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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APPLIED INDUSTRIAL TECHNOLOGIES, INC.

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1 APPLIED PLAZA

CLEVELAND, OHIO 44115

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www.applied.com

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

Tuesday, October 29, 201325, 2016

10:00 a.m. Eastern Time

Dear Shareholder:

We are pleased to invite you to the 20132016 annual meeting of the shareholders of Applied Industrial Technologies, Inc. The meeting will be at our headquarters, 1 Applied Plaza, East 36th Street and Euclid Avenue, Cleveland, Ohio, 44115 on Tuesday, October 29, 2013,25, 2016, at 10:00 a.m. Eastern Time. The meeting will be held for the following purposes:

Shareholders of record at the close of business on August 30, 2013,26, 2016, 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 13, 20139, 2016

Important Notice Regarding the Availability of Proxy Materials for the

Shareholder Meeting to be Held on October 29, 2013.25, 2016.

The Proxy Statement and 20132016 Annual Report to Shareholders are available at

www.applied.com/proxy

PROXY STATEMENT

CONTENTS

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.”

ITEM 1 — ELECTION OF DIRECTORS

Applied’s Code of Regulations divides our Board of Directors 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 20132016 annual meeting, the shareholders will elect directors for a three-year term expiring in 20162019 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 Board’s Corporate Governance Committee recommended, and the Board nominated, three incumbents for election as directors: L. Thomas Hiltz, Edith Kelly-Green, and Dan P. Komnenovich. Mr. Hiltz and Ms. Kelly-GreenThey were most recently elected at the 20102013 annual meeting and their terms expire this year. Mr. Komnenovich was elected in July 2012 and his term also expires at this annual meeting. The Board renominated them following the Corporate Governance Committee’s review and evaluation of their performance. William G. Bares, a member of the same class, will retire at the annual meeting. The Board currently intends to reduce its size to 11 directors following Mr. Bares’ retirement.

The directorsDirectors serving for terms expiring in 20142017 and 20152018 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. If a nominee becomes unavailable to serve, the proxies reserve discretionwill have authority to vote for any other person or persons who may be properly nominated at the meeting and/or to vote to reduce the number of directors. We are not aware of an existing circumstance that would cause a nominee to be unavailable to serve.

Below 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 as of the date of this proxy statement, that the respective director or nominee should serve as an Applieda director, in light of 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.

Nominees for Election as Directors with Terms Expiring in 20162019

		L. Thomas Hiltz   Director since 1981, member of Corporate Governance Executive, and Executive Organization & Compensation Committees   Business Experience. Mr. Hiltz, age 67,70, is an attorney in Covington, Kentucky and is one of five trustees of the H.C.S. Foundation, a charitable trust which has sole voting and dispositive power with respect to 500,000 shares (as of June 30, 2013)2016) of Applied stock.   Qualifications. Mr. Hiltz’s background as a practicing lawyer and fiduciary includes diverse experience with business transactions, including mergers and acquisitions, and board governance. In addition to service as a director of Great American Financial Resources, Inc., a public company prior to its acquisition by American Financial Group, Inc., he has served as a director of numerous private companies, some with significant minority shareholder bases, and led those boards in overseeing large corporate transactions. Mr. Hiltz also is the Board’s longest-serving member, contributing to its deliberations an institutional memory stretching back several generations of executive teams.

		Edith Kelly-Green   Director since 2002, member of Audit and Corporate Governance Committees   Business Experience. Until her retirementretiring in 2003, Ms. Kelly-Green, age 60,63, was Vice President and Chief Sourcing Officer of FedEx Express, the world’s largest express transportation company and a subsidiary of FedEx Corporation (NYSE: FDX).   Qualifications. Ms. Kelly-Green has significant procurement and logistics experience from her service with FedEx Express, where she was successful in designing and enhancing the company’s extensive internal supply chain processes. Because Applied is a distributor, the processes of buying, inventorying, and transporting products are critical to our business. In addition, her career began in the field of accounting as a Certified Public Accountant with an international public accounting firm and she served as Vice President-Internal Audit with FedEx Corporation. Ms. Kelly-Green’s skills and background in these areas make her well-suited for our company and Board.
		Dan P. Komnenovich   Director since 2012, member of Audit and Corporate Governance CommitteeCommittees   Business Experience. Until his retirement in August 2013, Mr. Komnenovich, age 61,64, was President and Chief Executive Officer of Aviall, Inc. from January 2010 until his retirement in August 2013. Aviall,, a wholly owned subsidiary of The Boeing Company (NYSE: BA),. Aviall is one of the world’s largest providers of new aviation parts and related aftermarket operations. It also provides maintenance for aviation batteries, wheels, and brakes, as well as hose assembly, kitting, and paint-mixing services, and offers a complete set of supply chain and logistics services, including order processing, stocking and fulfillment, automated inventory management, and reverse logistics to OEMs and customers. From 2000 until January 2010, he was Aviall’s Executive Vice President and Chief Operating Officer.   Qualifications. Mr. Komnenovich led a global multi-billion 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.

Continuing Directors with Terms Expiring in 20142017

		Thomas A. Commes Director since 1999, member of Audit, Corporate Governance, and Executive Committees Business Experience. Until his retirement in 1999, Mr. Commes, age 71, was President and Chief Operating Officer, and a director, of The Sherwin-Williams Company (NYSE: SHW), a manufacturer, distributor, and retailer of paints and painting supplies. His career included service as that company’s Chief Financial Officer. Other Directorship in Previous 5 Years. Agilysys, Inc. (NasdaqGS: AGYS) Qualifications. Mr. Commes has an extensive background in finance and accounting through his education and work as a Certified Public Accountant with an international public accounting firm and later as a financial executive for several large retailers, culminating in his role as Sherwin-Williams’ Chief Financial Officer. Mr. Commes then served as President and Chief Operating Officer of Sherwin-Williams, a multi-billion dollar company, for over a decade. From these experiences, he brings to the Board in-depth knowledge of business operations, including the logistics of operating a network of distribution centers and sales outlets, a fundamental characteristic of our business. He also has extensive acquisitions and financing experience. This knowledge and experience, along with his service on other public company boards, make him well-suited for our Board and, in particular, the Audit Committee, which he chairs.

		John F. Meier   Director since 2005, Board Chairman since 2011, member of Audit and Executive Organization & Compensation and Executive Committees   Business Experience. Until his retirementretiring in 2011, Mr. Meier, age 65,68, was Chairman and Chief Executive Officer of Libbey Inc. (NYSE Amex: LBY), a leading supplier of glass tableware products in the U.S., Canada, and Mexico, in addition to supplying to other key international markets. From December 2011 through October 2014 he served as Applied’s Board Chairman.   Other DirectorshipsDirectorship in Previous 5Years. Cooper Tire & Rubber Company (NYSE: CTB), Libbey Inc. (until 2011)   Qualifications. Mr. Meier served as Libbey’s Chairman and Chief Executive Officer for 18 years, leading the company through significant business acquisitions and international expansion. He brings to the Board broad general management and marketing experience, including considerable experience working with distributors in markets throughout the world. He also contributes knowledge and skills acquired through service on other public company boards, making him an effective Chairman of our Board.boards.

		Neil A. Schrimsher   Director since 2011, member of Executive Committee   Business Experience. Mr. Schrimsher, age 49,52, joined Applied as our Chief Executive Officer in October 2011 and was also elected President in August 2013. From February 2010 to August 2011, 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. He was President of Cooper Lighting, Inc. throughout the period from 2006 to December 2010. Prior to joining Cooper Other Directorship in 2006, he was an executive for Siemens Energy & Automation,Previous 5Years. Patterson Companies, Inc., part of Siemens AG, the global electronics and electrical engineering company. (NASDAQ: PDCO; since 2014)   Qualifications. Mr. Schrimsher is the only Applied executive to serve on the Board. Since joining Applied, he has acquired a deep understanding of the company’s businesses, markets, and competitive landscape. From his prior employment, Mr. Schrimsher bringshas 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.
		Peter C. Wallace   Director since 2005, Board Chairman since October 2014, member of Audit, Executive Organization & Compensation and Executive Committees   Business Experience. Mr. Wallace, age 59,62, most recently was Chief Executive Officer of Gardner Denver, Inc. from June 2014 until retiring in December 2015. Gardner Denver is a privately owned 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 February 2013 by National Oilwell Varco, Inc. Robbins & Myers iswas a leading designer, manufacturer, and marketer of highly engineered, application-critical equipment and systems for energy, chemical, pharmaceutical, and industrial markets worldwide. Prior to joining Robbins & Myers, Mr. Wallace was President and Chief Executive Officer of IMI Norgren Group, a manufacturer of sophisticated motion and fluid control systems for original equipment manufacturers.   Other Directorships in Previous 5Years. Curtiss-Wright Corporation (NYSE: CW; since 2016), Rogers Corporation (NYSE: ROG), Robbins & Myers, Inc. (until February 2013), Rogers CorporationParker Drilling Company (NYSE: ROG; since 2010)PKD; from 2013 to 2014)   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. Prior to joining Robbins & Myers, Mr. Wallace hadWallace’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.

Continuing Directors with Terms Expiring in 20152018

		Peter A. Dorsman   Director since 2002, member of AuditExecutive Organization & Compensation and Corporate GovernanceExecutive Committees   Business Experience.Mr. Dorsman, age 58, has been Executive Vice President and Chief Quality Officer for61, retired from NCR Corporation (NYSE: NCR) since July 2012.in April 2014. NCR is a global technology company providing assisted and self-service solutions and comprehensive support services that address the needs of retail, financial, travel, healthcare, hospitality, entertainment,technology, and gamingtelecommunication organizations throughout the world. As Executive Vice President, Services since July 2012, Mr. Dorsman leadsled NCR Services, a leading global provider of outsourced and managed service offerings. He iswas also responsible for customer experience, continuous improvement, and quality throughout NCR. Prior to his current role, he wasNCR, serving as Chief Quality Officer during this period. He served as NCR’s Executive Vice President, Industry Solutions Group and Global Operations from November 2011 to July 2012, and, before then, served as NCR’s Senior Vice President, Global Operations.   Qualifications. Mr. Dorsman has broad experience in marketing, sales, strategy, and operations. At NCR, a multi-billion$6 billion dollar company, he leadsled 11,000 service professionals serving customers in over 90 countries. In his role as Chief Quality Officer, he isHe also charged with leadingled NCR’s efforts to provide consistent, world-class service delivery, products, and solutions. With his diverse background and expertise, he contributes insights about many aspects of our business operations and initiatives.
		J. Michael Moore Director since 1997, member of Audit and Executive Organization & Compensation Committees Business Experience.Mr. Moore, age 70, is President of Oak Grove Consulting Group, Inc. He was Chairman and Chief Executive Officer of Invetech Company, a distributor of bearings, mechanical and electrical drive system products, industrial rubber products, and specialty maintenance and repair products, prior to its acquisition by Applied in 1997. Qualifications. Mr. Moore was the longtime Chairman and Chief Executive Officer of Invetech, an industrial distributor and direct competitor of Applied’s. After Applied acquired Invetech, Mr. Moore continued to participate in industry trade associations, and served as board chairman of the National Association of Wholesaler-Distributors. His firsthand experience with the operational, financial, and marketplace dynamics of Applied’s industry makes him a key contributor to the Board’s business discussions. In addition, Mr. Moore’s career includes service as Invetech’s Chief Financial Officer and as a board member, and chairman, of the Detroit branch of the Federal Reserve Bank of Chicago.
		Vincent K. Petrella   Director since 2012, member of Audit, CommitteeExecutive Organization & Compensation, and Executive Committees   Business Experience. Mr. Petrella, age 53,56, is SeniorExecutive Vice President, Chief Financial Officer and Treasurer of Lincoln Electric Holdings, Inc. (NASDAQ: LECO). Lincoln Electric engages in the design, manufacture, and sale of welding, cutting, and brazing products worldwide.   Qualifications. As one of Lincoln Electric’s top executives, Mr. Petrella has helped lead the company’s global expansion over the last decade. His leadership and operating experience, and his knowledge of industrial distribution in North America and abroad, positionmake him to be 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 current service as Chief Financial Officer for a multi-billion dollar public company make him a valued member of the Board and chairman of the Audit Committee.

		Dr. Jerry Sue Thornton   Director since 1994, member of Audit and Corporate Governance CommitteesCommittee   Business Experience.Experience.Dr. Thornton, age 66,69, retired in June 2013 after serving as President of Cuyahoga Community College, the largest multi-campus community college in Ohio, for more than 20 years. Upon her retirement, Cuyahoga Community College honored her with the title of President Emeritus.   Other Directorships in Previous 5 Years.Years.Barnes & Noble Education, Inc. (NYSE: BNED; since 2015); FirstEnergy Corp. (NYSE: FE; since 2015), RPM, Inc. (NYSE: RPM), American Greetings Corporation (formerly NYSE: AM; until 2013), National City Corporation (formerly NYSE: NCC; until 2009)   Qualifications.Qualifications.Dr. Thornton is a preeminent educator with significant experience in career training. Our workforce is our most important resource, and her background and skills help the Board monitor Applied’s efforts to maximize our associates’ potential. Having served as Cuyahoga Community College’s longtime President, overseeing a budget of over $330 million, she also contributes broad general management skills to Applied’s Board. In addition, Dr. Thornton has extensive service as a director of other NYSE-listed companies, including participation on numerous key board committees.

CORPORATE GOVERNANCE

Corporate Governance Documents

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

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 theall 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, 2013,2016, the Board hadheld five meetings. Each director attended at least 75% of the total number of meetings of the Board and the committees on which he or she served.

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

Meetings of Non-Management Directors

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

Board Leadership Structure

The Board periodically evaluates its leadership structure under circumstances existing at the time. In fiscal 2012, our former Chairman and Chief Executive Officer retired after more than a decade in those roles and Applied hired a new Chief Executive Officer from outside the company, Mr. Schrimsher. With this change in executive leadership, the Board concluded it would be in the best interests of Applied and its shareholders to separate the positions of Chairman of the Board and Chief Executive Officer and to have an independent director serve as Chairman. Mr. Wallace currently serves as Chairman.

In December 2011,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 elected Mr. Meier its Chairmanalso believes the separation of the roles allows the Chief Executive Officer to focus his efforts on operating and he has continued inmanaging the role since that time.company.

Committees

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

The committee members’ names and number of meetings held in fiscal 20132016 follow:

We describe the committees below. The committees’Their charters, posted via hyperlink from the investor relations area of Applied’s website, contain more detailed descriptions. The Board also has a standing Executive Committee which, during intervals between Board meetings and subject to the Board’s control and direction, possesses and may exercise the Board’s powers. The Executive Committee, whose members include the Board’s Chairman, the Chief Executive Officer, and the committee chairs, did not meetmet twice in fiscal 2013.2016.

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

The Board has determined that each Audit Committee member is independent for purposes of section 10A of the Securities Exchange Act of 1934 and that Mr. Commes,Petrella, Ms. Kelly-Green, and Mr. PetrellaKomnenovich 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 45 of this proxy statement.

Corporate Governance Committee.The Corporate Governance Committee assists the Board by reviewing and evaluating potential director nominees, Board and CEO performance, Board governance, director compensation, compliance with laws, public policy matters, and other issues. The committee also administers long-term incentive awards to directors under the 20112015 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 20112015 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 Chief Executive Officer as to the other executive officers’ compensation and benefits.

For more information on the committee, please read, beginning on page 14, the “Compensation Discussion and Analysis” portion of this proxy statement.

Board’s Role in Risk Oversight

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

The Board believes that robust communication with management is essential for risk management oversight. Senior management attends quarterly Board meetings and responds to directors’ questions or concerns about risk management and

other matters. At these meetings, management regularly presents to the Board on strategic matters involving our operations, and the directors and management engage in dialogue about the company’s strategies, challenges, risks, and opportunities. Each year, management reports more broadly on the company’s enterprise risk management process. The non-management directors also meet regularly in executive session without management to discuss a variety of topics, including risk.

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

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 atwww.applied.com. The Board has instructed Applied’s Secretary to review these communications and to exercise judgment not to forward correspondence such as routine business inquiries and complaints, business solicitations, and frivolous communications.communications; the Secretary delivers summary reports on the nature of all of the communications to the Audit Committee and the Corporate Governance Committee.

Director Nominations

In identifying and evaluating director candidates, the Corporate Governance Committee first considers Applied’s developing needs and desired characteristics of a new director, as determined from time to time by the committee. The committee then considers various candidate attributes, of candidates, including the following: business, strategic, and financial skills; independence, integrity, and time availability; diversity of gender, race, and other personal characteristics; and overall experience in the context of the Board’s needs. From time to time, the committee engages a professional search firm, to which it pays a fee, to assist in identifying and evaluating potential nominees to the Board; in 2012, a search firm assisted with the selection of Messrs. Komnenovich and Petrella.nominees.

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

Transactions with Related Persons

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

The related party transaction policy applies to a proposed transaction in which Applied is a participant, the aggregate amount involved exceeds $50,000 in a fiscal year, and a director, executive officer or significant shareholder, or an immediate family member of such a person, has a direct or indirect material interest. The policy provides that the Corporate

Governance Committee will consider, among other things, whether the transaction is on terms no less favorable than those provided to unaffiliated third parties under similar circumstances, and the extent of the related person’s interest. No director may participate in discussion or approval of a transaction for which he or she is a related person.

In October 2015, the Board designated Warren E. Hoffner, our Vice President-General Manager, Fluid Power, as an executive officer. Mr. Hoffner joined Applied in 1996 when we acquired a distribution business owned by him and his father. Two related party lease arrangements have survived from the time of 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 $150,591 per year, with a term expiring in 2019; and (2) we lease a second building from Mr. Hoffner’s father at a current rental rate of $124,760 per year, with a term expiring in 2019. Applied management, using a third-party broker, negotiates the rental rates and other lease terms and we consider them to be market competitive. Following a review, the Corporate Governance Committee ratified the lease transactions.

DIRECTOR COMPENSATION

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

Compensation Review

The Corporate Governance Committee reviews our directors’director compensation annually. The committee seeks to provide a competitive compensation program 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 published market survey data, advice from outside experts, and the committee’s own reasoned judgment. In general, the committee targets median director compensation levels for comparably sized companies in similar industries, considering also the time commitments required of directors. A majority of the directors must approve a change.

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

Components of Compensation Program

The primary components of the director compensation programprogram’s primary components follow:

awards upon joining the Board in July 2012).Plan. The stock options’ exercise price is the closing market price for Applied stock on the grant date. The options are exercisable immediately and expire on the tenth anniversary of the grant date. The restricted shares vest one year after the grant date, subject to conditions as to forfeiture and acceleration of vesting.

At the end of the quarter in which the compensation would otherwise become due and payable, Applied transfers the amount deferred, in either cash or treasury shares (depending on the option chosen), to a grantor trust. In general, distribution of a director’s account commences in the manner— lump sum or up to 10 annual installments— and at the time designated in the director’s election form. The plan prohibits acceleration of distributions and a distribution change must comply with section 409A.

Four directors defer all or a portion of their retainer and meeting fees and elect to invest the fees in Applied stock.

Stock Ownership Guideline

Applied expects each non-employee director to maintain,own, within five years ofafter joining the Board, ownership of Applied shares valued at a minimum of five times the annual retainer fees, or $275,000.

$400,000. Directors may hold the shares directly or indirectly, including shares deemed invested in the Deferred Compensation Plan for Non-Employee Directors, but not including unexercised stock options. EachAt June 30, 2016, each director, except one who joined the Board in July 2012, ownsowned shares valued in excess of the $275,000$400,000 guideline.

Director Compensation — Fiscal Year 20132016

The following table shows information about non-employee director compensation in 2013.2016.

HOLDINGS OF MAJOR SHAREHOLDERS, OFFICERS, AND DIRECTORS

The following table shows beneficial ownership of Applied common stock, as ofat June 30, 2013,2016, 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 named executive officers included in the Summary Compensation Table on page 27, and (iv) all directors, nominees, and executive officers (as of(at June 30, 2013)2016) as a group.

(2)

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

EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Introduction

This Compensation Discussion and Analysis section 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 2013.2016.

It focuses in particular on 2013 compensation arrangements for the following executive officers (the “named executive officers”):

This discussion and analysis should be read in conjunction with the Summary Compensation Table on page 27 its accompanying footnotes, and the additional tables and narrative disclosure that follow the Summary Compensation Table.it.

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

Executive Summary of Significant Compensation-Related Developments2016 Compensation Program Highlights

In 2012, theThe Board’s Executive Organization & Compensation Committee (the “Committee”) took several significant stepsseeks to strengthen the relationship betweenalign overall compensation andwith performance includingin order to maximize Applied’s long-term shareholder return. With this objective, in 2016, focusing on the following:primary pay elements, the Committee took the following actions:

With these measures completed,officer’s targeted long-term incentive value in performance shares, tied to key company performance metrics. Stock-settled stock appreciation rights (“SARs”) and restricted stock units (“RSUs”) each represented about one-quarter of the Committee’s work in 2013 continued to promote alignment of Applied’s executive compensation program with shareholder interests:

Goal-setting is an important element ofcritical to aligning incentive pay with performance, and Applied’s 20132016 incentive plan payouts in part reflectedreflect the Committee’s disciplined processdiscipline in this regard. OperatingWith continued weak demand in many industrial sectors of the economy, particularly oil-and-gas, metals, and mining, company operating performance continued to improve in 2013, as shown below:

Applied’s 2013 sales, EBITDA, and net income set company records. The accomplishments were notable considering they were achieved while Applied continued to implement a new enterprise resource planning system. In addition, with gains in our stock price, which reached record highs during the year, and reinvested dividends, our shareholders earned a 33.9% total return in 2013.

Despite the improvements, performancelargely fell short of goals set by the Committee at the beginning of the year, based onas shown below:

Results were impacted by a $64.8 million non-cash goodwill impairment charge ($63.8 million after tax). Of this amount, $56.0 million related to our Canadian operations, primarily as a result of the year’s business plan. sustained decline in oil and gas drilling activity. The remainder was for our Australian operations, due to the condition of the Australian industrial economy, especially mining. We also recorded $8.8 million of restructuring charges primarily relating to our upstream oil and gas focused operations.

As a result, the named executive officers earned annual incentive pay at 77.5%an average of 53% of their individual target values. In addition, shares “banked”banked for 20132016 under each of the three-year performance share programs fellwere below target values, as described below at pages 22-23.shown below:

Nevertheless, with gains in our stock price and reinvested dividends, shareholders earned a 17% total return in 2016. The company returned $80.8 million of cash to shareholders through dividends and share repurchases during the year.

The Committee valuesrevised the executive officers’ annual incentive plan in 2016 after reviewing an analysis by the Committee’s independent consultant and considering market practices. The Committee adopted an annual cash incentive bonus pool, equal to 2% of EBITDA, under the 2016 Management Incentive Plan and assigned each executive officer a maximum participation percentage of the pool, more closely tying total annual incentive compensation for the officer group to company-wide performance. The change is intended to preserve the tax deductibility of the annual incentive awards, including portions tied to individual performance, without limiting the Committee’s ability to appropriately recognize management’s results and the underlying conditions that influenced them.

We believe that our compensation decisions, as described in this Compensation Discussion and Analysis, reflect a balanced and responsible pay approach. We also value shareholder opinion and, in performing its duties, reviews and takes into accountthe Committee considers the outcome of the annual advisory vote to approve the named executive officers’ 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’ approvalaffirmation in 2012,2015, with greater than 90%98% of the shares cast voting in favor. With this affirmation,

Compensation Practices Highlights

We regularly review evolving best practices in executive compensation. Below are some of the Committee will continue its efforts to improve the program to further align executive paymore significant best practices we have adopted and shareholder value.practices we avoid:

Compensation Philosophy and Objectives

As with our overall business, 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:

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

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 those of shareholders.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:

The Committee routinely receives a tally sheetsheets displaying updated data with respect to material components of each executive’s compensation and benefits. This enablesbenefits, and share retention analyses. These help the Committee to 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 in the following:

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

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

executive officers’ individual performance and offers recommendations regarding their pay. The Committee sets the executive officers’ pay in executive session without management present.

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

Executive Compensation Program Overview

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

Base salary, annual incentives, and long-term incentives are the primary components. The Committee sets base salaries to be competitive with market medians for similar positions in peer distribution companies. Annual incentive pay rewards the achievement of annual earnings and cash flow goals, and incorporates an assessment of individual performance. Longer-term financial goals (including EBITDA and ROA), stock price appreciation, and executive retention are promoted through long-term incentive awards including performance shares, SARs, and RSUs. Target annual and long-term incentives aim to reflect market median practices of peers in order to deliver total target compensation in line with the medians of distribution peers. Actual incentive pay depends in large part on how Applied performs relative to its target performance goals.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 financial and stock price performance.

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

Applied also believes that programs leading to equity ownership promote the alignment ofhelp align executives’ interests with shareholders’. However, the long-term incentive program is structured to avoid excessive dilution, the Committee manages incentive awards to keepwith annual share utilization welltargeted below 2%1% of shares outstanding. The Committee regularlyperiodically reviews share utilization in relation to market practices.

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 practices.

The tablecharts below showsshow the percentage allocation (rounded) of opportunities provided in 20132016 to Mr. Schrimsher and the other named executive officers in the forms of base salary, annual incentive target opportunity, and long-term incentive target opportunity (awarded in equity-based instruments).

As reflected in the table, more senior executives have more pay at risk.

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

Competitive Pay Review in 2013.2016.To help evaluate Applied’s executive compensation, the Committee created a peer group of distribution companies, primarily industrial distributors, believing this group reflects the company’s principal market for senior executives. Comparisons with other distributorsDistributor comparisons provide the Committee greater insight into executive pay and benefits at companies in similar market environments.

With assistance from Pay Governance, the Committee selected a group of 1820 companies with fiscal 2011calendar year 2014 sales ranging from $700 million$1.13 billion to $6.1$6.90 billion, and median sales of $2.0$2.96 billion, compared with Applied’s 2011fiscal 2015 sales of $2.2$2.75 billion. The companies were the same as those used in the previous year’s peer group. Each peer group company disclosed compensation data for its top officers in SEC filings. Management did not participate in selecting the companies.

The 2013companies included the components of the previous year’s peer group, plus five additional companies selected based on various factors, including industry and size. Following acquisitions and going-private transactions, the peer group had shrunk in recent years; accordingly, Pay Governance recommended making the five additions.

The 2016 peer group (the “Peer Group”) included the following companies:companies, with the new components shown inbold:

After the Peer Group was selected, Pay Governance prepared a compensation review and assessment, analyzing the competitiveness of target compensation for Applied’s Chief Executive Officer’s target compensationOfficer and Chief Financial Officer relative to comparable Peer Group data, adjusting the data to reflect Applied’s sales being greater than the Peer Group median.data. Pay Governance did not analyze Peer Group data for other executive officer positions in 20132016 (although it didhad done so most recently in 2012)2014), but reported on broader compensation trends in the market to assist the Committee in evaluating target pay levels for those other officers.levels.

The study identified Peer Group CEO pay for each position at the 25th, 50th,50^th, 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 CEO pay data from broad multi-industry surveys, of companies across many industries, produced by several leading compensation consulting firms, as well as from a group of select industrial companies that were comparable in size (as measured by revenues) to Applied.firms. The Committee requested this supplemental data as a secondary resource to help confirm the reliability of the Peer Group data.

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

In most years, Pay Governance also compares Applied’s business performance, over one, three, and five years, with the Peer Group companies’ performance, considering various business metrics as well as total shareholder return. Performance 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 2013,2016, the Committee seeks to compensate executives near the market median if Applied’s performance targets are met. Sustained performance below target levels should result in realized total compensation below market medians, and performance that exceeds target levels should result in realized total compensation above market medians.

It is important to note, however, thatHowever, market medians and the ranges around them 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.

Components of Compensation

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

In 2013,2016, after considering the Peer Group data, for the CEO position, executive pay trends in the broader market, and the more subjective factors referenced above, the Committee adjusted modestly upward (less than 3% for Mr. Schrimsher)made small adjustments to the named executive officers’ base salaries, for three named executive officers and did not changewith Mr. Schrimsher’s salary remaining the others’ base salaries.same as in 2015. The Committee’s actions maintained the officers’ competitive pay positions and reflected a discipline of managing base salaries within the framework of Applied’s pay philosophy and competitive data.

Annual Incentives. UsingWith the annual incentive plans,Management Incentive Plan, the Committee seeks to reward the executive officers, in cash, for achieving fiscal year goals. In general, the Committee seeks to pay total cash compensation near the market median when Applied meets its performance goals, and to pay substantially above (or below) the market median when Applied substantially exceeds (or falls short of) its goals. If Applied does not achieve a threshold performance level, then the executive officers do not earn annual incentive pay and fall substantially below the market median.

In 2013, each executive officer participated in the annual Management Incentive Plan. 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 performance goals and targets for the year’s Management Incentive Plan. The Committee considers the market outlook and the business plan, along with the available opportunities and attendant risks.

ForIn 2016, consistent with historical practice, the 2013Committee established performance goals based on company-wide performance measures. In addition, for the first time, the Committee provided that Management Incentive Plan payouts be funded from a maximum aggregate cash bonus pool equal to 2% of EBITDA. EBITDA is calculated from our financial statements by starting with operating income, as shown in the statements of consolidated income, and adding the following items from the statements of consolidated cash flows: depreciation and amortization of property, amortization of intangibles, amortization of stock option and appreciation rights, and goodwill or intangibles impairment (if any). Our 2016 EBITDA was $196.7 million.

The Committee then assigned each executive officer a maximum participation percentage of the bonus pool. The Committee assigned the following maximum participation percentages to the named executive officers: Mr. Schrimsher, 40.32%; Mr. Eisele, 13.74%; Mr. Bauer, 10.25%; Mr. Barlett, 9.72%; and Mr. Armold, 9.41%.

For 2016, consistent with previous years, the Committee setadopted goals tied to the following company-wide weighted performance measures:measures, which it considers to be key indicators of shareholder value creation:

Sixty percent of each executive officer’s Management Incentive Plan payout was determined based on the level of achievement of Net Income and 20% was determined based on the level of achievement of Cash Provided by Operating Activities, as well as each executive officer’s target incentive award value. The Committee sets goals for these performance measures that it believes are attainable, but that require executives to perform at a consistently high level to achieve target award values. As illustrated in the table below,The target and maximum incentive objectives represented significant improvements over 2012 results. The Committee setfor 2016 are shown in the following 2013 goals:table below:

As shown above, 2013The 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 as toreport on market practices. Payouts for each performance measure were to beare prorated on a straight-line proportional basis for results falling between the threshold 50%, 100%, and maximum 200% payout levels. In addition, except for Mr. Schrimsher, individual payouts were further subject to positive or negative adjustment, up to 20%, based on the Committee’s subjective evaluation of individual performance.

The Committee assignsassigned an annual incentive target, expressed as a percentage of salary, to each executive officer. The Committee maintainedassigned target percentages for 2013 at the same levels used for the previous two years;2016 to approximate market practices, as shown in Pay Governance’s review showed that thosereview. Several named executive officers’ target percentages approximated market practices.were increased modestly from 2015, including Mr. Schrimsher’s (from 100% to 105%), although he did not receive a base salary increase. The 2013 Management Incentive Plan2016 targets for the named executive officers follow:

Name		Base Salary ($)		Incentive Target (%)		Target Award Value ($)
N. Schrimsher		820,000		105		861,000
M. Eisele		451,500		65		293,475
F. Bauer		398,000		55		218,900
T. Barlett		346,000		60		207,600
T. Armold		335,000		60		201,000

As a result of Applied’s 20132016 performance, the Management Incentive Plan payout formula waspayouts for the Net Income and Cash Provided by Operating Activities components were as follows:

AnnualThe remaining 20% of each executive officer’s Management Incentive Plan payout was determined based on Applied’s EBITDA, the aggregate size of the bonus pool remaining following deductions for the Net Income and Cash Provided by Operating Activities component payouts described above, the participant’s maximum portion of the bonus pool, and individual performance. After the Committee determined the dollar value of each participant’s maximum payout for this remaining component, the Committee could exercise discretion to reduce (but not increase) this portion of the incentive planbased on the Committee’s subjective evaluation of the participant’s individual performance during 2016, taking into account individual performance relative to strategic objectives.

Following the Committee’s evaluation of the named executive officers’ individual performance, their payouts in 2013relation to this final component were as follows: Mr. Schrimsher, $172,200; Mr. Eisele, $29,348; Mr. Bauer, $32,835; Mr. Barlett, $20,760; and Mr. Armold, $20,100.

Shown below are the total 2016 Management Incentive Plan payouts for the named executive officers:

The average payout for the named executive officers, are shown inas a percentage of the “Non-Equitytarget awards, was 53%. Management Incentive Plan Compensation” columnpayouts in 2015 and 2014, as a percentage of the Summary Compensation Table at page 27.target awards, were 79.5% and 57.8%, respectively.

Long-Term Incentives. The Committee makesmade long-term incentive awards to the executive officers annually under the 2011 Long-Term Performance Plan. Subsequent to those awards, at the 2015 annual meeting, the shareholders adopted the 2015 Long-Term Performance Plan to replace the 2011 plan.

The plan seeksplans seek to reward executives for achieving long-term goals and authorizesauthorize incentive awards in a variety of forms. The Committee typically makes awards annually, near the beginning of the year, after reviewing the previous fiscal year’s financial results.

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

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

Pay Governance’s 20122016 study had indicated Applied’sMr. Schrimsher’s annual long-term incentive target compensation values were generallyvalue was below market levels, even after increases approved for that fiscal year. Focusing on the CEO position, the 2013 study reported that Mr. Schrimsher’s long-term incentive target compensation value (excluding inducement awards made at the time of hire) remained below marketcompetitive norms. With this background, and after considering the more subjective factors referenced above, the Committee approved increases to the named executive officers’increased his long-term incentive target valuesvalue by approximately 5.5%. The Committee approved adjustments ranging from 5%-8% to 13%.+11% for the other officers.

Pay Governance also reported on the growing prominence in the broader market of long-term incentive vehicles tied toEmphasizing performance, metrics, especially at companies, like Applied, that provided a mix of awards. Considering these trends and the roles of the different vehicles in Applied’s program, the Committee in 2013 awarded the executives’ long-term incentive target value approximately one-half in three-year stock-settled performance shares, one-quarter in SARs, and one-quarter in RSUs, rather than the approximately equal mix awarded in previous years.RSUs. The Committee believes the newthis combination betterappropriately balances the vehicles’ distinct purposes. The awards also reflect the Committee’s subjective judgment regarding the portion ofthat long-term incentive earnings that should be paid in shares.

In determining numbers of performance shares to be targeted and SARs and RSUs to be awarded, and performance shares to be targeted, the Committee valuedvalues Applied’s shares using a methodology based on the 90-day average closing share price prior to the grant date, after consideringdata provided by Pay Governance’s input on market practices and the desirability of reducingGovernance. To reduce the impact of short-term stock price volatility.volatility, the valuation methodology uses the average closing share price for 90 calendar days prior to the grant date. The Grants of Plan-Based Awards table on page 29 shows the threshold, target, and maximum payouts for the performance shares, as well as the number of SARs and RSUs awarded to the named executive officers, as well as the threshold, target, and maximum payouts for the performance shares.officers.

The following paragraphs describe the three types of long-term incentive awards made to executive officers in 2013,2016, as well as performance for the year under previously awardedoutstanding performance shares:share programs:

The Committee and management believe SARs are strong performance-based vehicles, as the value of these awards 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 through fourth anniversaries of the grant date, subject to continuous employment with Applied, thereby promoting executive retention. In addition, unvested SARs vest on an executive officer’s retirement.

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 purpose.objective. Moreover, SARs are less dilutive than stock options, further protecting shareholder interests.

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 for restricted stock 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. Applied pays dividend equivalents on RSUs on a current basis, which rewards management for total returns delivered to shareholders.

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

Each year, asPerformance 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 performance 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 the period. Then, after also considering the independent consultant’s guidance as to market practices, the Committee determines the

performance measures and goal ranges at which payouts can be earned.earned for each year of the period. 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 29 shows the threshold, target, and maximum payouts for performance shares awarded to the named executive officers in 2013.2016.

Because the payout is measured in number of 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.

Performance shares provide incentives to achieve goals over a three-year period. For the 2013-20152016-2018 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. EBITDA is calculated from our financial statements by starting with operating income, as shown in the statements of consolidated income, and adding the following items from the statements of consolidated cash flows: depreciation and amortization of property, amortization of intangibles, amortization of stock option and appreciation rights, and goodwill or intangibles impairment (if any). ROA is calculated by dividing annual net income by average monthly assets for the year. ROA improvements can be achieved by, among other things, increasing sales margin, and inventory turnover,margins, as well as improving the management of working capital, all of which are important annual and long-term objectives for industrial distributors.

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

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

The goals for the first year of the performance period, 2013, follow:2016, are shown below.

As shown above, bankedBanked 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 falling between the threshold 50%, 100%, and maximum 200% payout levels.

In 2013,The company’s EBITDA of $196.7 million and ROA of 2.2% would have resulted in the banking of performance shares for the first year of the 2016-2018 program at 45.5% of the targeted awards. The Committee believed that those financial results, which were impacted by the $64.8 million non-cash goodwill impairment charge and $8.8 million of restructuring charges, did not reflect the company’s underlying operating performance and management��s achievements for the year. Following a review, the Committee determined, as permitted under the program, to exclude the charges from the achievement calculations, but only for the 2016 year of the 2016-2018 program. Accordingly, 68.8% of the targeted performance shares were banked for the first year of this program, still well below the 100% payout level. As shown below, this decision did not affect the 2015-2017 and 2014-2016 programs; no shares were banked for those programs for 2016.

•

2015-2017 Performance Shares (2016 performance).

As described above, the Committee sets separate goals for each year of a resultthree-year performance share program. So, while 2016 was the first year of achieving incentivethe 2016-2018 performance period, it was also the second year of the 2015-2017 period and the third year of the 2014-2016 period. For the 2015-2017 program, the 2016 goals, adopted in August 2014, follow:

With 2016 performance falling short of threshold goals, the participants bankeddid not bank awards to be distributed in shares of Applied stock followingfor 2016. The award for the end ofprogram’s first year, 2015, as follows:a percentage of target performance shares, was 81.1%.

The goals for the final year of the 2014-2016 program, adopted in August 2013, follow:

In 2013,

With 2016 performance falling short of threshold goals, the participants bankeddid not bank awards to be distributedfor 2016. The awards for the first two years of the program, as a percentage of target performance shares, were 64.2% in shares of Applied stock following the end of 2014 as follows:and 63.2% in 2015.

•

2011-2013 Performance Shares (2013 performance). The goals for the third and final year of the 2011-2013 program, set in September 2010, follow:

For the company’s 2013 performance, participants were awarded shares of Applied stock as follows:

Qualified, Nonqualified, and Welfare Plan Benefits. Through the plans described below, we seek to provide personal security and other 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 survey information, considering executives’ positions and years of service.

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

Effective as of December 31, 2011, the Committee froze participation in the SERP and the accrual of additional plan benefits, by virtue of years of service and compensation levels, to existing participants. The Committee’s action followed a detailed review, with Pay Governance’s assistance, of executive retirement benefit programs prevalent among Peer Group companies and in the broader market.

Normal SERP retirement benefits are payable upon separation from service after attainment of age 65 to participants with at least five years’ credited service as an executive officer. Reduced benefits are available to participants who separate from service with at least 10 years’ credited service with Applied, five as an executive officer.

Each named executive officer, other than Mr. Schrimsher, participated in the SERP and, subject to the vesting criteria described above, has historical benefits accrued. Their accrued benefits are described in “Pension Plans,” at page 31.

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

Accordingly, in 2012 the Committee adopted the Key Executive Restoration Plan (the “KERP”), an unfunded, nonqualified deferred compensation plan, to replaceplan. To participate in the SERP. To participate,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 RSPRSP. Account balances are deemed invested in mutual funds selected by the participant from those available in the KERP. In this way, participants take responsibility for funding their own retirement benefits. Further, because of the payment period. 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 payment periodyear or have retired, died, or become disabled during the payment period. Applied uses calendar years for payment periods and made the first KERP account credits in January 2013 based on calendar 2012 pay.year. Unless otherwise provided 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 participant’s account balance is deemed invested in mutual funds selected by the participant from those available under the KERP.

The Committee has designated each named executive officer as a KERP participant. The Committee set the account credit percentage for Mr. Schrimsher at 10% and provided that he willwould vest in 50% of his account after three years of service, 75% after four years, and 100% after five years. In October 2015, he reached four years of service.

Applied also maintains plans that permit highly compensated U.S. employees to defer receiving portions of base salary and cash incentive awards and to accumulate nonqualified savings. Applied does not contribute to these plans and participants are not provided above-market or guaranteed returns. We describe the plans, along with the KERP, more fully in “Nonqualified Deferred Compensation,” at page 31.

Applied maintains the Supplemental Executive Retirement Benefits Plan (the “SERP”), a nonqualified defined benefit plan that was frozen in 2012, for executive officers that were designated as participants by the Committee.

Messrs. Armold, Barlett, Bauer, and Eisele, the only remaining active SERP participants, have historical benefits accrued, which are described in “Pension Plans,” beginning at page 33.

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

Perquisites and Other Personal Benefits. Two years ago, with Pay Governance’s assistance, the Committee completed a detailed review ofApplied does not offer perquisites and personal benefits provided to executive officers by Applied’s peers and in the broader market. The Committee concluded that providing certain perquisites and personal benefits was no longer warranted to attract and retain superior employees for key positions.

Accordingly, effective on January 1, 2012, the Committee ceased providing to Applied’s executive officers the following: an automobile allowance and related gas and maintenance payments; reimbursement and tax gross-up forsuch as company automobiles or allowances, financial planning, estate planning and tax return preparation services; an annualservices, or country clubs to the named executive physical examination; reimbursement and tax gross-up for spousal travel and child care tied to approved business trips; and club memberships for business purposes (which were available for personal use too, with the executive bearing personal use expenses).officers.

Applied provides executive officers five weeks’ annual vacation on aper calendar year basis;year; other employees get five weeks when they achievereach 25 years of service. Unused vacation time is forfeited at the end of theeach calendar year.

Change in Control and Termination Benefits. Upon his hire, Applied and Mr. Schrimsher entered into a CEO-level executive severance agreement providing termination benefits as described in “Potential Payments upon Termination or Change in Control,” on page 34. Applied does not have employment contracts with the other named executive officers, nor does it have a formalan executive severance policy. The Committee retains discretion to determine severance benefits, if any, to be offered to the other named executive officers if the company terminates their employment, other than in the circumstance of a change in control.

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

The agreements provide severance benefits if an executive’s employment is terminated by the officer for “Good Reason” or by Applied “Without Cause” (each as defined in the agreements), if the termination occurs within threetwo years (two(three years for Mr. Schrimsher)under older agreements entered into with Messrs. Armold, Barlett, Bauer, and Eisele) after a change in control. These “double trigger” arrangements are believed to be consistent with typical market practices. The executive, in turn, must not compete with Applied for one yearthree years following termination (three years(one year for Messrs. Armold, Barlett, Bauer, and Eisele). Change in control agreements entered into after 2011, including Mr. Schrimsher).Schrimsher’s, do not provide a gross-up for excise taxes. We describe the agreements more fully on pages 35-36 of this proxy statement.

In 2012, the Committee terminated change in control agreements for employees below the executive officer level. As a result, the only remaining agreements are with the company’s six executive officers. The two agreements entered into most recently (including Mr. Schrimsher’s) do not include a gross-up for excise taxes and it is expected that future agreements will follow suit.

Stock Ownership and Retention Guidelines

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

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

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

Until the guideline is achieved, executives are required tomust retain net shares received as a result of the exercise ofexercising SARs or the vesting of RSUs or performance shares. “Net shares” are those shares that remain after shares are sold or netted to pay withholding taxes.

At June 30, 2013,2016, the value of the holdings (determined as described above) of the named executive officers and their individual guidelines were as follow:

The Committee monitors compliance with the guidelines, interprets the guidelines,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 from engaging in:

Clawback Provisions

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

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.

Tax Deductibility and Regulatory Considerations

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

In general, the Committee seeks to preserve the tax deductibility of compensation without compromising the Committee’s flexibility in designing an effective, competitive compensation program. Applied has intended for most awards under most executive incentive programs— annual incentive plan awards (for the Chief Executive Officer), performance share payouts, and income from the exercise of SARs— to qualify as performance-based compensation.

In making long-term incentive grants, the Committee considers executive retention to be aone of the key objective.objectives. Accordingly, the Committee has in recent years useduses RSUs as one of three award vehicles, although RSUs now represent only about one-quarter of the target long-term incentive value. RSUs do not qualify as performance-based compensation, but the Committee believes that drawback is outweighed by the awards’their beneficial impact on executive retention.

Conclusion

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

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

Summary Compensation Table — Fiscal Years 2013, 2012,2016, 2015, and 20112014

The following table summarizes information, for the years ended June 30, 2013, 2012,2016, 2015, and 2011,2014, regarding the compensation of Applied’s Chief Executive Officer, Chief Financial Officer, and the three other most highly compensated executive officers at June 30, 2013. Mr. Schrimsher joined Applied in October 2011. Mr. Mondics retired in August 2013, after the end of fiscal year 2013.2016.

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

The 20132016 figure is the difference between the number shown in the Pension Benefits table on page 3234 for 20132016 year-end and the same item calculated for July 1, 2012.2015. See the notes to that table for information regarding how estimated amounts were calculated. TheIn 2016 the present value of Mr. Armold’s benefit decreased (by $2,251), and in 2014 the benefitpresent values decreased for Mr. Mondics decreased by $383,205 in 2013 as a result of the announcement of his retirement,Messrs. Armold (by $22,777), Barlett (by $14,897), and Eisele (by $12,817), but, pursuant to SEC rule, the changechanges in value isare shown in the table as $0.

In December 2011,2012, the Committee stopped the accrual of additional plan benefits by virtue of years of service and compensation levels. The increasesAccordingly, the values in accrued benefits for 2013 and 2012 related primarilythis column relate to reductionschanges in the discount rate and the components of the three-segment interest rate structure, as well as to mortality factor adjustments, as described below.

The SERP uses interest rates and mortality tables that are imposed on tax-qualified pension plans by Code section 417(e). Values for 20132016 reflect a 2.25% discount rate and a three-segment interest rate structure in effect for January 2016, with 1.78% for the first five years, 4.08% for the next 15 years, and 5.02% thereafter.

Values for 2015 reflect a 3.00% discount rate and a three-segment interest rate structure in effect for January 2013,2015, with 1.00%1.33% for the first five years, 3.73%3.46% for the next 15 years, and 4.89%4.40% thereafter.

Values for 20122014 reflect a 2.75% discount rate and a three-segment interest rate structure in effect for January 2012,2014, with 1.84%1.24% for the first five years, 4.36%4.42% for the next 15 years, and 5.19%5.40% thereafter. Values for 2011 reflect a 4.50% discount rate and a three-segment interest rate structure in effect for January 2011, with 2.45% for the first five years, 5.10% for the next 15 years, and 6.04% thereafter, including recognition of a 20% permissible transition with the 30-year treasury rate. There is no permissible transition with the 30-year treasury rate for 2012 and later years.

In addition, in each successive year, the mortality table reflected adjustments pursuant to Code section 417(e). Present values were determined assuming no probability of termination, retirement, death, or disability before normal retirement age (age 65).

The following perquisites and other personal benefits were made availableprovided in 20132016 to named executive officers: relocation benefits provided to Mr. Schrimsher under Applied’s standard associate relocation program; the annual expense related to post-retirement health care coverage; and company contributions for officer-level accident insurance benefits. No perquisite or personal benefit exceeded the greater of $25,000 or 10% of the total amount of perquisites and personal benefits for a named executive officer in 2013, except Mr. Schrimsher received benefits under Applied’s standard associate relocation program in the amount of $54,812, and the annual expense incurred relating to his post-retirement health care coverage was $38,300.2016.

The following table itemizes “All Other Compensation” for 2013:2016: