UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

SCHEDULE 14A

(RULE 14a-101)

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934 (Amendment No.     )

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☐	Soliciting Material Pursuant to Section 240.14a-12

APPLIED INDUSTRIAL TECHNOLOGIES, INC.

 

(Name of Registrant as Specified In Its Charter)

 

          

 

(Name of Person(s) Filing Proxy Statement)

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☐	Fee computed on table in exhibit required by Item 25(b) per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

 

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

 

TUESDAY, OCTOBER 25, 2022   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 2022 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 25, 2022, 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 ratify the Audit Committee’s appointment of independent auditors for the fiscal year ending June 30, 2023.     Shareholders of record at the close of business on August 26, 2022, 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.   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 9, 2022				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
				IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SHAREHOLDER MEETING TO BE HELD ON OCTOBER 25, 2022.
				The Proxy Statement and 2022 Annual Report to Shareholders are available at WWW.APPLIED.COM/ACCESS-PROXY

 

Proxy Statement Table of Contents

 

 

PROXY STATEMENT TABLE OF CONTENTS

 

 

Applied Industrial Technologies 2022 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 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 begins 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			52
Item 3: Vote to Ratify Appointment of Independent Auditors		FOR			54

Director Nominees

 

Nominee		Age		Director Since		Principal Occupation		Independent
Mary Dean Hall		65		2019		Executive Vice President and Chief Financial Officer, Ingevity Corporation		Yes
Dan P. Komnenovich		70		2012		Former President and Chief Executive Officer, Aviall, Inc.		Yes
Joe A. Raver		56		2017		Former President and Chief Executive Officer, Hillenbrand, Inc.		Yes

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

Corporate Governance Highlights

 

Independence		●   The Board Chairman is an independent director. ●   All directors are independent, except for our Chief Executive Officer. ●   The independent directors meet regularly in private executive sessions without management. ●   The Board’s Audit, Corporate Governance & Sustainability, and Executive Organization & Compensation Committees 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. ●   We have four Audit Committee financial experts.
Board Evaluations,   Refreshment, and   Composition		●   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. ●   Five directors are actively employed public company executives. ●   Four current or former public company chief executive officers currently serve on the Board. ●   We have adopted limits on the number of other public company boards on which our directors may serve. ●   Director tenures range from 0 to 17 years, average of 7 years. ●   Director ages range from 50 to 70 years, average of 60 years.
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 Chief Executive Officer, 3x for other executive officers.

Additional information about our corporate governance is on pages 12-16.

 

2		Applied Industrial Technologies 2022 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 52-54.

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, 2023. The committee made the appointment after evaluating the firm and its performance. We seek the shareholders’ ratification of the appointment as described on page 54.

 

Applied Industrial Technologies 2022 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 2022 Proxy Statement

    Introduction and Voting Information

 

 

 

Applied Industrial Technologies 2022 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 2022 annual meeting, the shareholders will elect directors for a three-year term expiring in 2025 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 & Sustainability Committee recommended, and the Board nominated, three incumbents for election as directors: Mary Dean Hall, Dan P. Komnenovich, and Joe A. Raver. The shareholders most recently elected the nominees at the 2019 annual meeting. Their terms expire this year and the Board renominated them following the Corporate Governance & Sustainability Committee’s review and evaluation of their performance. Directors serving terms expiring in 2023 and 2024 will continue in office.

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. In this uncontested election, a withhold vote will not affect the outcome.

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.

 

6		Applied Industrial Technologies 2022 Proxy Statement

Election of Directors

 

 

Nominees for Election as Directors with Terms Expiring in 2025
		Mary Dean Hall Executive Vice President and Chief Financial Officer, Ingevity Corporation   Age: 65 Director since: 2019 Committees:   ●    Audit   ●    Corporate Governance &         Sustainability						Dan P. Komnenovich Former President and Chief Executive Officer, Aviall, Inc.   Age: 70 Director since: 2012 Committees:   ●    Audit   ●    Corporate Governance &         Sustainability
Business Experience: Ms. Hall has served as Executive Vice President and Chief Financial Officer of Ingevity Corporation (NYSE: NGVT) since April 2021. Ingevity is a manufacturer of specialty chemicals, high performance carbon materials, and engineered polymers. Before joining Ingevity, she served with Quaker Houghton (NYSE: KWR) as Senior Vice President, Chief Financial Officer and Treasurer since August 2019, and, prior to then, as Vice President, Chief Financial Officer and Treasurer beginning in 2015. Quaker Houghton is the global leader in industrial process fluids for the primary metals and metalworking markets.   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 make her 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, now operating under the Boeing brand, 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 2022 Proxy Statement		7

Election of Directors

 

 

Nominees for Election as Directors with     Terms Expiring in 2025 (continued)						Continuing Directors with Terms     Expiring in 2023
		Joe A. Raver Former President and Chief Executive Officer, Hillenbrand, Inc.   Age: 56 Director since: 2017 Committees:   ●    Corporate Governance &         Sustainability   ●    Executive Organization &         Compensation   ●    Executive						Robert J. Pagano, Jr. Chief Executive Officer, President, and Chairperson of the Board, Watts Water Technologies, Inc.   Age: 59 Director since: 2017 Committees:   ●    Audit   ●    Corporate Governance &         Sustainability   ●    Executive Organization &         Compensation
Business Experience: Mr. Raver served as President and Chief Executive Officer of Hillenbrand, Inc. (NYSE: HI) from 2013 until retiring in December 2021. Hillenbrand is a diversified industrial company with multiple brands that serve a range of industries across the globe. The company’s industrial businesses provide compounding, extrusion, and material handling; screening and separating; and injection molding and hot runner systems, products, and services for a range of manufacturing and other industrial processes.   Other Directorship in Previous 5 Years: Hillenbrand, Inc. (until December 2021)   Qualifications: Mr. Raver brings to Applied’s Board his broad management experience as a 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, and Chairperson of the Board since February 2022. 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 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.

 

8		Applied Industrial Technologies 2022 Proxy Statement

Election of Directors

 

 

Continuing Directors with Terms Expiring in 2023 (continued)
		Neil A. Schrimsher President & Chief Executive Officer, Applied Industrial Technologies, Inc.   Age: 58 Director since: 2011 Committee:   ●    Executive						Peter C. Wallace Former Chief Executive Officer, Gardner Denver, Inc.   Age: 68 Director since: 2005 Chairman since: 2014 Committees:   ●    Corporate Governance &         Sustainability   ●    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. from 2014 until retiring in 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), 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 2022 Proxy Statement		9

Election of Directors

 

 

Continuing Directors with Terms Expiring in 2024
		Madhuri A. Andrews Executive Vice President, Chief Digital and Information Officer, Jacobs   Age: 55 Director since: 2019 Committees:   ●    Audit   ●    Corporate Governance &         Sustainability						Shelly M. Chadwick Vice President, Finance and Chief Financial Officer, Materion Corporation   Age: 50 Director since: August 2022
Business Experience: Ms. Andrews has served as Executive Vice President, Chief Digital and Information Officer for Jacobs (NYSE: J) since June 2019 and had been Senior Vice President, Chief Information Officer from August 2018 to June 2019. Jacobs 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 2015 to August 2018, she was Chief Information Officer at DynCorp International LLC, a global aviation, logistics, intelligence, and field operations service provider.   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 make her an important contributor to Applied’s Board.						Business Experience: Since November 2020, Ms. Chadwick has served as Vice President, Finance and Chief Financial Officer for Materion Corporation (NYSE: MTRN), a global high-tech solutions provider of performance alloys, advanced materials, and precision optics. From 2016 to November 2020, she was Vice President, Finance and Chief Accounting Officer of The Timken Company (NYSE: TKR), a world leader in manufacturing engineered bearings and power transmission products.   Qualifications: Ms. Chadwick leads her company’s accounting, tax, treasury, and financial planning functions. As CFO, she also has responsibility for Materion’s procurement and investor relations functions. She brings to our Board more than 20 years of leadership experience driving financial and operational results and transformational projects at world-class manufacturing companies.

 

10		Applied Industrial Technologies 2022 Proxy Statement

Election of Directors

 

 

Continuing Directors with Terms Expiring     in 2024 (continued)
		Vincent K. Petrella Former Executive Vice President, Chief Financial Officer and Treasurer, Lincoln Electric Holdings, Inc.   Age: 62 Director since: 2012 Committees:   ●    Audit   ●    Corporate Governance &         Sustainability   ●    Executive Organization &         Compensation   ●    Executive
Business Experience: Mr. Petrella retired from Lincoln Electric Holdings, Inc. (NASDAQ: LECO) in August 2020 as Executive Vice President. He also served as Chief Financial Officer and Treasurer until April 2020. Lincoln Electric engages in the design, manufacture, and sale of welding, cutting, and brazing products worldwide.   Other Directorships in Previous 5 Years: The Gorman-Rupp Company (NYSE: GRC; since 2020), Sotera Health, Inc. (NYSE: SHC; since 2020)   Qualifications: As one of Lincoln Electric’s top executives, Mr. Petrella helped lead the company’s global expansion in recent decades. 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 multibillion-dollar public company make him a valued member of the Board and chairman of the Audit Committee.

 

Applied Industrial Technologies 2022 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 & Sustainability, and Executive Organization & Compensation Committees.

Board Matrix

The matrix below provides information regarding our directors’ knowledge, skills, experiences, and attributes. The matrix does not encompass all the knowledge, skills, experiences, or attributes of our directors, and the fact that we do not list a particular item does not mean that a director does not possess it. In addition, the absence of a particular knowledge, skill, experience, or attribute with respect to a director does not mean the director is unable to contribute to the decision-making process in that area. The type and degree of knowledge, skill, and experience listed below may vary among the directors.

 

M. Andrews

S. Chadwick

M. Hall

D. Komnenovich

R. Pagano, Jr.

V. Petrella

J. Raver

N. Schrimsher

P. Wallace

Knowledge, Skills, and Experience

Other Public Company Board Experience

✓

✓

✓

✓

✓

Active Executive

✓

✓

✓

✓

✓

Distribution Industry

✓

✓

✓

✓

✓

Sales / Marketing

✓

✓

✓

✓

✓

Operations / Supply Chain

✓

✓

✓

✓

✓

✓

Strategic Planning and Execution

✓

✓

✓

✓

✓

✓

✓

✓

✓

Finance / Accounting

✓

✓

✓

✓

✓

Risk Management

✓

✓

✓

✓

✓

✓

✓

✓

✓

Corporate Governance / Compliance

✓

✓

✓

✓

✓

✓

Human Resources / Executive Compensation

✓

✓

✓

✓

✓

✓

Technology

✓

✓

✓

✓

✓

✓

✓

✓

Mergers and Acquisitions

✓

✓

✓

✓

✓

✓

✓

✓

✓

Demographics

Gender

Female

✓

✓

✓

Male

✓

✓

✓

✓

✓

✓

Race / Ethnicity

African American / Black

Asian / Pacific Islander

✓

Caucasian / White

✓

✓

✓

✓

✓

✓

✓

✓

Hispanic / Latino

Native American

Board Tenure

Years

3

<1

3

10

5

10

5

11

17

 

12		Applied Industrial Technologies 2022 Proxy Statement

Corporate Governance

 

 

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, 2022, the Board held five meetings. Each 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.

Membership on Other Boards

Directors must be willing to devote sufficient time to carrying out their duties and responsibilities effectively and to avoid actual or potential conflicts of interest that may arise from serving on other boards of directors. To that end, the Board has adopted a policy that a director who is not a named executive officer of a public company may serve as a director on up to four boards of public companies, including Applied. For directors who are also serving as a named executive officer of a public company, the maximum number of public company boards on which the director may serve is two.

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 & Sustainability Committee.

Board Leadership Structure

The Board periodically evaluates its leadership structure under circumstances existing at the time. The Board has long maintained separate positions of Chairman and Chief Executive Officer (“CEO”) and elected an independent director to 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 & Sustainability, 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.

 

Applied Industrial Technologies 2022 Proxy Statement		13

Corporate Governance

 

 

The committee members’ names and number of meetings held in fiscal 2022 follow:

 

Audit Committee 4 meetings		Corporate Governance & Sustainability Committee 3 meetings		Executive Organization & Compensation Committee 5 meetings
Vincent K. Petrella, Chair		Peter C. Wallace, Chair		Joe A. Raver, Chair
Madhuri A. Andrews		Madhuri A. Andrews		Robert J. Pagano, Jr.
Mary Dean Hall		Mary Dean Hall		Vincent K. Petrella
Dan P. Komnenovich		Dan P. Komnenovich		Peter C. Wallace
Robert J. Pagano, Jr.		Robert J. Pagano, Jr.
		Vincent K. Petrella
		Joe A. Raver

Ms. Chadwick joined the Board in August 2022 and has 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 descriptions that are more detailed. 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 2022.

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. Each year, the committee appoints, determines the compensation of, evaluates, and oversees the independent auditor’s work, 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. Hall 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 55 of this proxy statement.

Corporate Governance & Sustainability Committee. The Corporate Governance & Sustainability 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, sustainability and social subjects, and other issues. The committee also administers long-term incentive awards to directors under the 2019 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 2019 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 20, the “Compensation Discussion and Analysis” portion of this proxy statement.

 

14		Applied Industrial Technologies 2022 Proxy Statement

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. Among other topics, management presents on information security matters at the quarterly meetings. 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 & Sustainability Committee assists with respect to management of risks associated with Board organization and membership, and other corporate governance matters, as well as company culture, ethical compliance, and other sustainability and social subjects.

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 the communications to the Audit Committee and the Corporate Governance & Sustainability Committee.

Director Nominations

In identifying and evaluating director candidates, the Corporate Governance & Sustainability 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 candidate attributes, including the following: business, strategic, and financial skills; independence, integrity, and time availability; diversity of gender, race, ethnicity, 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.

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

 

Applied Industrial Technologies 2022 Proxy Statement		15

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 & Sustainability 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 (1) Applied is a participant, (2) a director, executive officer or significant shareholder, or an immediate family member of such a person, has a direct or indirect material interest, and (3) the aggregate amount involved exceeds $50,000 in a fiscal year or is otherwise material to the related person. The policy provides that the Corporate Governance & Sustainability 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 $157,147 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 $129,913 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 market competitive. Following a review, the Corporate Governance & Sustainability Committee ratified the lease transactions.

 

16		Applied Industrial Technologies 2022 Proxy Statement

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 & Sustainability 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, also considering 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 limits director compensation (cash and equity) to $750,000 per year per director, consistent with evolving best practices.

Components of Compensation Program

The director compensation program’s primary components, effective January 1, 2022, follow:

Cash Retainers.

 

Position		Annualized Retainers ($) (1)
Each Non-Employee Director		100,000
Board Chairman		Additional 80,000
Audit Committee Chair		Additional 20,000
Corporate Governance & Sustainability Committee Chair		None (2)
Executive Org. & Comp. Committee Chair		Additional 15,000

 

(1)	Retainers are earned on a quarterly basis.

 

(2)	The Board discontinued the Corporate Governance & Sustainability Committee chair retainer in 2019 when the committee roster was reconstituted to include all the independent directors, with Mr. Wallace, the Board Chairman, serving as committee chair.

Long-Term Incentives. Annually, the Corporate Governance & Sustainability Committee considers long-term incentive awards to directors. In recent years, the awards have been in the form of restricted shares of Applied stock. The shares vest one year after the grant date, subject to conditions as to forfeiture and acceleration of vesting.

To mitigate the impact of short-term stock price volatility, the method for determining the shares’ targeted value uses an average closing share price for 90 trading days prior to the grant, similar to the approach used in determining equity awards for Applied’s executives.

In January 2022, the committee awarded each director 1,268 restricted shares under the 2019 Long-Term Performance Plan. The award’s 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. In addition, after considering the Board Chairman’s extra responsibilities, the committee (with Mr. Wallace abstaining) awarded Mr. Wallace an additional 203 shares.

 

Applied Industrial Technologies 2022 Proxy Statement		17

Director Compensation

 

 

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 sole qualifying director and participant in fiscal 2022. We believe these practices generally are consistent with those of other companies and are relatively modest in their cost to Applied.

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 $500,000. 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.

On June 30, 2022, each director owned shares valued in excess of the $500,000 guideline. Ms. Chadwick joined the Board in August 2022.

The average non-employee director share ownership value on June 30, 2022, was 14 times the annual retainer fees.

Director Compensation — Fiscal Year 2022

The following table shows information about non-employee director compensation in 2022. Ms. Chadwick 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 ($)
Madhuri A. Andrews		97,500		122,590		0		0		220,090
Peter A. Dorsman (3)		83,750		122,590		0		0		206,340
Mary Dean Hall		97,500		122,590		0		0		220,090
Dan P. Komnenovich		97,500		122,590		0		0		220,090
Robert J. Pagano, Jr.		97,500		122,590		0		0		220,090
Vincent K. Petrella		117,500		122,590		0		0		240,090
Joe A. Raver		101,250		122,590		0		0		223,840
Peter C. Wallace		172,500		142,216		0		17,540 (4)		332,256

 

(1)

On June 30, 2022, each current non-employee director held 1,268 restricted shares which vest in January 2023, except for Mr. Wallace, who held 1,471 shares. Restricted stock awards provide for the accrual of dividends and payment at vesting. 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)	On June 30, 2022, the following directors held the corresponding numbers of stock options from previous years’ awards: Mr. Petrella, 3,114; and Mr. Wallace, 3,114.

 

(3)	Mr. Dorsman resigned from the Board in March 2022 and, as a result, forfeited his restricted shares.

 

(4)	Reflects the value of health care benefits.

 

18		Applied Industrial Technologies 2022 Proxy Statement

Beneficial Ownership

 

 

HOLDINGS OF MAJOR SHAREHOLDERS,

OFFICERS, AND DIRECTORS

The following table shows beneficial ownership of Applied common stock, on June 30, 2022, 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 36, and (iv) all directors, nominees, and executive officers (on June 30, 2022) as a group.

 

Name of Beneficial Owner		Shares Beneficially Owned           on June 30, 2022 (1)				Percent of   Class (%) (2)
BlackRock, Inc. 55 East 52nd Street, New York, New York 10055			6,541,984	(3)		17.0
The Vanguard Group, Inc. P.O. Box 2600, Valley Forge, Pennsylvania 19482-2600			4,727,534	(4)		12.3
JPMorgan Chase & Co. 383 Madison Avenue, New York, New York 10017			2,316,327	(5)		6.0
Madhuri A. Andrews			5,768
Fred D. Bauer			126,054
Shelly M. Chadwick (6)			0
Mary Dean Hall			5,768
Warren E. Hoffner			60,227
Dan P. Komnenovich			24,091
Kurt W. Loring			79,671
Robert J. Pagano, Jr.			9,128
Vincent K. Petrella			21,780
Joe A. Raver			10,643
Neil A. Schrimsher			373,392			1.0
Peter C. Wallace			31,740
David K. Wells			65,941
All Directors, Nominees, and Executive Officers as a Group (14 Individuals)			854,674	(7)		2.2

 

(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, 2022, by exercising vested stock options and stock-settled stock appreciation rights (“SARs”): Mr. Bauer, 40,225; Mr. Hoffner, 21,925; Mr. Loring, 68,225; Mr. Petrella, 3,114; Mr. Schrimsher, 166,750; Mr. Wallace, 3,114; and Mr. Wells, 57,525. Mr. Wallace’s total also includes 9,269 shares held in a nonqualified deferred compensation plan account for which he has voting, but not dispositive power. Except for Ms. Chadwick, each non-employee director’s total also includes 1,268 restricted shares (1,471 for Mr. Wallace), 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 27, 2022, indicating it had sole voting power for 6,386,794 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 12, 2022, indicating it had shared voting and dispositive power for 62,320 shares, no voting but sole dispositive power for 4,628,868 shares, and no voting but shared dispositive power for 36,346 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 11, 2022, indicating it had sole voting and shared dispositive power for 2,125,443 shares, and no voting but shared dispositive power for 190,884 shares.

 

(6)	Elected to Board in August 2022.

 

(7)	Includes 392,403 shares that could be acquired by the individuals within 60 days after June 30, 2022, 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.

 

Applied Industrial Technologies 2022 Proxy Statement		19

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 2022.

This discussion and analysis should be read in conjunction with the Summary Compensation Table on page 36 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”):

 

Name		Position
Neil A. Schrimsher		President & Chief Executive Officer (“CEO”)
David K. Wells		Vice President – Chief Financial Officer & Treasurer (“CFO”)
Fred D. Bauer		Vice President – General Counsel & Secretary
Warren E. Hoffner		Vice President, General Manager – Fluid Power & Flow Control
Kurt W. Loring		Vice President – Chief Human Resources Officer

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

2022 Compensation Program Highlights

The Board’s Executive Organization & Compensation Committee (the “Committee”) seeks to align overall compensation with performance to maximize Applied’s long-term shareholder return. With this objective, and after considering competitive market data and subjective factors, the Committee maintained the compensation program similar to prior years, taking the following actions in 2022 relative to the primary pay elements:

Base Salary and Target Annual Incentive Pay

 

●

Following pandemic-related temporary reductions from April 2020 to January 2021 and no adjustments in 2021, the Committee approved base salary adjustments for the NEOs for 2022, with Mr. Schrimsher earning a 3% raise. Mr. Schrimsher’s base salary had remained unchanged since July 2018.

 

●

The Committee held four NEOs’, including Mr. Schrimsher’s, annual incentive targets as a percentage of salary at the same levels as in the previous three years.

 

●

Selecting a performance measure for the annual Management Incentive Plan that better aligned the assessment of cash management performance with sales, the Committee replaced cash provided by operating activities, used in prior years, with a new goal of average working capital as a percentage of sales.

Long-Term Incentives

 

●

Emphasizing performance in Applied’s incentive plans, the Committee awarded approximately 50% (55% for Mr. Schrimsher) 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”), equally weighted, made up the remainder of the targeted long-term incentive value. Accordingly, all long-term incentives were equity-based.

 

20		Applied Industrial Technologies 2022 Proxy Statement

Executive Compensation

 

 

●

After considering market data and subjective factors, the Committee approved single-digit adjustments to annual long-term incentive target values for four NEOs, with Mr. Schrimsher earning an increase of less than 3%.

The actions maintained the NEOs’ total targeted compensation at levels reasonably approximating market medians among peer distribution industry companies, consistent with Applied’s pay philosophy.

Business momentum continued during 2022 and Applied achieved record financial results, supported by our competitive market position and operating discipline amid ongoing inflationary and supply chain pressures. Net sales rose 17.8% and net income rose 77.8%, both to record levels:

 

		2022		2022 Adjusted (1)		2022 Goal		2021
Sales		$3.8 billion		—		—		$3.2 billion
Net Income		$257.4 million		$256.9 million		$200.7 million		$144.8 million
Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) (2)		$409.6 million		$408.9 million		$346.6 million		$262.8 million
Average Working Capital as a Percentage of Sales (3)		25.4%		—		25.8%		25.8%
Return on Assets (“ROA”) (4)		11.1%		11.1%		8.4%		6.4%

 

(1)	Following a review, the Committee excluded certain income from the achievement calculations under the NEOs’ incentive programs. The “2022 Adjusted” column reflects results as so adjusted, with adjusted ROA rounding to the same figure as the unadjusted result.

 

(2)	EBITDA is calculated, for purposes of the NEOs’ performance share programs, by adding net income, interest expense, income taxes, depreciation, and intangibles amortization.

 

(3)

Average working capital as a percentage of sales is calculated, for purposes of the 2022 Management Incentive Plan, by taking the arithmetic average, for the fiscal year’s four quarters, of the following calculations: average working capital for the quarter as a percentage of sales for the twelve months ending with the quarter end.

 

(4)	ROA is calculated, for purposes of the performance share programs, by dividing annual net income by average monthly assets for the year.

Total shareholder return, considering the change in our stock price and reinvested dividends, rose 7.1% for the year (78.2% over five years). The company returned $65.6 million of cash to shareholders through dividends and share repurchases during the year.

Net income, adjusted as described above, and average working capital as a percentage of sales both exceeded 2022 goals. The NEOs earned annual incentive pay for 2022 at an average of 166.6% of their individual target values.

Shares earned or “banked” for 2022 under the performance share programs, described in detail on pages 30-32, are shown below:

 

Performance Shares Program		Banked Award as % of 2022 Target Shares
2022-2024		178.9%
2021-2023		200.0%
2020-2022		137.0%

2022 achievements under the three-year performance share programs averaged 172.0% of target shares. The average payout for the full three-year period of the completed 2020-2022 program was 97.3% of target.

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 97% of the shares cast voting in favor; as a result, the Committee made no material changes to the program.

 

Applied Industrial Technologies 2022 Proxy Statement		21

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 2022, an average of 73% of the targeted primary compensation for the NEOs (82% 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 peer distribution industry companies.   The Committee sets reasonably demanding incentive plan goals that are regularly reviewed for difficulty and analyzes the alignment of our pay program outcomes with our financial results.   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, or on restricted stock units granted under 2019 Long-Term Performance Plan, 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 duplication of metrics in the goals for our short and long-term incentive plans.   No equity award vesting periods shorter than one year.   No hedging or short sales of Applied stock are 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 frozen legacy SERP with only one remaining active participant.   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 mature markets, 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.

 

22		Applied Industrial Technologies 2022 Proxy Statement

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:

 

●

Evaluating Applied’s executive compensation, including by reviewing market data from a distribution company peer group the Committee establishes,

 

●

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,

 

●

Approving incentive plan goals that use performance metrics and evaluating performance to determine whether goals were achieved, and

 

●

Reviewing (1) whether Applied’s compensation plans, arrangements, policies, and practices are reasonably likely to promote excessive risk-taking behavior, and (2) the effectiveness of policies, practices, or other circumstances that mitigate such behavior.

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 the Committee with the following:

 

●

Establishing the executive compensation program’s components,

 

●

Identifying and reviewing peer group companies,

 

●

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 & Sustainability 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 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.

 

Applied Industrial Technologies 2022 Proxy Statement		23

Executive Compensation

 

 

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.

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.

 

Component				Description		Rationale
Base Salary				Fixed compensation paid in cash for service during year		To provide base amount of market competitive pay
Annual Incentive Pay: Management Incentive Plan				Variable compensation paid annually in cash based on performance relative to annual company goals as well as individual performance		To motivate and reward executives with respect to fiscal year company and individual performance
Long- Term Incentives		Performance Shares (55% weighting for CEO, 50% for other NEOs)		Shares earned based on achievement of company goals over a three-year period		To promote   ●   Achievement of longer-term company goals ●   Stock price appreciation through use of stock-based and stock-settled instruments   ●   Executive retention through service-based vesting
		Stock Appreciation Rights (SARs) (22.5% weighting for CEO, 25% for other NEOs)		Stock-settled awards that provide realizable compensation only to the extent our stock price appreciates
		Restricted Stock Units (RSUs) (22.5% weighting for CEO, 25% for other NEOs)		Shares earned after three years of continued service

The Committee sets base salaries to be competitive with market medians for similar positions in peer distribution industry companies. Target annual and long-term incentives aim to reflect market median practices of peers in order to deliver total target compensation competitive with the market medians. 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. Most 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.

 

24		Applied Industrial Technologies 2022 Proxy Statement

Executive Compensation

 

 

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.

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 2022 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).

2022 TARGET COMPENSATION MIX

 

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 weighted, however, 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 2022. To help evaluate Applied’s executive compensation, the Committee creates 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. Pay Governance then prepares a competitive review and assessment, analyzing the competitiveness of target compensation for Applied’s executive positions relative to comparable peer group data.

For 2022, with assistance from Pay Governance, the Committee selected 20 distribution companies (the “Peer Group”) with annual sales ranging from $1.6 billion to $8.5 billion, and median sales of $3.4 billion, as compared with Applied’s sales of $3.1 billion for the same comparison period. Each Peer Group company disclosed compensation for top officers in SEC filings. Management did not participate in selecting the companies. The Peer Group included the companies in the table below, with additions to the group used in previous years shown in bold:

 

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Executive Compensation

 

 

2022 Peer Group
AAR Corp.		GMS Inc.		Rush Enterprises, Inc.
APi Group Corporation		MRC Global Inc.		ScanSource, Inc.
Avient Corporation		MSC Industrial Direct Co., Inc.		SiteOne Landscape Supply, Inc.
Beacon Roofing Supply, Inc.		NOW Inc.		UniFirst Corporation
BlueLinx Holdings Inc.		Owens & Minor, Inc.		Univar Solutions Inc.
Boise Cascade Company		Patterson Companies, Inc.		Watsco, Inc.
Fastenal Company		Pool Corporation

The following companies were in the peer group in previous years but were removed for 2022 after being acquired or for reasons of size or business change: Anixter International Inc., BMC Stock Holdings, Inc., HD Supply Holdings, Inc., Kaman Corporation, LKQ Corporation, WESCO International, Inc., and Wesco Aircraft Holdings, Inc.

Pay Governance then prepared a compensation review and assessment, analyzing the competitiveness of target compensation for Applied’s CEO and CFO positions relative to comparable Peer Group data. Pay Governance did not analyze Peer Group data for other officer positions for 2022, but reported on broader compensation trends to assist the Committee in evaluating target pay levels.

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 several broad industrial company surveys, as well as from the previous peer group. The Committee requested this supplemental data to help confirm the Peer Group data’s reliability.

Pay Governance analyzed base salary, annual incentive target compensation as a percentage of base salary, 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 each of the past five years with the Peer Group companies’ performance, considering metrics such as sales growth, EBITDA growth, cash flow growth, EBITDA margin, cash flow 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 2022, the Committee seeks to compensate executives near the market median if Applied’s performance targets are achieved. 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 held 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.

 

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In 2022, after considering the Peer Group data, executive pay trends in the broader market, and the more subjective factors referenced above, the Committee approved base salary adjustments, with Mr. Schrimsher earning a 3% raise. This action followed pandemic-related temporary reductions from April 2020 to January 2021 and no adjustments in 2021; Mr. Schrimsher’s base salary had remained unchanged since July 2018.

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 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 2022, the Committee established goals based on company-wide measures that it considers key indicators of shareholder value creation:

 

●

Net Income – bottom-line profitability; and

 

●

Average Working Capital as a Percentage of Sales – a measure of operating working capital management efficiency.

The Committee selected average working capital as a percentage of sales to replace cash provided by operating activities, used in prior years, in order to better align the assessment of cash management performance with sales. The new measure is calculated, for purposes of the 2022 Management Incentive Plan, by taking the arithmetic average, for the four quarters of the fiscal year, of the following calculations: average working capital for the quarter as a percentage of sales for the twelve months ending with the quarter end.

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 average working capital as a percentage of sales, 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. In the prior year, 2021, net income was $144.8 million and average working capital as a percentage of sales was 25.8%.

Target and maximum incentive objectives for 2022 are shown in the table below:

 

Net Income (weighted 60%)		Under $170.6     million		$170.6       million		$200.7        million		$240.8        million
% of Prorated Portion of Target Award		0%		50%		100%		200%
Average Working Capital as a Percentage of Sales (weighted 20%)		Over 27.9%		27.9%		25.8%		23.8%
% 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 guidance 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 assigns an annual incentive target, expressed as a percentage of salary, to each executive officer. For 2022, the Committee maintained the percentages at the same levels as in previous years, except that Mr. Wells’ percentage was adjusted to 70% (from 65%). The 2022 targets follow:

 

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Name		Base Salary ($)		Incentive Target (%)		Target Award Value ($)
N. Schrimsher		930,000		105		976,500
D. Wells		470,000		70		329,000
F. Bauer		435,000		55		239,250
W. Hoffner		400,000		60		240,000
K. Loring		380,000		55		209,000

The Management Incentive Plan terms provide the Committee the authority, in its sole discretion, to adjust performance achievements in order to prevent diminution or enlargement of the benefits intended to be conferred, in a manner the Committee determines is equitably required by circumstances such as those specified above. After reviewing Applied’s reported financial results, the Committee excluded $0.6 million of income ($0.5 million net of tax) from the achievement calculations.

As a result of Applied’s 2022 performance, as adjusted, the Management Incentive Plan payouts for the net income and average working capital as a percentage of sales components were as follows:

 

Goal		2022 Achievement		Payout as % of Prorated Portion of Target Award
Net Income     (weighted 60%)		$256.9 million (1)		200%
Average Working Capital as a Percentage of Sales     (weighted 20%)		25.4%		120%

 

(1)	Net income amount reflects adjusted achievement.

The remaining 20% of each executive officer’s plan opportunity was tied to the Committee’s subjective evaluation of individual performance, considering performance relative to strategic objectives, including sustainability and social matters.

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, $234,360; Mr. Wells, $75,670; Mr. Bauer, $52,635; Mr. Hoffner, $52,800; and Mr. Loring, $45,980.

Shown below are the NEOs’ total 2022 Management Incentive Plan payouts:

 

Name		Annual Incentive Payout ($)
N. Schrimsher		1,640,520
D. Wells		549,430
F. Bauer		397,155
W. Hoffner		398,400
K. Loring		346,940

The average NEO payout, as a percentage of the target awards, was 166.6%.

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

 

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Year		Achievement of Company Goals (Combined %)
2022		180.0
2021		200.0
2020		99.7
2019		61.3

Long-Term Incentives. Early in the year, the Committee made long-term incentive awards to the executive officers under the 2019 Long-Term Performance Plan.

The plans reward executives for achieving long-term goals and authorize incentive awards in a variety of forms. The Committee makes awards annually, 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 achieved, then long-term compensation should fall below the market median.

After considering Pay Governance’s study and the subjective factors identified above, the Committee approved single-digit adjustments to annual long-term incentive target values for four NEOs, with Mr. Schrimsher earning an increase of less than 3%. Emphasizing operating performance, the Committee awarded long-term incentives using three vehicles, all stock-settled, in the approximate weightings shown below.

2022 LONG-TERM INCENTIVE AWARDS

 

The Committee believes these combinations appropriately balance the vehicles’ distinct purposes, with Mr. Schrimsher’s weighting, as befits his broad responsibilities, tilted more toward the operating performance-driven performance shares. 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 38 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 executive officers’ 2022 awards, as well as performance for the year under the performance share programs:

 

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Executive Compensation

 

 

●

Stock Appreciation Rights (22.5% of CEO’s Target Long-Term Incentive Value; 25% for Other NEOs)

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. 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 42.

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 (22.5% of CEO’s Target Long-Term Incentive Value; 25% for Other NEOs)

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 2019 Long-Term Performance Plan provide for the accrual of dividend equivalents and payment on vesting.

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.

 

●

2022-2024 Performance Shares (55% of CEO’s Target Long-Term Incentive Value; 50% for Other NEOs)

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 a 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 38 shows the threshold, target, and maximum payouts for performance shares awarded in 2022.

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 2022-2024 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

 

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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, 2022, follow:

 

		EBITDA (weighted 75%)		Under $277.3   million		$277.3     million		$346.6     million		$433.3     million
		% of Prorated Portion of Target Share Award for 2022		0%		50%		100%		200%
		ROA (weighted 25%)		Under 6.7%		6.7%		8.4%		10.5%
		% of Prorated Portion of Target Share Award for 2022		0%		50%		100%		200%

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

The performance share terms provide the Committee the authority, in its sole discretion, to adjust performance achievements in order to prevent diminution or enlargement of the benefits intended to be conferred, in a manner the Committee determines is equitably required by circumstances such as those specified above. After reviewing Applied’s reported financial results, the Committee excluded $0.6 million of income ($0.5 million net of tax) from the achievement calculations.

As a result of the 2022 achievements, as adjusted, participants banked awards, to be distributed in shares of Applied stock following the end of 2024, as follows:

 

		2022 Goal		2022 Adjusted Achievement		Banked Award as % of               Target Performance Shares for 2022
		EBITDA (weighted 75%)		$408.9 million		171.9%
		ROA (weighted 25%)		11.1%		200.0%
						Overall: 178.9%

 

●

2021-2023 Performance Shares (2022 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 2022 was the first year of the 2022-2024 performance period, it was also the second year of the 2021-2023 performance period and the third year of the 2020-2022 performance period. For the 2021-2023 performance shares, the 2022 goals, adopted in October 2020, follow:

 

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Executive Compensation

 

 

		EBITDA (weighted 75%)		Under $195.3   million		$195.3     million		$244.1     million		$305.1     million
		% of Prorated Portion of Target Share Award for 2022		0%		50%		100%		200%
		ROA (weighted 25%)		Under 4.1%		4.1%		5.1%		6.4%
		% of Prorated Portion of Target Share Award for 2022		0%		50%		100%		200%

As a result of 2022 achievements, as adjusted (in addition to the income exclusion referenced above, total assets in the ROA calculation were adjusted to exclude the effects of goodwill and intangible asset impairments), participants banked awards, to be distributed in shares of Applied stock following the end of 2023, as follows:

 

				2022 Adjusted Achievement		Banked Award as % of Target Performance Shares for 2022
		EBITDA (weighted 75%)		$408.9 million		200.0%
		ROA (weighted 25%)		10.9%		200.0%
						Overall: 200.0%

The award banked for the program’s first year, 2021, as a percentage of target performance shares, was 200.0%.

 

●

2020-2022 Performance Shares (2022 performance)

The goals for the final year of the 2020-2022 performance shares program, adopted in September 2019, follow:

 

		EBITDA (weighted 75%)		Under $305.0   million		$305.0     million		$381.3     million		$476.6     million
		% of Prorated Portion of Target Share Award for 2022		0%		50%		100%		200%
		ROA (weighted 25%)		Under 7.2%		7.2%		9.0%		11.3%
		% of Prorated Portion of Target Share Award for 2022		0%		50%		100%		200%

As a result of 2022 achievements, as adjusted (in addition to the income exclusion referenced above, total assets in the ROA calculation were adjusted to exclude the effects of goodwill and intangible asset impairments), participants were awarded shares of Applied stock as follows:

 

				2022 Adjusted Achievement		Banked Award as % of                 Target Performance Shares for 2022
		EBITDA (weighted 75%)		$408.9 million		129.0%
		ROA (weighted 25%)		10.4%		160.9%
						Overall: 137.0%

The awards banked for the program’s first two years, as a percentage of target performance shares, were 75.4% in 2020 and 79.6% in 2021. The average payout for the full three-year period was 97.3% of target. By comparison, the average payout for the full three-year period for the 2019-2021 performance shares was 25.4% of target.

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.

 

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●

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, Applied maintains 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. 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).

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 40-41.

 

●

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 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; Messrs. Schrimsher and Bauer are the only remaining active eligible executives.

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’ 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,” beginning 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.

 

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Executive Compensation

 

 

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 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, 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 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:

 

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 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.

The value of the NEOs’ holdings (determined as described above) on June 30, 2022, and their guidelines are shown below:

 

Name		Value of Applied Stock Holdings ($)		Stock Ownership Guideline ($)
N. Schrimsher		22,882,882		4,650,000
D. Wells (hired in May 2017)		1,396,004		1,410,000
F. Bauer		8,754,259		1,305,000
W. Hoffner		4,125,885		1,200,000
K. Loring		1,562,378		1,140,000

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:

 

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●

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 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.

Conclusion

The Committee reviews all components of Applied’s executive compensation program. When deciding 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 considers Applied’s performance compared with 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 compensation program for the foreseeable future.

 

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