition, we consider trends and practices outside the industry to understand best practices and their potential implications for Applied.

Applied Industrial Technologies 2019 Proxy Statement		21

Executive Compensation

Applied believes it is important for executives to focus on both short-term and long-term performance to maximize shareholder return. Accordingly, we provide annual and long-term incentive plans designed to align executives’ interests with shareholders’.

Roles and Responsibilities

Executive Organization & Compensation Committee. The Committee is composed solely of independent directors and is responsible for the executive compensation program’s design and implementation. The Committee’s duties include the following:

·

Setting compensation components and levels for the CEO and the other executive officers,

·

Overseeing Applied’s executive compensation and benefit plans, including approving incentive awards, and

·

Approving incentive plan goals that use performance metrics and evaluating performance to determine whether goals have been achieved.

The Committee routinely receives tally sheets displaying updated data with respect to material components of each executive’s compensation and benefits, and share retention analyses. These help the Committee make decisions with respect to each component in the context of total compensation.

Independent Compensation Consultant. Pay Governance LLC serves as the Committee’s independent compensation consultant, assisting with the following:

·

Establishing the executive compensation program’s components,

·

Analyzing the program’s competitiveness as well as alignment with the company’s performance,

·

Setting executive officers’ annual target compensation levels, overall and by pay component, and

·

Updating the Committee on market trends, best practices, and regulatory changes affecting Applied’s executive compensation program.

Pay Governance is engaged by and reports directly to the Committee. The firm’s representative directly interacts with the Committee chair between meetings, participates in meetings, and performs assignments as requested. He also communicates with management to obtain information for completing assignments for the Committee, as well as to understand how the program supports the company’s strategic plans and needs. The firm submits its invoices to the Committee chair for approval and payment by Applied.

Except for a director compensation review project for the Board’s Corporate Governance Committee, Pay Governance performed no other work for Applied during the year and received no other compensation from Applied outside its engagement by the Committee. Following a review of existing facts and circumstances, including factors specified in the NYSE’s listing standards, the Committee concluded that Pay Governance and its representative are independent from Applied’s management and directors.

Management. While the Committee is responsible for the program’s design and implementation, management assists the Committee in several ways.

Key executives attend portions of Committee meetings at its invitation. They prepare and present analyses at the Committee’s request, and regularly report on Applied’s performance. Our CEO also reports on the other executive officers’ individual performance and offers recommendations regarding their pay. The Committee sets the executive officers’ pay in executive session without management present.

Management assists the Committee’s consultant by providing compensation data and other input and helping the consultant understand Applied’s organizational structure, business plans, goals, and performance, and the competitive landscape. Management does not have its own executive compensation consultant.

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Executive Compensation

Executive Compensation Program Overview

Structure. The compensation program for executive officers includes the following components:

·

Base salary,

·

Annual incentive pay,

·

Long-term incentives,

·

Qualified, nonqualified, and welfare plan benefits, and

·

Change in control and termination benefits.

Base salary, annual incentive pay, and long-term incentives are the primary components and are summarized below.

The Committee sets base salaries to be competitive with market medians for similar positions in peer distribution companies. Target annual and long-term incentives aim to reflect market median practices of peers in order to deliver total target compensation in line with the medians of distribution peers. Actual incentive pay depends in large part on how Applied performs relative to its goals and how its stock price performs in response. As a result, actual compensation from annual and long-term incentives can vary significantly based on the company’s operating and stock price performance.

Applied’s compensation practices reflect a pay-for-performance philosophy. A majority of the NEOs’ compensation is “at risk” and tied to company-wide and individual performance. Moreover, incentive pay generally makes up a greater share of the overall opportunity for executives in more senior positions.

Applied also believes programs leading to equity ownership help align executives’ interests with shareholders’. However, the long-term incentive program is structured to avoid excessive dilution, with annual share utilization approximating 1% of shares outstanding. The Committee periodically reviews share utilization in relation to market practices in an effort to ensure Applied’s equity plan is not unduly diluting shareholders’ interests.

The Committee generally determines each executive officer’s base salary, annual incentive target compensation (expressed as a percentage of base salary), and long-term incentive target compensation independently from the other primary components of compensation. Nevertheless, the Committee also reviews data regarding total target cash compensation (salary plus annual incentive target compensation) and total target compensation (salary plus annual incentive target compensation plus long-term incentive target compensation) and considers the information contextually, with the company’s pay philosophy and desired pay position, when evaluating each component.

Applied Industrial Technologies 2019 Proxy Statement		23

Executive Compensation

The result is a mix among base salary, annual incentive target compensation, and long-term incentive target compensation, as well as between cash and equity-based incentives, that is competitive with market median practices.

The charts below show the percentage allocation of opportunities provided in 2019 to Mr. Schrimsher and the other NEOs in the forms of base salary, annual incentive target opportunity, and long-term incentive target opportunity (awarded in equity-based instruments).

2019 TARGET COMPENSATION MIX

Neil A. Schrimsher		Other NEOs (Average)

Mr. Schrimsher, our CEO, earns higher pay than the other officers, reflecting his role in establishing and achieving the company’s strategic goals, as well as market practices. His overall compensation is, however, weighted more toward incentive pay, particularly long-term incentives. This distinction is appropriate considering his responsibility and influence over Applied’s performance and is typical among companies in the peer group described below.

Competitive Pay Review for 2019. To help evaluate Applied’s executive compensation, the Committee created a peer group of distribution companies, primarily industrial distributors. Distributor comparisons provide the Committee insight into executive pay and benefits at companies in similar market environments.

With assistance from Pay Governance, the Committee selected 19 companies with annual sales ranging from $1.5 billion to $10.1 billion, and median sales of $3.8 billion, compared with Applied’s projected approximate annual sales, following the 2018 FCX acquisition, of $3.5 billion. Each peer group company disclosed compensation for top officers in SEC filings. Management did not participate in selecting companies.

The 2019 peer group (the “Peer Group”) included the following companies, with additions since last year shown in bold :

2019 Peer Group
AAR Corp.		KLX Inc.		Pool Corporation
Anixter International Inc.		Kaman Corporation		ScanSource, Inc.
BMC Stock Holdings, Inc.		LKQ Corporation		WESCO International, Inc.
Beacon Roofing Supply, Inc.		MRC Global Inc.		Watsco, Inc.
Fastenal Company		MSC Industrial Direct Co., Inc.		Wesco Aircraft Holdings, Inc.
GMS Inc.		NOW Inc.
HD Supply Holdings, Inc.		Patterson Companies, Inc.

Four companies with annual sales under $1.5 billion (DXP Enterprises, Inc., H&E Equipment Services, Inc., Olympic Steel, Inc., and Park-Ohio Holdings Corp.) in the previous year’s peer group were removed due to their size.

Pay Governance then prepared a compensation review and assessment, analyzing the competitiveness of target compensation for the NEOs relative to comparable Peer Group data.

24		Applied Industrial Technologies 2019 Proxy Statement

Executive Compensation

The study identified Peer Group pay for each position at the 25th, 50th, and 75th percentile levels. The 50th percentile is referred to here as the “market median” and represents Applied’s target pay objective.

Beyond the Peer Group data, Pay Governance presented other pay data from broad multi-industry surveys, produced by leading compensation consulting firms. The Committee requested this supplemental data as a secondary resource to help confirm the reliability of the Peer Group data.

Pay Governance analyzed base salary, annual incentive target compensation, total cash target compensation (base salary plus annual incentive target compensation), long-term incentive target compensation, and total direct target compensation (total cash target compensation plus long-term incentive target compensation).

The study also compared Applied’s performance in the past three and five years with the Peer Group companies’ performance, considering metrics such as sales growth, EBITDA growth, cash flow growth, EBITDA margin, net income margin, ROA, and total shareholder return. The comparisons assist the Committee in examining how Applied’s executive pay aligns with company performance relative to peers.

Using Pay Governance’s study, the Committee evaluated each primary compensation component. In most years, including 2019, the Committee seeks to compensate executives near the market median if Applied’s performance targets are met. Sustained performance below target levels should result in realized total compensation below market medians, and performance that exceeds target levels should result in realized total compensation above market medians.

However, market medians and ranges only represent beginning reference points; the Committee also uses its subjective judgment to adjust targeted compensation to reflect factors such as individual performance and skills, long-term potential, tenure in the position, internal equity, retention considerations, and the position’s importance in Applied’s organization.

Detailed Review of Compensation Components

Base Salary. The Committee observes a general policy that base salaries for executive officers who have been in their positions for at least three years and are meeting performance expectations should approximate the market median for comparable positions. As with all pay components, however, the Committee, using its subjective judgment, sets salaries higher or lower to reward individual performance and skills and other considerations such as those mentioned above.

In 2019, after considering the Peer Group data, executive pay trends in the broader market, and the more subjective factors referenced above, the Committee approved adjustments to the NEOs’ base salaries, with Mr. Schrimsher earning a 2.9% increase. The Committee’s actions maintained the officers’ pay at competitive levels relative to market medians and reflected a discipline of managing base salaries within the framework of Applied’s pay philosophy and competitive data.

Annual Incentive Pay. With the annual Management Incentive Plan, the Committee seeks to reward the executive officers, in cash, for achieving fiscal year goals. In general, the Committee seeks to pay total cash compensation near the market median when Applied meets its goals, and to pay above (or below) the median when Applied exceeds (or falls short of) its goals.

At the beginning of the fiscal year, after the Board reviews Applied’s annual business plan as prepared and presented by management, the Committee develops objective goals and targets for the Management Incentive Plan. The Committee considers the market outlook and the business plan, along with the available opportunities and attendant risks.

In 2019, consistent with historical practice, the Committee established goals based on company-wide measures that it considers to be key indicators of shareholder value creation:

·

Net Income – bottom-line profitability; and

·

Cash Provided by Operating Activities – a cash-based measure of company performance.

Applied Industrial Technologies 2019 Proxy Statement		25

Executive Compensation

Sixty percent of each executive officer’s Management Incentive Plan payout was determined based on the level of achievement of Net Income and 20% was determined based on the level of achievement of Cash Provided by Operating Activities, as well as each executive officer’s target incentive award value. The Committee sets goals for the performance measures that it believes are attainable, but that require executives to perform at a consistently high level to achieve target award values. Target and maximum incentive objectives for 2019 are shown in the table below:

Net Income (weighted 60%)		Under $153.9 million		$153.9 million		$181.0 million		$217.2 million
% of Prorated Portion of Target Award		0%		50%		100%		200%
Cash Provided by Operating Activities (weighted 20%)		Under $204.3 million		$204.3 million		$240.3 million		$300.4 million
% of Prorated Portion of Target Award		0%		50%		100%		200%

The payouts for these components could have ranged from 0% to 200% of the executive officers’ target award values. The Committee established this range, consistent with prior years, after considering Pay Governance’s report on market practices. Payouts for each performance measure are prorated on a straight-line basis for results falling between the threshold 50%, 100%, and maximum 200% payout levels.

The Committee assigned an annual incentive target, expressed as a percentage of salary, to each executive officer. The Committee assigned target percentages for 2019 to approximate market practices, as shown in Pay Governance’s review, resulting in maintaining the percentages at the same levels as 2018. The 2019 targets follow:

Name		Base Salary ($)		Incentive Target (%)		Target Award Value ($)
N. Schrimsher		900,000		105		945,000
D. Wells		425,000		65		276,250
F. Bauer		420,000		55		231,000
K. Loring		360,000		55		198,000
W. Hoffner		375,000		60		225,000

The Committee set the Management Incentive Plan’s goals near the beginning of the year. Actual 2019 financial results were unfavorably impacted by a noncash long-lived intangible asset impairment charge, a related deferred tax asset valuation allowance, and certain related restructuring charges, but also favorably impacted by unplanned tax benefits. After reviewing the results, the Committee concluded they did not reflect the company’s underlying operating performance and management’s achievements for the year.

The Management Incentive Plan provides the Committee the authority, in its sole discretion, to make adjustments in order to prevent diminution or enlargement of the benefits intended to be conferred, in a manner the Committee determines is equitably required by changes or events such as those specified above. After deliberation, the Committee exercised this authority and adjusted achievements for purposes of the plan so as to exclude the impact of the specific items mentioned above.

As a result of Applied’s 2019 performance, as adjusted, the Management Incentive Plan payouts for the Net Income and Cash Provided by Operating Activities components were as follows:

Goal		2019 Adjusted Achievement ($)		Payout as % of Prorated Portion of Target Award
Net Income (weighted 60%)		171.1 million		81.7%
Cash Provided by Operating Activities (weighted 20%)		180.6 million		0.0%

The remaining 20% of each executive officer’s plan opportunity was tied to the Committee’s evaluation of individual performance relative to strategic objectives approved by the Committee.

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Executive Compensation

After evaluating individual performance, with Mr. Schrimsher reporting on the other officers’ performance, the Committee approved the following payouts for this final component: Mr. Schrimsher, $189,000; Mr. Wells, $60,775; Mr. Bauer, $46,200; Mr. Loring, $39,600; and Mr. Hoffner, $45,000.

Shown below are the NEOs’ total 2019 Management Incentive Plan payouts:

The average NEO payout, as a percentage of the target awards, was 69.4% .

Considering company goals only, Management Incentive Plan achievements for the most recent five years, as a percentage of targeted achievement, were as follows:

Long-Term Incentives. The Committee made long-term incentive awards to the executive officers under the 2015 Long-Term Performance Plan. The plan seeks to reward executives for achieving long-term goals and authorizes incentive awards in a variety of forms. The Committee makes awards annually, near the start of the year, after reviewing the previous fiscal year’s financial results.

As with the other primary compensation components, the Committee sets the awards’ value after reviewing the independent consultant’s target compensation study. In most years, the Committee seeks to provide awards with a targeted value near the market median for equivalent positions, with variation to reward individual performance and skills, as well as to reflect factors such as long-term potential, responsibility, tenure in the position, internal equity, retention considerations, and the position’s importance in Applied’s organization.

The Committee uses long-term incentive awards for purposes of motivation, alignment with long-term company goals, and retention. The Committee intends to pay total long-term compensation near the market median when Applied meets its goals and above when Applied exceeds its goals. If goals are not met, then long-term compensation should fall below the market median.

After considering the Pay Governance’s study and the subjective factors identified above, the Committee approved adjustments to the NEOs’ annual long-term incentive target values, including increasing Mr. Schrimsher’s target value by 8.7%.

Emphasizing operating performance, the Committee awarded the executives’ long-term incentive target value using three vehicles, all stock-settled, in the approximate weightings shown:

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Executive Compensation

2019 Long-Term Incentive Awards

The Committee believes this combination appropriately balances the vehicles’ distinct purposes. Reflecting Applied’s culture, the mix differs from the norm for the Peer Group companies, which tend to place greater emphasis on service-based restricted stock. The awards also reflect the Committee’s subjective judgment that long-term incentive earnings should be paid in shares.

In determining numbers of performance shares to be targeted and SARs and RSUs to be awarded, the Committee values Applied’s shares based on data provided by Pay Governance. To reduce the impact of short-term stock price volatility, the valuation method uses an average closing share price for 90 trading days prior to the grant. The Grants of Plan-Based Awards table on page 37 shows the threshold, target, and maximum payouts for the performance shares, as well as the number of SARs and RSUs awarded to the NEOs.

The following paragraphs describe the awards made to the executive officers in 2019, as well as performance for the year under the performance share programs:

·

Stock Appreciation Rights (25% of Target Long-Term Incentive Value)

The Committee and management believe SARs are strong performance-based vehicles, as the awards’ value depends on Applied’s stock price growth; until Applied performs in a manner that is recognized by the stock market and creates gains for shareholders, SARs have no value to executives. The base stock price is the market closing price on the grant date. SARs have a ten-year term and vest 25% on each of the first four anniversaries of the grant date, subject to continuous employment with Applied, thereby promoting executive retention. In addition, unvested SARs vest on an executive officer’s retirement, but the remaining term for all the outstanding SARs is truncated to three years. The effect of other events on SARs and the other incentive vehicles is discussed in “Potential Payments upon Termination or Change in Control,” beginning on page 41.

The Committee intends for SARs to align the interests of management and shareholders in achieving long-term growth in the value of Applied’s stock by using a form of award the value of which is determined primarily by long-term stock price appreciation. The four-year vesting period, ten-year term, and stock-settled nature of the SARs are consistent with this objective. Moreover, SARs are less dilutive than stock options, further protecting shareholder interests.

·

Restricted Stock Units (25% of Target Long-Term Incentive Value)

RSUs are grants valued in shares of Applied stock, but shares are not issued to executives until the grants vest on the third anniversary of the award date, assuming continued employment with Applied. The Committee believes cliff vesting is more demanding than typical market practice, but appropriate considering the nature of the award. The RSUs do vest, albeit pro rata, if an executive retires during the three-year term. RSU grants under the 2015 Long-Term Performance Plan have paid dividend equivalents on a current basis, which rewards management for total returns delivered to shareholders.

The Committee considers RSUs to be a good tool for retaining executives. Because their value will increase or decrease over the three-year vesting period along with Applied’s stock, RSUs also promote efforts to maximize long-term shareholder return.

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·

2019-2021 Performance Shares (50% of Target Long-Term Incentive Value)

Performance shares provide incentives to achieve goals over a three-year period. At the beginning of a period, the Committee sets a target number of shares of Applied stock to be paid to each executive at the end of the period, assuming continued employment. The actual payout is then calculated, relative to the target, based on Applied’s achievement of objective goals. If an executive retires during the three years, the performance shares vest on a pro rata basis, tied to the period worked and actual performance during that period.

As a new three-year period begins, the Committee reviews the business plan and market outlook for each year of the period. Then, after also considering the independent consultant’s guidance as to market practices, the Committee determines performance measures and goal ranges at which payouts can be earned for each year; i.e., the goals for each year of a three-year period are established and approved at the start of the three-year period.

Applied’s approach, as opposed to setting goals covering the full three-year period, reduces the risk that any given year of over or under-performance unduly influences payouts for the full three years.

The Committee sets goals it believes are attainable without inappropriate risk-taking, but that still require executives to perform on a sustained basis at a consistently high level to achieve the targeted payout.

Payouts can range from 0% to 200% of the target number of shares. The target payout is 100% of the target number assigned to the executive. The Grants of Plan-Based Awards table on page 37 shows the threshold, target, and maximum payouts for performance shares awarded in 2019.

Because the payout is measured in shares, the award’s value depends on both the company’s operating performance and its stock price, motivating executives throughout the performance period with regard to both.

For the 2019-2021 performance shares, consistent with prior years, the Committee set separate goals for each year of the period, with 75% of an award tied to Applied’s EBITDA and 25% to ROA. ROA improvements can be achieved by, among other things, increasing sales and margins, as well as improving working capital management, all of which are important objectives for industrial distributors.

The Committee considered these metrics to be appropriate measures of management’s impact on operating performance and efficiency over a three-year period. The metrics also balanced the Management Incentive Plan’s emphasis on bottom-line results and cash flow.

Each participant’s targeted number of shares for the three-year period is divided into one-third for each year. Shares awarded for achievement during a particular year are then “banked” for distribution at the end of the three-year term and do not affect the banking of shares for the other years.

Using individual years’ performance makes achieving maximum awards for the full three-year period more difficult because results exceeding maximum goals in any one year do not make up for shortfalls in other years.

The goals for the first year of the performance period, 2019, follow:

Banked awards could range from 0% to 200% of the executive officers’ target share award values. The Committee established this range after considering Pay Governance’s guidance as to market practices. Awards for each

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performance measure were to be prorated on a straight-line proportional basis for results between the threshold 50%, 100%, and maximum 200% payout levels.

As with the Management Incentive Plan, the Committee set the performance shares’ goals near the beginning of the year. Actual 2019 financial results were unfavorably impacted by a noncash long-lived intangible asset impairment charge, a related deferred tax asset valuation allowance, and certain related restructuring charges, but also favorably impacted by unplanned tax benefits. After reviewing the results, the Committee concluded they did not reflect the company’s underlying operating performance and management’s achievements for the year.

The performance shares’ terms provide the Committee the authority, in its sole discretion, to make adjustments in order to prevent diminution or enlargement of the benefits intended to be conferred, in a manner the Committee determines is equitably required by changes or events such as those specified above. After deliberation, the Committee exercised this authority and adjusted achievements for purposes of the 2019-2021 performance shares program to exclude the impact of the specific items mentioned above.

As a result of 2019 achievements, as adjusted, participants banked awards, to be distributed in shares of Applied stock following the end of 2021, as follows:

2019 Goal		2019 Adjusted Achievement		Banked Award as % of Target Performance Shares for 2019
EBITDA (weighted 75%)		$329.9 million		74.6%
ROA (weighted 25%)		7.5%		81.3%
				Overall: 76.3%

·

2018-2020 Performance Shares (2019 performance)

As described above, the Committee sets separate goals for each year of a three-year performance share program at the time the program is adopted. So, while 2019 was the first year of the 2019-2021 performance period, it was also the second year of the 2018-2020 performance period and the third year of the 2017-2019 performance period. For the 2018-2020 performance shares, the 2019 goals, adopted in August 2017, prior to the FCX acquisition and the Tax Cuts and Jobs Act of 2017, follow:

EBITDA (weighted 75%)		Under $200.6 million		$200.6 million		$250.8 million		$313.5 million
% of Prorated Portion of Target Share Award for 2019		0%		50%		100%		200%
ROA (weighted 25%)		Under 7.4%		7.4%		9.3%		11.6%
% of Prorated Portion of Target Share Award for 2019		0%		50%		100%		200%

As a result of 2019 achievements, which the Committee adjusted relative to the FCX acquisition and the Tax Cuts and Jobs Act of 2017, as well as the other specific items mentioned above with respect to the 2019-2021 program, participants banked awards, to be distributed in shares of Applied stock following the end of 2020, as follows:

2019 Goal		2019 Adjusted Achievement		Banked Award as % of Target Performance Shares for 2019
EBITDA (weighted 75%)		$260.3 million		115.2%
ROA (weighted 25%)		9.6%		113.0%
				Overall: 114.6%

The award banked for the program’s first year, 2018, as a percentage of target performance shares, was 149.2%.

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·

2017-2019 Performance Shares (2019 performance)

The goals for the final year of the 2017-2019 performance shares program, adopted in August 2016, follow:

EBITDA (weighted 75%)		Under $184.1 million		$184.1 million		$230.1 million		$287.6 million
% of Prorated Portion of Target Share Award for 2019		0%		50%		100%		200%
ROA (weighted 25%)		Under 7.4%		7.4%		9.2%		11.5%
% of Prorated Portion of Target Share Award for 2019		0%		50%		100%		200%

As a result of 2019 achievements, which the Committee adjusted relative to the FCX acquisition and the Tax Cuts and Jobs Act of 2017, as well as the other specific items mentioned above, participants were awarded shares of Applied stock as follows:

2019 Goal		2019 Adjusted Achievement		Award as % of Target Performance Shares for 2019
EBITDA (weighted 75%)		$260.3 million		152.5%
ROA (weighted 25%)		9.3%		104.3%
				Overall: 140.5%

The awards banked for the program’s first two years, as a percentage of target performance shares, were 133.7% in 2017 and 178.1% in 2018. The average payout for the full three-year period was 150.8%.

Qualified, Nonqualified, and Welfare Plan Benefits. Through the plans described below, we seek to provide benefits comparable to those available at Peer Group and other similarly sized companies. The Committee, with its independent consultant’s assistance, reviews executive-level benefits periodically and compares them with market information, considering executives’ positions and years of service.

·

Qualified savings plan

Applied maintains a defined contribution plan with a section 401(k) feature (the Retirement Savings Plan, or “RSP”) for eligible U.S. employees, including NEOs.

·

Nonqualified deferred compensation plans

The Committee believes that providing competitive supplemental retirement benefits is important for executive recruitment and retention. Statutory limits exist, however, on the value of benefits executives can receive under the company’s qualified savings plan.

Accordingly, in 2012 the Committee adopted the Key Executive Restoration Plan (the “KERP”), an unfunded, nonqualified deferred compensation plan. To participate in the KERP, an executive must be designated by the Committee or the Board. Applied credits a bookkeeping account for each participant with an amount equal to (i) 6.25% (unless the Committee or the Board specifies a different percentage) of the participant’s base salary and annual actual cash incentive pay for the calendar year, minus (ii) the amount of company contributions credited to the participant under the RSP. Account balances are deemed invested in mutual funds selected by the participant from a menu of diverse investment options. In this way, participants take responsibility for funding their own retirement benefits. Further, because of the use of incentive pay in the KERP formula, company contributions are tied in part to Applied’s annual performance results.

To be eligible for KERP account credits, participants must be employed on the last day of a year or have retired, died, or become disabled during the year. Unless otherwise determined by the Committee or the Board, credits to a participant’s account vest based on years of service with Applied, 25% per year. In addition, a participant will be 100% vested in the event of attainment of age 65, death, disability, or certain separations from service within one year after a change in control (as defined in the KERP).

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Each NEO participates in the KERP. The Committee set Mr. Schrimsher’s account credit percentage at 10%.

Applied also maintains the Supplemental Defined Contribution Plan, which permits highly compensated U.S. employees to defer portions of their pay and to accumulate nonqualified savings. Applied does not contribute to the plan and participants are not provided above-market or guaranteed returns. We describe the plan, along with the KERP, more fully in “Nonqualified Deferred Compensation,” at pages 39-40.

·

Welfare plans

Applied maintains a contributory health care plan as well as life and disability insurance plans for U.S. employees. Executive officers may also participate in executive life and disability insurance programs.

Applied provides continuation health care coverage, at the active employee contribution rate, to executive officers who retire after reaching age 55, with at least ten years’ service, for the 18-month period under the Consolidated Omnibus Budget Reconciliation Act of 1986 (“COBRA”). In addition, when the retiree attains age 65, Applied provides Medicare supplement coverage through a third-party policy. Individuals first elected as executive officers after 2012 are not eligible for these benefits.

Perquisites and Other Personal Benefits. Applied does not offer perquisites such as company automobiles or allowances, financial planning and tax services, or country clubs to the NEOs.

Applied provides executive officers five weeks’ annual vacation per calendar year; other employees get five weeks when they reach 25 years of service. Unused vacation time is forfeited at the end of each calendar year.

Change in Control and Termination Benefits. Upon his hire, Applied and Mr. Schrimsher entered into a CEO-level severance agreement providing termination benefits as described in “Potential Payments upon Termination or Change in Control,” on page 42. Applied does not have employment contracts with the other NEOs, nor does it have an executive severance policy. The Committee retains discretion to determine severance benefits, if any, to be offered to the other NEOs if the company terminates their employment, other than in the circumstance of a change in control.

The company’s only change in control agreements are with Messrs. Schrimsher, Wells, Bauer, and Loring. The arrangements are designed to retain executives and to promote management continuity if an actual or threatened change in control occurs. The Board approved the agreements primarily because it believes that the executives’ continued attention and dedication to their duties under the adverse circumstances attendant to a change or potential change in control are ultimately in the best interests of Applied and its shareholders.

The agreements provide severance benefits if an executive’s employment is terminated by the officer for “Good Reason” or by Applied “Without Cause” (each as defined in the agreements) and the termination occurs within two years (three years under an older agreement entered into with Mr. Bauer) after a change in control. These “double trigger” arrangements are consistent with typical market practices. The executive, in turn, must not compete with Applied for three years following termination (one year under the older agreement). Change in control agreements entered into after 2011, including with Messrs. Schrimsher, Wells, and Loring, do not provide for a gross-up for excise taxes. We describe the agreements more fully on pages 43-44 of this proxy statement.

Stock Ownership and Retention Guidelines

The Committee believes executives should accumulate meaningful equity stakes in Applied to align their economic interests with shareholders’ interests, thereby promoting the objective of increasing shareholder value. Accordingly, we have adopted stock ownership guidelines, requiring that executive officers not dispose of stock unless their “owned” shares’ market value equals or exceeds the following annual base salary multiples immediately after the disposition:

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Executive Compensation

Position		Stock Ownership Guideline
Chief Executive Officer		5x base salary
Other Executive Officers		3x base salary

“Owned” shares, per the guidelines, include those owned outright, those owned beneficially in Applied’s Retirement Savings Plan, and RSUs, but do not include SARs or performance shares.

The guidelines are not mandatory in the sense that they do not require an executive immediately to acquire shares if the executive’s ownership is below the applicable guideline.

Until the guideline is achieved, executives must retain net shares received from exercising SARs or the vesting of RSUs or performance shares. “Net shares” are shares that remain after shares are sold or netted to pay withholding taxes.

At June 30, 2019, the value of the NEOs’ holdings (determined as described above) and their guidelines are shown below:

Name		Value of Applied Stock Holdings ($)		Stock Ownership Guideline ($)
N. Schrimsher		7,407,166		4,500,000
D. Wells (hired in May 2017)		406,836		1,275,000
F. Bauer		5,430,146		1,260,000
K. Loring (hired in July 2014)		691,166		1,080,000
W. Hoffner (elected officer in October 2015)		781,862		1,125,000

The Committee monitors compliance with the guidelines, interprets them, and must approve exceptions. The Committee also periodically reviews the guidelines and compares them with market data reported by the independent consultant and others.

Consistent with the objectives of the stock ownership guidelines, the company prohibits its insiders (including directors, officers, and other employees with access to material inside information about Applied) from engaging in:

·

Short sales of Applied’s stock;

·

Market transactions in puts, calls, warrants, or other derivative securities based on Applied stock; and

·

Hedging or monetization transactions such as prepaid variable forward contracts, equity swaps, collars, and exchange funds.

Clawback Provisions

Because incentive awards are intended to motivate executives to act in Applied’s best interests, the Committee includes provisions in award terms to claw back compensation under certain circumstances:

·

The Committee may terminate or rescind an award and, if applicable, require an executive to repay cash or shares (and dividends, distributions, and dividend equivalents paid thereon) issued pursuant to the award within the previous 12 months (and proceeds thereof), if the Committee determines that, during the executive’s employment with Applied or during the period ending 12 months following separation from service, the executive competed with Applied or in certain other circumstances engaged in acts inimical to Applied’s interests.

·

The Committee may require an executive to repay cash or shares (and dividends, distributions, and dividend equivalents paid thereon) issued pursuant to an award within the previous 36 months (and proceeds thereof) if (i) Applied restates its historical consolidated financial statements and (ii) the Committee determines that (x) the restatement is a result of the executive’s, or another executive officer’s, willful misconduct that is unethical or illegal, and (y) the executive’s earnings pursuant to the award were based on materially inaccurate financial statements or materially inaccurate performance metrics that were invalidated by the restatement.

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Executive Compensation

Tax Deductibility and Regulatory Considerations

Internal Revenue Code (the “Code”) section 162(m) limits the amount of compensation a publicly held corporation may deduct as a business expense for federal income tax purposes. The limit, which applies to the principal executive officer, the principal financial officer, and the three other most highly compensated executive officers, as well as certain former executive officers, is $1 million per individual per year, subject to certain exceptions.

Prior to January 1, 2018, the law provided an exception for performance-based compensation. Effective with The Tax Cuts and Jobs Act of 2017, this exception was repealed; accordingly, new performance-based awards under executive incentive programs are subject, like other compensation, to the limit on deductibility.

In general, the Committee has sought to preserve the tax deductibility of compensation without compromising the Committee’s flexibility in designing an effective, competitive compensation program. The Committee reserves the right to pay nondeductible compensation if it is in Applied’s best interests.

Conclusion

The Committee reviews all components of Applied’s executive compensation program. When making a decision regarding any component of an executive officer’s compensation, the Committee takes into consideration the other components.

The Committee believes that the executive officers’ compensation is appropriate and that the program’s components are consistent with market standards. The program takes into account Applied’s performance compared to the Peer Group, and appropriately aligns executive compensation with Applied’s annual and long-term financial results and to long-term financial return to shareholders. The Committee believes the foregoing philosophy is consistent with Applied’s culture and objectives and will continue to serve as a reasonable basis for administering Applied’s total compensation program for the foreseeable future.

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Executive Compensation

Summary Compensation Table — Fiscal Years 2019, 2018, and 2017

The following table summarizes information, for the years ended June 30, 2019, 2018, and 2017, regarding the compensation of Applied’s CEO, CFO, and the three other most highly compensated executive officers at June 30, 2019.

Name and Principal Position		Year		Salary ($)				Stock Awards ($) (1)				Option Awards ($) (1)				Non-Equity Incentive Plan Compensation ($) (2)				Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) (3)				All Other Compensation ($) (4)				Total ($)
Neil A. Schrimsher President & Chief Executive Officer		2019			900,000				2,000,363				696,010				652,239				0				244,765				4,493,377
		2018			875,000				1,604,070				562,330				1,371,014				0				228,898				4,641,312
		2017			845,000				1,597,463				619,894				1,240,376				0				166,076				4,468,809
David K. Wells Vice President – Chief Financial Officer & Treasurer		2019			425,000				353,943				122,250				196,193				0				51,279				1,148,665
		2018			410,000				278,730				97,612				392,357				0				214,218				1,392,917
Fred D. Bauer Vice President – General Counsel & Secretary		2019			420,000				310,589				109,210				159,436				171,316				54,767				1,225,318
		2018			410,000				262,940				92,307				327,485				0				51,375				1,144,107
		2017			398,000				292,615				113,490				301,644				0				49,077				1,154,826
Kurt W. Loring Vice President – Chief Human Resources Officer		2019			360,000				288,912				101,060				136,660				0				39,986				926,618
		2018			348,000				242,000				84,880				281,791				0				36,105				992,776
		2017			335,000				268,648				104,032				257,582				0				31,981				997,243
Warren E. Hoffner Vice President, General Manager – Fluid Power & Flow Control		2019			375,000				252,669				88,020				155,295				0				41,908				912,892
		2018			342,500				183,990				65,782				290,543				0				37,422				920,237
		2017			330,000				196,683				75,660				257,367				0				34,178				893,888

(1)

Amounts represent the aggregate grant date fair value of awards computed in accordance with FASB ASC Topic 718, excluding the effect of estimated forfeitures. The assumptions used to determine the awards’ grant date fair values are described in the notes to Applied’s consolidated financial statements, included in our annual reports on Form 10-K for those years. The 2019 awards are described in the Compensation Discussion and Analysis at pages 27-30 and the Grants of Plan-Based Awards table at page 37. The amounts reported for 2019 in the Stock Awards column are totals of the following:

Name		RSUs ($)				Performance Shares ($)
N. Schrimsher			663,495			1,336,868
D. Wells			119,280			234,663
F. Bauer			104,370			206,219
K. Loring			96,915			191,997
W. Hoffner			82,005			170,664

Performance shares’ grant date fair values assume performance at the target achievement level. If instead it was assumed that the highest level of performance would be achieved, then the grant date fair values would be twice the amounts reported for the performance shares.

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(2)	Amounts shown reflect Management Incentive Plan earnings.

(3)

Mr. Bauer participated in the Supplemental Executive Retirement Benefits Plan, a nonqualified defined benefit plan that was frozen in 2012. The amounts in this column reflect increases in the estimated actuarial present values of his historical accrued benefits. Mr. Bauer is partially vested in his benefits.

The 2019 figure is the difference between the number shown in the Pension Benefits table on page 41 for 2019 year-end and the same item calculated for July 1, 2018. See the notes to that table for information regarding how estimated amounts were calculated.

In 2012, the Committee stopped the accrual of additional plan benefits by virtue of years of service and compensation levels. Accordingly, the values in this column relate to changes in the discount rate and the components of the three-segment interest rate structure, as well as to mortality factor adjustments, as described below.

The SERP uses interest rates and mortality tables imposed on tax-qualified pension plans by Code section 417(e). The value for 2019 reflects a 2.75% discount rate and a three-segment interest rate structure in effect for January 2019, with 3.19% for the first five years, 4.25% for the next 15 years, and 4.60% thereafter.

The value for 2018 reflect a 3.50% discount rate and a three-segment interest rate structure in effect for January 2018, with 2.48% for the first five years, 3.65% for the next 15 years, and 4.15% thereafter. The value for 2017 reflects a 2.75% discount rate and a three-segment interest rate structure in effect for January 2017, with 2.00% for the first five years, 3.91% for the next 15 years, and 4.66% thereafter.

In addition, in each successive year, the mortality table reflects adjustments pursuant to Code section 417(e). Present values were determined assuming zero probability of termination, retirement, death, or disability before normal retirement age (age 65).

(4)	Amounts in this column for 2019 are totals of the following:

·

Retirement Savings Plan (section 401(k) plan) matching contributions,

·

KERP account credits,

·

Company contributions for executive life insurance, for a $300,000 benefit, and

·

Estimated values of perquisites and other personal benefits.

Amounts relating to the following perquisites and other personal benefits provided to NEOs are included: annual expense related to post-retirement health care coverage for Messrs. Schrimsher and Bauer (the only remaining active executives eligible for this benefit), and company contributions for officer-level accident insurance benefits. No perquisite or personal benefit exceeded the greater of $25,000 or 10% of the total amount of perquisites and personal benefits in 2019.

The following table itemizes “All Other Compensation” for 2019:

Name		Retirement Savings Plan Contributions ($)				Key Executive Restoration Plan Account Credits ($)				Gross-up Payments ($)		Life Insurance Benefits ($)				Perquisites and Other Personal Benefits ($)
N. Schrimsher			8,288				217,731			0			689				18,057
D. Wells			7,985				42,348			0			889				57
F. Bauer			7,915				38,143			0			652				8,057
K. Loring			8,015				31,473			0			441				57
W. Hoffner			7,461				33,136			0			1,254				57

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