UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

__________________________



SCHEDULE 14A
(Rule 14a-101)

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934

__________________________









MSC INDUSTRIAL DIRECT CO., INC.

(Name of Registrant as Specified In Its Charter)



(Name of Person(s) Filing Proxy Statement, if other than the Registrant)



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Notice of 2020 Annual Meeting

and 2019 Proxy Statement









































Wednesday, January 29, 2020

9:00 a.m., local time

The Hilton Long Island/Huntington

598 Broad Hollow Road

Melville, New York 11747

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Notice of 2020 Annual Meeting of Shareholders



To the shareholders of MSC Industrial Direct Co., Inc.:



NOTICE IS HEREBY GIVEN that the annual meeting of shareholders of MSC Industrial Direct Co., Inc., a New York corporation, will be held on January 29, 2020 at 9:00 a.m., local time, at the Hilton Long Island/Huntington, 598 Broad Hollow Road, Melville, New York 11747, for the following purposes:



Only shareholders of record at the close of business on December 11, 2019 are entitled to vote at the annual meeting and any adjournments or postponements thereof.



All shareholders are cordially invited to attend the annual meeting.  However, to assure your representation at the annual meeting, you are urged to vote on the Internet, by telephone or by completing, signing and dating the enclosed proxy card as promptly as possible, and returning it in the postage-paid envelope provided.  Any shareholder attending the annual meeting may vote in person even if he or she has already voted on the Internet, by telephone or by returning a proxy.



By Order of the Board of Directors,



Steve Armstrong

Senior Vice President, General Counsel and
Corporate Secretary

Melville, New York

December 19, 2019



IMPORTANT: The prompt return of proxies will ensure that your shares will be voted.  A self-addressed envelope is enclosed for your convenience.  No postage is required if mailed within the United States.

 

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We are furnishing this proxy statement to you in connection with the solicitation of proxies by our Board of Directors to be used at our 2020 annual meeting of shareholders, or at any adjournments or postponements thereof.  This proxy statement describes the matters to be presented at the meeting and related information that will help you vote at the meeting.  References in this proxy statement to “the company,” “we,” “us,” “our” and similar terms mean MSC Industrial Direct Co., Inc.



We have elected to take advantage of the “notice and access” rule of the Securities and Exchange Commission (which we refer to as the SEC) that allows us to furnish proxy materials to shareholders online.  We believe that electronic delivery expedites the receipt of proxy materials, while significantly lowering costs and reducing the environmental impact of printing and mailing full sets of proxy materials.  As a result, on or about December 19, 2019, we mailed to our shareholders of record as of the close of business on December 11, 2019, either (i) a Notice of Internet Availability of Proxy Materials containing instructions on how to access our proxy materials online and how to request paper copies of our proxy materials or (ii) a printed set of proxy materials, which includes the notice of annual meeting, this proxy statement, our 2019 annual report to shareholders and a proxy card.  If you received a Notice of Internet Availability of Proxy Materials by mail, you will not receive a printed copy of the materials unless you specifically request one.  If your shares are held in the MSC Industrial Direct 401(k) Plan, you will receive a printed set of proxy materials and the enclosed proxy will serve as a voting instruction card for the trustee of the MSC Industrial Direct 401(k) Plan, T. Rowe Price Trust Company, who will vote all shares of Class A common stock of the company allocated to your 401(k) account in accordance with your instructions.  If you hold your shares through a broker, bank or other nominee, rather than directly in your own name, your intermediary will either forward to you printed copies of the proxy materials or will provide you with instructions on how you can access the proxy materials electronically.



 

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Table of Contents







 

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2019 Proxy Statement Summary



This summary highlights information contained elsewhere in our proxy statement.  This summary does not contain all of the information that you should consider.  You should read the entire proxy statement carefully before voting.



Annual Meeting







Meeting Agenda and Voting Matters







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Board Nominees





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As previously disclosed, Roger Fradin, a director since 1998 and a member of the Compensation Committee and the Nominating and Corporate Governance Committee, has decided not to stand for re-election due to other time commitments, and will not be a director effective as of the conclusion of the 2020 annual meeting.  We expect to retain Mr. Fradin as an adviser to the Board and senior management in order to continue to obtain the benefit of Mr. Fradin’s operational expertise and broad experience as a senior executive of a major diversified technology and manufacturing company, and his insight and perspective relating to our customer base.

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Corporate Governance Highlights

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Fiscal Year 2019 Company Performance



In fiscal year 2019, we executed well in a weakening demand and pricing environment, posting year-over-year average daily sales (ADS) growth of 5.8%.  In a challenging environment, we took focused actions to improve our profitability by accelerating new business conversions, deepening our supplier partnerships to drive future profitability and market share gains, and beginning to reshape and resize our organization.  We also continued to expand our technological capabilities and drive increased innovation to reposition the company as a mission-critical partner for our customers, offering our customers highly technical and high-touch solutions to solve their most complex challenges on the plant floor.  Moving forward, we will continue to focus on streamlining our cost structure and transforming our operating model to be leaner, more agile and more effective.  Our operating performance in fiscal 2019 was highlighted by the following achievements:



Net sales increased 5.0% to $3.36 billion in fiscal 2019 from $3.20 billion in fiscal 2018.  ADS, including acquisitions, increased 5.8% in fiscal 2019, as compared to fiscal 2018.  Our operating expenses, which included $6.7 million of severance and separation benefits charges, increased as a percentage of sales to 30.7% of net sales for fiscal 2019, compared to 30.4% of net sales for fiscal 2018.  Operating income in fiscal 2019 was $400.0 million, representing a decrease of 4.9% from operating income of $420.6 million in fiscal 2018.  For fiscal 2019, the company achieved diluted earnings per share of $5.20 versus $5.80 in fiscal 2018. 

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Fiscal Year 2019 Compensation Decisions



Consistent with our pay-for-performance compensation philosophy, the Compensation Committee of our Board took the following key actions with respect to NEO compensation for fiscal 2019:



Please see “Compensation Discussion and Analysis” beginning on page 32 of this proxy statement.

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Compensation Summary



The following table shows the compensation for the following individuals for the fiscal years ended August 31, 2019 and September 1, 2018.  For an explanation of the amounts in the table below, please see “Summary Compensation Table” on page 52 of this proxy statement.







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Ratification of Appointment of Independent Registered Public Accounting Firm (Proposal No. 2)



Our Audit Committee has appointed the firm of Ernst & Young LLP to serve as our independent registered public accounting firm for fiscal year 2020.  Our Board considers it desirable for shareholders to pass upon the selection of the independent registered public accounting firm.  Our Board recommends that you vote “FOR” the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for fiscal year 2020.  Please see “Ratification of Appointment of Independent Registered Public Accounting Firm (Proposal No. 2)” beginning on page 29 of this proxy statement.





Approval, on an Advisory Basis, of the Compensation of Named Executive Officers (Proposal No. 3)



As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, we are providing our shareholders with the opportunity to vote to approve, on a non-binding, advisory basis, the compensation of our named executive officers as disclosed in this proxy statement in accordance with the compensation disclosure rules of the SEC.  This vote is advisory, which means that this vote on executive compensation is not binding on the company, our Board or our Compensation Committee.  Based on company and individual performance, our Compensation Committee believes that compensation levels for fiscal year 2019 were appropriate and consistent with the philosophy and objectives of the company’s compensation programs.  Our Board recommends that you vote “FOR” the approval, on an advisory basis, of the compensation of our named executive officers as disclosed in this proxy statement.  Please see “Approval, on an Advisory Basis, of the Compensation of Named Executive Officers (Proposal No. 3)” on page 66 of this proxy statement.



 

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Proxy Statement for the Annual Meeting
of Shareholders to be held on January 29, 2020



ELECTION OF DIRECTORS (PROPOSAL NO. 1)



Eight directors will be elected at our 2020 annual meeting of shareholders for a term of one year expiring at our 2021 annual meeting, and will serve until their respective successors have been elected, or until their earlier resignation or removal.  Each of the nominees for director was previously elected as a director of the company by our shareholders.  Mr. Fradin has decided not to stand for re-election due to other time commitments, and will not be a director effective as of the conclusion of the 2020 annual meeting.   



Each nominee has indicated that he or she is willing to serve as a member of our Board, if elected, and our Board has no reason to believe that any nominee may become unable or unwilling to serve.  In the event that a nominee should become unavailable for election for any reason, the shares represented by a properly executed and returned proxy will be voted for any substitute nominee who shall be designated by the current Board.  There are no arrangements or understandings between any director or nominee for director and any other person pursuant to which such person was selected as a director or nominee for director of the company.



Our Nominating and Corporate Governance Committee has reviewed the qualifications and independence of the nominees for director and, with each member of the Nominating and Corporate Governance Committee abstaining as to himself or herself, has recommended each of the other nominees for election to our Board.





Board and Committee Evaluations; Qualifications of Nominees



Our Nominating and Corporate Governance Committee annually reviews the composition and performance of our Board and Board committees, and considers, among other factors, Board diversity and director tenure, age, skills, background and experience.  The Nominating and Corporate Governance Committee is responsible for recruiting, evaluating and recommending candidates to be presented for appointment, election or reelection to serve as members of our Board.  Our Board and each Board committee conduct annual written self-evaluations to help ensure that our Board and Board committees have the appropriate number and mix of members, skills and experience and the appropriate scope of activities.  These self-evaluations also provide Board and Board committee members with insight for enhancing the effectiveness of their meetings.  In evaluating our Board, our Nominating and Corporate Governance Committee has considered that our directors have a wide range of experience as senior executives of large publicly traded companies, and in the areas of investment banking, accounting, business education and business management consulting.  In these positions, they have also gained industry experience and knowledge in core management skills that are important to their service on our Board, such as business-to-business distribution, supply chain management, mergers and acquisitions, strategic and financial planning, financial reporting, compliance, risk management, intellectual property matters and leadership development.  Several of our directors also have experience serving on the boards of directors and board committees of other public companies, which provides them with an understanding of current corporate governance practices and trends and executive compensation matters.  Our Nominating and Corporate Governance Committee also believes that our directors have other key attributes that are important to an effective board of directors, including the highest professional and personal ethics and values, a broad diversity of business experience and expertise, an understanding of our business, a high level of education, broad-based business acumen and the ability to think strategically.



In addition to the qualifications described above, our Nominating and Corporate Governance Committee also considered the specific skills and attributes described in the biographical details that follow in determining whether each individual nominee should serve on our Board.



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2020 Nominees for Director

















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Director Qualifications



The chart below demonstrates how our Board’s nominees for election at our 2020 annual meeting of shareholders provide the skills, experiences and perspectives that our Nominating and Corporate Governance Committee and our Board consider important for an effective board of directors.







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CORPORATE GOVERNANCE



Director Independence



Pursuant to New York Stock Exchange listing standards, a majority of the members of our Board must be independent.  The Board must determine that each independent director has no material relationship with the company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company).  The Board follows the criteria set forth in Section 303A of the New York Stock Exchange listing standards to determine director independence.  Our independence criteria are also set forth in Section 1.1 of our Corporate Governance Guidelines, a copy of which is available on our website at www.mscdirect.com/corporategovernance.   In addition to applying these guidelines, the Board will consider all relevant facts and circumstances in making an independence determination.



The Board undertakes a review of director independence on an annual basis and as events arise which may affect director independence.  Based upon this review, the Board determined that Ms. Goeser and Messrs. Byrnes, Fradin, Kaufmann, Kelly, Paladino and Peller are independent in accordance with Section 303A.02 of the New York Stock Exchange listing standards and Rule 10A-3 promulgated under the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act, as well as under our Corporate Governance Guidelines.



In evaluating the independence of Ms. Goeser, the Board considered that Ms. Goeser is a director of Watts Water Technologies, Inc., which is a customer and supplier of our company.  Sales to and purchases from Watts Water Technologies, Inc. were made in the ordinary course of business and amounted to significantly less than 0.5% of the recipient company’s gross revenues during its most recent fiscal year.



In evaluating the independence of Mr. Byrnes, the Board considered that Mr. Byrnes is a Senior Lecturer at MIT, which is a customer of our company.  Sales to MIT were made in the ordinary course of business and amounted to significantly less than 0.5% of our gross revenues during our most recent fiscal year.



In evaluating the independence of Mr. Fradin, the Board considered that Mr. Fradin (i) was a director of Pitney Bowes Inc., which is a customer and supplier of our company,  (ii) is a director of Harris Corporation, which is a supplier of our company, and (iii) is a director of Resideo Technologies, Inc., which is a customer of our company.  Sales to and purchases from such companies were made in the ordinary course of business and amounted to significantly less than 0.5% of the recipient company’s gross revenues during its most recent fiscal year.



In evaluating the independence of Mr. Kaufmann, the Board considered that Mr. Kaufmann is the Chief Executive Officer of Cardinal Health, Inc., which is a customer of our company.  Sales to Cardinal Health, Inc. were made in the ordinary course of business and amounted to significantly less than 0.5% of our gross revenues during our most recent fiscal year.



In evaluating the independence of Mr. Paladino, the Board considered that Mr. Paladino is the Executive Vice President and Chief Financial Officer of Henry Schein, Inc., which is a customer and supplier of our company.  Sales to and purchases from Henry Schein, Inc. were made in the ordinary course of business and amounted to significantly less than 0.5% of the recipient company’s gross revenues during its most recent fiscal year.

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Board Committees and Attendance



The standing committees of our Board are the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. The table below provides the current membership of our Board and each of these committees and the number of meetings held by our Board and each of these committees during fiscal year 2019.





Lead Director      Chairperson    Audit Committee Financial Expert   Member



During fiscal year 2019, each of our current directors attended at least 75% of the aggregate number of meetings of our Board and of the committees of our Board on which he or she is a member.

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Board Committees



Audit Committee



Principal Functions



The principal functions of the Audit Committee are to:



Composition and Charter



The Audit Committee is currently comprised of Messrs. Byrnes, Kaufmann, Kelly, Paladino and Peller, each of whom the Board has determined to be independent under both the rules of the SEC and the listing standards of the New York Stock Exchange and to meet the financial literacy requirements of the New York Stock Exchange. Mr. Peller is the Chairperson of the Audit Committee.  The Board has determined that each of Messrs. Peller, Kaufmann, Kelly and Paladino qualifies as an “audit committee financial expert” within the meaning of the rules of the SEC.



The Audit Committee is directly responsible for the appointment, termination, compensation, retention and oversight of the work of our independent auditors.  The Audit Committee has adopted a written charter, a copy of which is available on our website at www.mscdirect.com/corporategovernance.  The Audit Committee has the authority to engage independent counsel and other advisors as it deems necessary to carry out its duties.  We are obligated to provide appropriate funding for the Audit Committee for these purposes.



Policy on Service on Other Audit Committees



Under our corporate governance guidelines, members of the Audit Committee may not serve as members of an audit committee for more than three public companies, including the Audit Committee of our Board.

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Compensation Committee



Principal Functions



The principal functions of the Compensation Committee are to:



Composition and Charter



Our Compensation Committee is currently comprised of Ms. Goeser and Messrs. Fradin, Kaufmann, Kelly and Paladino, each of whom is an independent director.  Mr. Kelly is the Chairperson of the Compensation Committee.  The Compensation Committee has adopted a written charter, a copy of which is available on our website at www.mscdirect.com/corporategovernance.



Delegation of Authority



The Compensation Committee does not delegate its responsibilities to any other directors or members of management.  Under our 2015 Omnibus Incentive Plan, the Compensation Committee is permitted to delegate its authority under such plan to a committee of one or more directors or one or more officers, in all cases to the extent permitted under applicable law, including New York Stock Exchange listing requirements.  However, as a matter of policy, the Compensation Committee authorizes all grants of awards under the 2015 Omnibus Incentive Plan.



Compensation Processes and Procedures



The Compensation Committee makes all compensation decisions for our executive officers.  In fiscal year 2019, the views and recommendations of Mitchell Jacobson, our Chairman of the Board, and Erik Gershwind, our President and Chief Executive Officer, were considered by the members of the Compensation Committee in its review of the performance and compensation of individual executives.  The views and recommendations of Mr. Jacobson and Mr. Gershwind will continue to be considered by the members of the Compensation Committee in its review of the performance and compensation of individual executives.  In fiscal year 2019, Mr. Jacobson also provided input on Mr. Gershwind’s compensation.  In addition, the Compensation Committee obtains input from Mr. Gershwind on the compensation of the other named executive officers and other executive officers and senior officers.  Our Human Resources department and

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our then Senior Vice President and Chief People Officer, Kari Heerdt, assisted the Chairperson of the Compensation Committee in developing the agenda for Compensation Committee meetings and worked with the Compensation Committee in developing agenda materials for the committee’s review, including coordinating and presenting management’s proposals and recommendations to the Compensation Committee with respect to executive and non-executive director compensation, until January 2019, when Ms. Heerdt became our interim Senior Vice President, Sales & Customer Success.  Beginning in January 2019, our new Vice President and Chief People Officer, Beth Bledsoe, assumed Ms. Heerdt’s functions as Chief People Officer, including providing assistance to the Compensation Committee.  Ms. Bledsoe and Mr. Gershwind regularly attend Compensation Committee meetings, excluding portions of meetings where their own compensation is discussed.  To ensure a smooth transition of responsibility to Ms. Bledsoe, Ms. Heerdt continued to attend Compensation Committee meetings with Ms. Bledsoe and Mr. Gershwind until the end of fiscal year 2019.  The Compensation Committee considers, but is not bound by, management’s proposals and recommendations with respect to executive compensation.



The Compensation Committee has the authority to retain and terminate any third-party compensation consultant and to obtain advice and assistance from internal and external legal, accounting and other advisors.  In connection with compensation decisions made by the Compensation Committee for fiscal year 2019, the Compensation Committee relied on competitive market data and analysis prepared by its independent compensation consultant, Frederic W. Cook & Co., Inc., a compensation consulting firm that we refer to in this proxy statement as FW Cook.  FW Cook provides research, market data and survey information and makes recommendations to the Compensation Committee regarding our executive compensation programs and our non-executive director compensation programs.  FW Cook advises the Compensation Committee on the competitiveness of our compensation arrangements and provides input, analysis and recommendations for the compensation paid to our named executive officers, other executives and non-management directors.  FW Cook provides data and analysis with respect to public companies having similar characteristics (including size, profitability, geography, business lines and growth rates) to those of our company.  As discussed under “Compensation Risk Assessment” on page 50 of this proxy statement, FW Cook also conducted a comprehensive risk assessment of our incentive-based compensation plans in 2019 to assist the Compensation Committee in its compensation risk assessment.  In addition to the consulting services provided by FW Cook to the Compensation Committee, in fiscal 2019 management retained Aon Rewards Solutions, a compensation consultant, to assist management in developing management’s recommendation to the Compensation Committee to alter the mix of awards in our long-term stock-based compensation program to include PSUs in order to further align executive compensation with company performance.  The Compensation Committee considers, but is not bound by, consultant recommendations with respect to executive and non-executive director compensation.



During fiscal year 2019, the Compensation Committee reviewed the independence of FW Cook, its other advisors and the individuals employed by such advisors who furnish services to us, which included a consideration of the factors required by New York Stock Exchange listing standards.  Based on its review, the Compensation Committee determined that FW Cook, its other advisors and the individuals employed by such advisors who furnish services to us are independent and that their service does not raise any conflicts of interest that would prevent them from providing independent and objective advice to the committee.



Compensation Committee Interlocks and Insider Participation 



During fiscal year 2019, Ms. Goeser and Messrs. Fradin, Kaufmann, Kelly and Paladino served as members of our Compensation Committee.  None of the members of the Compensation Committee was, during or prior to fiscal year 2019, an officer of the company or any of our subsidiaries or had any relationship with us other than serving as a director and as a de minimis shareholder.  In addition, none of our directors has interlocking or other relationships with other boards, compensation committees or our executive officers that would require disclosure under Item 407(e)(4) of Regulation S-K.



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Nominating and Corporate Governance Committee



Principal Functions



The principal functions of the Nominating and Corporate Governance Committee are to:



Composition and Charter



Our Nominating and Corporate Governance Committee is currently comprised of Ms. Goeser and Messrs. Byrnes, Fradin and Peller, each of whom is an independent director.  Ms. Goeser is the Chairperson of the Nominating and Corporate Governance Committee.  The Nominating and Corporate Governance Committee has adopted a written charter, a copy of which is available on our website at www.mscdirect.com/corporategovernance. 



Policy Regarding Shareholder Nominations for Director



The Nominating and Corporate Governance Committee of our Board believes that the best director candidates will be those who have a number of qualifications, including independence, knowledge, judgment, integrity, character, leadership skills, education, experience, financial literacy, standing in the community and an ability to foster a diversity of backgrounds and views and to complement our Board’s existing strengths.  There are no specific, minimum or absolute criteria for Board membership.  The Nominating and Corporate Governance Committee seeks to achieve a balance and diversity of knowledge, experience and capability on our Board, while maintaining a sense of collegiality and cooperation that is conducive to a productive working relationship within the Board and between the Board and management.  The Nominating and Corporate Governance Committee also believes that it is important for directors to have demonstrated an ethical and successful career.  Such a career may include:

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At all times, the Nominating and Corporate Governance Committee will make every effort to ensure that our Board and its committees include at least the required number of independent directors, as that term is defined by applicable standards promulgated by the New York Stock Exchange and the SEC.  In addition, prior to nominating an existing director for re-election to our Board, the Nominating and Corporate Governance Committee will consider and review such existing director’s attendance and performance, independence, experience, skills and contributions as an existing director to our Board.



The Nominating and Corporate Governance Committee may employ third-party search firms to identify director candidates, if so desired.  The Nominating and Corporate Governance Committee will review and consider recommendations from a wide variety of contacts, including current executive officers, directors, community leaders and shareholders, as a source for potential director candidates.



The Nominating and Corporate Governance Committee will consider qualified director candidates recommended by shareholders in compliance with our procedures and subject to applicable inquiries.  The Nominating and Corporate Governance Committee does not have different standards for evaluating nominees depending on whether they are proposed by our directors or by our shareholders.  Any shareholder may recommend a nominee for director at least 120 calendar days prior to the one-year anniversary of the date on which our proxy statement was released to shareholders in connection with the previous year’s annual meeting, by writing to Corporate Secretary, MSC Industrial Direct Co., Inc., 75 Maxess Road, Melville, NY 11747, and providing the following information:



All of these communications will be reviewed by our Senior Vice President, General Counsel and Corporate Secretary and forwarded to Ms. Goeser, the Chairperson of the Nominating and Corporate Governance Committee, for further review and consideration in accordance with this policy.  Any such shareholder recommendation should be accompanied by a written statement from the candidate of his or her consent to be named as a candidate and, if nominated and elected, to serve as a director.

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Board Leadership Structure; Executive Sessions of the Independent Directors



Our Board functions collaboratively and emphasizes active participation and leadership by all of its members.  Our Board currently consists of nine directors, each of whom, other than Messrs. Gershwind and Jacobson, is independent under our Corporate Governance Guidelines and the applicable rules of the New York Stock Exchange.    Following the conclusion of the 2020 annual meeting, our Board will consist of eight directors, as Mr. Fradin has decided not to stand for re-election due to other time commitments, and will not be a director effective as of the conclusion of the 2020 annual meeting.  Mr. Gershwind has served as our President and Chief Executive Officer since January 1, 2013 and as a member of our Board since 2010.  Mr. Jacobson, who is one of our principal shareholders, was appointed our Chairman of the Board in January 1998 and became Non-executive Chairman of the Board effective January 1, 2013.  Mr. Jacobson previously served as our President from October 1995 through November 2003, and as our Chief Executive Officer from October 1995 through November 2005.  The Board has separated the roles of Chairman and Chief Executive Officer since 2005 and has appointed a non-management, lead director since 2007.



Our Board of Directors believes that the most effective Board leadership structure for our company at the present time is for the roles of Chief Executive Officer and Chairman of the Board to be separated.  Under this structure, our Chief Executive Officer is generally responsible for setting the strategic direction for our company and for providing the day-to-day leadership over our operations, and our Chairman of the Board sets the agenda for meetings of the Board and presides over Board meetings.  In addition, our independent directors meet at regularly scheduled executive sessions without members of management present.  Mr. Peller, who has served as our Lead Director since 2007, serves as the presiding director at the executive sessions of the independent directors.  The Lead Director also has such other duties and responsibilities as determined by the Board from time to time.  Those additional duties and responsibilities include:



Our Board retains the authority to modify this leadership structure as and when appropriate to best address our unique circumstances at any given time and to serve the best interests of our shareholders.





Role of the Board in Risk Oversight



Our Board’s role in risk oversight involves both the full Board and its committees.  The full Board is responsible for the oversight of risk management and reviews our major financial, operational, cybersecurity, compliance, ESG, reputational and strategic risks, including steps to monitor, manage and mitigate such risks.  In addition, each of the Board committees is responsible for oversight of risk management practices for categories of risks relevant to their functions.  For example, the Audit Committee discusses with management our major financial risk exposures and the steps that have been taken to monitor and mitigate such exposures, including with respect to risk assessment and risk management.  The Audit Committee is also responsible for oversight of cybersecurity risks, as well as the company’s overall cybersecurity risk management program.  Similarly, the Nominating and Corporate Governance Committee has oversight responsibility over ESG, governance and compliance matters and the Compensation Committee has oversight responsibility for our overall compensation structure, including review of its compensation practices, in each case with a view to assessing associated risks.  Please see “Compensation Risk Assessment” on page 50 of this proxy statement.



The Board as a group is regularly updated on specific risks in the course of its review of corporate strategy, business plans and reports to the Board by management and its respective committees.  The Board believes that its leadership structure supports its risk oversight function by providing a greater role for the independent directors in the oversight of our company.

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Corporate Governance Guidelines



We have adopted Corporate Governance Guidelines, which are available on our website at www.mscdirect.com/corporategovernance.





Director Attendance at Shareholder Meetings



We encourage attendance by the directors at our annual meeting of shareholders.  All of our current directors attended the annual meeting held on January 29, 2019, either in person or by telephone.





Non-Executive Director Stock Ownership Guidelines



To more closely align the interests of our non-executive directors with those of our shareholders, our Board of Directors, upon the recommendation of the Nominating and Corporate Governance Committee, adopted stock ownership guidelines for our non-executive directors.  The ownership guidelines provide for each of our non-executive directors to own a minimum number of shares having a value equal to five times his or her base annual cash retainer on his or her first year of service on our Board (i.e., a value equal to $210,000 for directors whose tenure began before the adoption of the guidelines and a value equal to $250,000 for Messrs. Kaufmann and Paladino).  All shares held by our non-executive directors, including unvested restricted stock units (“RSUs”), count toward this guideline.  The guidelines provide for our non-executive directors to reach this ownership level within the later of five years from the date on which the guidelines were adopted or five years from the date on which the director is first appointed or elected.  Once a non-executive director has attained his or her minimum ownership requirement, he or she must maintain at least that level of ownership.  If a non-executive director has not satisfied his or her proportionate minimum stock ownership guideline, the director must retain an amount equal to 100% of the net shares received as a result of the exercise of stock options or the vesting of RSUs.  All of our non-executive directors are in compliance with their current stock ownership guidelines.







Overview of Director Compensation



Our Compensation Committee is responsible for reviewing and making recommendations with respect to the compensation of our non-executive directors.  The key objective of our non-executive directors’ compensation program is to attract and retain highly qualified directors with the necessary skills, experience and character to oversee our management.  In addition, our compensation program is designed to align the interests of our Board with the long-term interests of our shareholders.  The compensation program is also designed to recognize the time commitment, expertise and potential liability required of active Board membership.  We compensate our non-executive directors with a mix of cash and equity-based compensation.  Directors who are also executives of the company do not receive any compensation for their service on our Board.



Our Compensation Committee’s policy is to engage a compensation consultant every year to conduct a full review and benchmarking (using the same peer group used to benchmark executive compensation) of our non-executive directors’ compensation in order to ensure that our directors’ compensation is in line with peer companies competing for director talent.  In fiscal year 2019, our Compensation Committee engaged FW Cook as its compensation consultant. In August 2019, FW Cook conducted a competitive analysis of our non-executive directors’ compensation using the same peer group used to benchmark executive compensation.  Based on this analysis, FW Cook concluded that, on a normalized basis, the average total annual compensation per non-executive director (excluding our Non-Executive Chairman) in fiscal year 2019 approximated the median of the peer group.



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Fiscal Year 2019 Director Compensation



For the fiscal year ended August 31, 2019, we paid each non-executive director the following compensation:



In the event that a director ceases to provide services to the company by virtue of his or her death, disability or retirement (which means cessation of services with approval of the Board), the vesting of outstanding RSUs will accelerate and the shares underlying the RSUs will become fully vested.  In addition, in the event of a change in control of the company, the vesting of all outstanding RSUs held by the director will accelerate, and all shares underlying RSUs will become fully vested.  A change in control of the company for purposes of the 2015 Omnibus Incentive Plan is described below under the section entitled “Executive Compensation – Potential Payments Upon Termination or Change in Control –Change in Control Arrangements.”



In October 2014, our Compensation Committee recommended, and our Board approved, a change in the non-executive chairman compensation for Mr. Jacobson. Due to the level of his stock ownership, Mr. Jacobson and the company would have needed to make a filing and he would have needed to pay a filing fee under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 in connection with the annual equity grant. Under these circumstances, our Board, upon the recommendation of our Compensation Committee, decided that it was appropriate to pay Mr. Jacobson cash in lieu of the annual equity grant, such amount to be paid quarterly in arrears.



Director compensation is paid quarterly in arrears.  The cash compensation of directors who serve less than a full quarter is pro-rated for the number of days actually served.  Directors who are appointed between annual shareholder meetings receive a pro-rated equity award upon appointment to our Board.  In addition, we reimburse our non-executive directors for reasonable out-of-pocket expenses incurred in connection with attending in-person Board or Board committee meetings and for fees incurred in attending continuing education courses for directors that are approved in advance by the company.

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Non-Executive Director Summary Compensation in Fiscal Year 2019



The following table presents the compensation paid to our non-executive directors in respect of fiscal year 2019 for their services as directors.  Mr. Gershwind, as an executive officer of the company, did not receive compensation for his services as a director of the company in fiscal year 2019.





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Code of Ethics and Code of Business Conduct



We have adopted a Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer and senior financial officers and a Code of Business Conduct that applies to all of our directors, officers and associates.  The Code of Ethics and the Code of Business Conduct are available on our website at www.mscdirect.com/corporategovernance.  We intend to disclose on our website, in accordance with all applicable laws and regulations, amendments to, or waivers from, our Code of Ethics and our Code of Business Conduct.





Corporate Social Responsibility



Our purpose is to provide greater value to our stakeholders, which include our associates, customers, owners, suppliers and communities, by helping them achieve their potential and greater success.  We express that purpose through our “Built to Make You Better” brand promise, and we sum up our values and guiding principles in four simple words: Do the right thing. 



The Nominating and Corporate Governance Committee has oversight responsibility for our ESG efforts and initiatives.  During fiscal year 2019, we undertook a variety of ESG efforts and initiatives, including:















For more information on our corporate social responsibility and ESG initiatives, please visit our website at  www.mscdirect.com/corporate/community-relations and www.mscdirect.com/corporategovernance.





Shareholder Communications Policy



Any shareholder or other interested party who desires to communicate with our Chairman of the Board, Lead Director or non-management members of our Board may do so by writing to: Board, c/o Philip Peller, Lead Director of the Board, MSC Industrial Direct Co., Inc., 75 Maxess Road, Melville, NY 11747.  Communications may be addressed to the Chairman of the Board, the Lead Director, an individual director, a Board committee, the non-management directors or the full Board.



Written Related Person Transactions Policy



We have adopted a written related person transactions policy detailing the policies and procedures relating to transactions that may present actual, potential or perceived conflicts of interest and may raise questions as to whether such transactions are consistent with the best interest of the company and our shareholders.  The Nominating and Corporate Governance Committee must review and approve any related person transaction proposed to be entered into and, if appropriate, ratify any such transaction previously commenced and ongoing.  The Nominating and Corporate Governance Committee may delegate its authority under the policy to the Chairperson of the Nominating and Corporate Governance Committee, who may act alone.  The Chairperson will report to the Nominating and Corporate Governance Committee at the next meeting any approval made pursuant to such delegated authority.  Based on its consideration of all of the relevant facts and circumstances, the Nominating and Corporate Governance Committee will decide whether or not to approve any related person transaction.

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Under our related person transactions policy, any relationship, arrangement or transaction between the company and (a) any director, executive officer or any immediate family member of either a director or an executive officer, (b) any beneficial owner of more than 5% of our Class A common stock or (c) any entity in which any of the foregoing is employed or is a partner, principal or owner of a 5% or more ownership interest, is deemed a related person transaction, subject to certain exceptions, including (i) transactions available to all associates generally, (ii) transactions involving less than $25,000 in any 12-month period when aggregated with all similar transactions during such period, (iii) transactions involving executive compensation approved by our Compensation Committee or director compensation approved by our Board and (iv) certain charitable contributions.





Related Person Transactions



Other than compensation arrangements, including those described under the sections entitled “Executive Compensation” beginning on page 52 of this proxy statement and “Overview of Director Compensation” beginning on page 22 of this proxy statement, and the arrangements described below, since the beginning of fiscal year 2019, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we have been or will be a participant:



Stock Purchase Agreement



On July 25, 2018, we entered into a stock purchase agreement with Mitchell Jacobson, our Chairman, Erik Gershwind, our President and Chief Executive Officer, and three other beneficial owners (collectively, the “Sellers”) of our Class B common stock, as amended on July 30, 2018 and August 29, 2018 (the “Stock Purchase Agreement”). Pursuant to the Stock Purchase Agreement, in connection with our existing share repurchase authorization, each Seller agreed to sell or cause to be sold by trusts or other entities on whose behalf such Seller acted, and we agreed to purchase, a pro rata number of shares of Class A common stock, such that the Sellers’ aggregate percentage ownership in the company would remain substantially the same. Shares purchased under the Stock Purchase Agreement were purchased each month at a price per share equal to the volume weighted average market price that we paid for shares repurchased during the previous month from holders of our Class A common stock under our share repurchase authorization.  The Stock Purchase Agreement was approved by our Nominating and Corporate Governance Committee as well as the disinterested members of our Board.  Pursuant to the Stock Purchase Agreement, we purchased an aggregate of 283,239 shares of our Class A common stock from the Sellers and/or such trusts or other entities for an aggregate purchase price of approximately $23.4 million. On October 29, 2018, we entered into a termination agreement with the Sellers pursuant to which the Stock Purchase Agreement was terminated.



Adviser Agreement with Roger Fradin



As previously disclosed, Roger Fradin is not standing for re-election at the 2020 annual meeting.  We expect to retain Mr. Fradin as an adviser to the Board and senior management in order to continue to obtain the benefit of Mr. Fradin’s operational expertise and broad experience as a senior executive of a major diversified technology and manufacturing company and his insight and perspective on our customer base.  We expect that Mr. Fradin’s compensation as an adviser will be substantially the same as the compensation of a non-executive director.





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Certain Information About Our EXECUTIVE OFFICERS



The following individuals are our executive officers as of the date of this proxy statement:





Erik Gershwind



Please refer to the section entitled “Election of Directors (Proposal No. 1)” beginning on page 8 of this proxy statement for the biographical data for Mr. Gershwind.



Steven Baruch



Mr. Baruch was appointed our Executive Vice President and Chief Strategy & Marketing Officer in August 2017.  Previously, he served as our Senior Vice President, Strategy and Marketing, a position he held from July 2015 until August 2017.  Prior to that, he served as our Vice President of Digital & Strategy, a position he held from 2014 until July 2015, and as our Vice President of eCommerce from November 2010 until May 2014.  Mr. Baruch began his career with our company in May 2008.  Prior to joining our company, Mr. Baruch served as Senior Vice President of Sales and Managed Services for Adecco where he was responsible for leading B2B sales and marketing with focus on digital, web and eCommerce strategy and execution.  Previously, he held various executive positions at global electronics distributor Arrow Electronics, including Director of Sales, Marketing, and Public Relations for arrow.com.



Rustom Jilla



Mr. Jilla was appointed our Executive Vice President and Chief Financial Officer in July 2015.  From April 2013 through September 2014, Mr. Jilla served as Chief Financial Officer of Dematic Group, a global provider of warehouse logistics and inventory management solutions.  From September 2002 to April 2013, he served as Chief Financial Officer of Ansell Limited, a global leader in protective solutions, publicly traded on the Australian Securities Exchange. Prior to that, Mr. Jilla served as Vice President, Financial Operations at PerkinElmer Inc., and earlier spent 12 years at The BOC Group, a multinational industrial gas company that was acquired by Linde AG in 2006, where he held various Product Management and Finance leadership roles.  He began his career in auditing with Coopers & Lybrand (now PricewaterhouseCoopers LLP).



Douglas Jones



Mr. Jones was appointed our Executive Vice President and Chief Supply Chain Officer in October 2014, having previously served as our Executive Vice President, Global Supply Chain Operations since October 2009.  Previously, he was our Senior Vice President, Supply Chain Management from April 2008 until October 2009 and our Senior Vice President of Logistics from December 2005 until April 2008.  Mr. Jones joined our company in July 2001, as Vice President of Fulfillment.  Prior to joining our company, he served as Vice President, Distribution Operations for the Central Region of the United States, at Fisher Scientific from 1998 to 2001.  Prior to his role at Fisher Scientific, Mr. Jones was part of the management team at McMaster-Carr Supply Company, based in Chicago.  During his tenure with McMaster-Carr, Mr. Jones held various managerial positions of increasing responsibility in fulfillment, finance, purchasing and inventory management.



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Steve Armstrong



Mr. Armstrong was appointed our Senior Vice President, General Counsel and Corporate Secretary in October 2012.  Previously, he served as our Vice President, General Counsel and Corporate Secretary from October 2008 until October 2012.  From 2006 to 2008, he was a legal consultant based in New York, New York performing services for Thomson Reuters and NBC Universal.  Mr. Armstrong was the Executive Vice President and General Counsel of the Home Shopping Network in Tampa, Florida from 2002 to 2006.  From 2000 to 2002, he was the Senior Vice President and General Counsel of Agilera, Inc., a technology company in Denver, Colorado.  Prior to 2000, Mr. Armstrong was the Vice President, General Counsel & Secretary of Samsonite Corporation and a partner in the law firms Paul Hastings, and Baker and Hostetler.



Charles Bonomo



Mr. Bonomo was appointed our Senior Vice President and Chief Information Officer in August 2011.  Previously, he served as our Vice President and Chief Information Officer from July 2007 through August 2011.  From 1999 through 2007 he served as Vice President at Arrow Electronics, Inc., including in the position of Vice President of Infrastructure and Operations from January 2006 to July 2007, and as Vice President and Chief Architect from July 2003 through January 2006.  Previously, he was the Director of Clinical Technology at Mount Sinai Medical Center from 1996 to 1998, rising to Vice President and Chief Information Officer of NYU Health System in 1998.  Prior to 1996, he held various positions of increasing responsibility at J.P. Morgan in the United States and Europe and at Grumman Aerospace Corp., where he designed and tested software for the F14 Tomcat aircraft.



Kari Heerdt



Ms. Heerdt was appointed Senior Vice President, New Business Innovation & Transformation in June 2019.  Previously, she served as our interim Senior Vice President, Sales & Customer Success from January 2019 to June 2019, and as our Senior Vice President, Chief People Officer from August 2014 to January 2019.  Previously, Ms. Heerdt served as Partner, Strategic Account Executive at Aon Hewitt, the global talent, retirement and health business of Aon Plc (NYSE: AON), where she oversaw one of Aon Hewitt’s largest clients. Prior to that, Ms. Heerdt was a Senior Consultant at Aon Hewitt in the Corporate Restructuring and Change, Talent and Organization Consulting practice, later becoming the Senior Manager, Operations for Cerberus Capital Management, a leading investment management firm, before becoming the Senior Vice President, Human Resources for two of Cerberus’ portfolio companies, Mervyn’s LLC and Talecris Biotheraputics, Inc.  Ms. Heerdt served as Senior Vice President, Human Resources for Mervyn’s LLC from April 2005 until January 2008.



Gregory Polli



Mr. Polli was appointed our Senior Vice President, Supplier Enablement in May 2019.  Previously, he served as our Senior Vice President, Category Management from July 2015 to May 2019, as our Vice President, Product Management from November 2005 to July 2015, our Vice President, Metalworking from November 2002 to November 2005, our Vice President, Metalworking Merchandising from April 2002 to November 2002 and our Vice President, Product from October 1999 to April 2002.  Prior to that, Mr. Polli held various positions of increasing responsibility at our company in product management and merchandising since joining our company in 1988.



Edward Martin



Mr. Martin was appointed our Senior Vice President, Sales & Customer Success in June 2019.  Previously, he served as Chief Commercial Officer, Industrial Solutions, for GE Power, an American energy techniques company owned by General Electric Co. (NYSE: GE) from October 206 to June 2019.  Prior to that, Mr. Martin served as Chief Commercial Officer, Measurement & Control for GE Oil and Gas, an equipment service provider to the global oil and gas industry owned by GE from February 2014 to September 2016.  Prior to that, Mr. Martin served as Chief Marketing Officer at GE Appliances, a company owned by GE from April 2010 to February 2014, and served in various positions of increasing responsibility during his tenure at GE.    



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RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PROPOSAL NO. 2)



Our Audit Committee has appointed the firm of Ernst & Young LLP, which has been our independent registered public accounting firm since 2002, to serve as our independent registered public accounting firm for fiscal year 2020.  Although shareholder ratification of the Audit Committee’s action in this respect is not required, our Board considers it desirable for shareholders to pass upon the selection of the independent registered public accounting firm.  If the shareholders disapprove of the selection, our Audit Committee intends to reconsider the selection of Ernst & Young LLP as our independent registered public accounting firm.



Ernst & Young LLP has advised us that neither it nor any of its members has any direct or material indirect financial interest in our company.  We expect that a representative from Ernst & Young LLP will be present at the annual meeting.  This representative will have the opportunity to make a statement if he or she so desires and is expected to be available to respond to appropriate questions.





Principal Accountant Fees and Services



For the fiscal years ended August 31, 2019 and September 1, 2018, Ernst & Young LLP billed us for their services the fees set forth in the table below.  All audit and permissible non-audit services reflected in the fees below were pre-approved by the Audit Committee in accordance with established procedures.





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Audit Committee Pre-Approval Policy



The Audit Committee is required to pre-approve all audit and non-audit services provided by our independent registered public accounting firm and is not permitted to engage the independent registered public accounting firm to perform any non-audit services proscribed by law or regulation.  The Audit Committee may delegate pre-approval authority to the Chairperson of the Audit Committee, in which case decisions taken are to be presented to the full Audit Committee at its next meeting.



The Audit Committee of the Board has considered whether, and has determined that, the provision of non-audit services by Ernst & Young LLP is compatible with maintaining auditor independence.



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AUDIT COMMITTEE REPORT



The information contained under this “Audit Committee Report” shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any filings under the Securities Act of 1933, as amended, which we refer to as the Securities Act, or under the Exchange Act, except to the extent that we specifically incorporate this information by reference into any such filing.



The Audit Committee oversees the company’s financial accounting and reporting processes and systems of internal controls on behalf of our Board.  Management has the primary responsibility for the financial statements and the reporting process, including the systems of internal controls.  The Audit Committee is directly responsible for the appointment, termination, compensation, retention and oversight of the work of our independent auditors.  The Audit Committee consists of the five directors named below, each of whom is an independent director as defined by applicable SEC rules and NYSE listing standards.



Each year the Audit Committee evaluates the qualifications, performance and independence of our independent registered public accounting firm and determines whether to reengage the current firm. In doing so, the Audit Committee considers the quality and efficiency of the services provided by the independent registered public accounting firm, its capabilities, its technical expertise, its knowledge of our operations and the appropriateness of its fees for audit and non-audit services. Based on this evaluation, the Audit Committee appointed Ernst & Young LLP as our independent registered public accounting firm to examine our consolidated financial statements and internal controls over financial reporting for fiscal year 2019.  The Audit Committee also oversees the periodic required rotation of the lead audit partner, as required by SEC rules, and is directly involved in the selection of such partner.



Our financial and senior management supervise our systems of internal controls and the financial reporting process.  Our independent registered public accounting firm performs an independent audit of our consolidated financial statements in accordance with generally accepted auditing standards and expresses an opinion on these consolidated financial statements.  In addition, our independent registered public accounting firm expresses its own opinion on the company’s internal control over financial reporting.  The Audit Committee monitors these processes.



The Audit Committee has reviewed and discussed with both the management of the company and our independent registered public accounting firm our audited consolidated financial statements for the fiscal year ended August 31, 2019, as well as management’s assessment and our independent registered public accounting firm’s evaluation of the effectiveness of our internal controls over financial reporting.  Our management represented to the Audit Committee that our audited consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America.



The Audit Committee discussed with our internal auditors and independent registered public accounting firm the overall scope and plans for their respective audits.  The Audit Committee met with the company’s Director of Internal Audit and the independent registered public accounting firm, with and without management present, to discuss the results of their audits, their evaluations of our internal controls, including internal control over financial reporting, and the overall quality of our financial reporting.

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The Audit Committee also discussed with our independent registered public accounting firm the matters required to be discussed by the applicable requirements of the Public Company Accounting Oversight Board and the SEC.  The Audit Committee has also received the written disclosures and the letter from our independent registered public accounting firm required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent registered public accounting firm’s communications with the Audit Committee concerning independence, and has discussed with the independent registered public accounting firm the independence of that firm.  The Audit Committee has also considered whether the provision of non-audit services by our independent registered public accounting firm is compatible with maintaining the independence of the auditors.  The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by our independent registered public accounting firm.  All audit and permissible non-audit services performed by our independent registered public accounting firm during fiscal year 2019 and fiscal year 2018 were pre-approved by the Audit Committee in accordance with established procedures.



Based on the reviews and discussions referred to above, the Audit Committee recommended to our Board (and our Board approved) that the audited financial statements be included in the Annual Report on Form 10-K for the fiscal year ended August 31, 2019, which was filed with the SEC on October 24, 2019.



Submitted by the Audit Committee of the Board,



Philip Peller (Chairperson)

Jonathan Byrnes

Michael Kaufmann

Denis Kelly

Steven Paladino

 

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COMPENSATION DISCUSSION AND ANALYSIS



In this section, we discuss the material elements of our compensation programs and policies, including the objectives of our compensation programs and the reasons why we pay each element of our executives’ compensation.  Following this discussion, you will find a series of tables containing more specific details about the compensation earned by or awarded to the following individuals, whom we refer to as the named executive officers or NEOs.  This discussion focuses principally on compensation and compensation practices relating to the NEOs for our 2019 fiscal year.







Executive Summary



Fiscal 2019 Performance Highlights



In fiscal year 2019, we executed well in a weakening demand and pricing environment, posting year-over-year average daily sales (ADS) growth of 5.8%.  In a challenging environment, we took focused actions to improve our profitability by accelerating new business conversions, deepening our supplier partnerships to drive future profitability and market share gains, and beginning to reshape and resize our organization.  We also continued to expand our technological capabilities and drive increased innovation to reposition the company as a mission-critical partner for our customers, offering our customers highly technical and high-touch solutions to solve their most complex challenges on the plant floor.  Moving forward, we will continue to focus on streamlining our cost structure and transforming our operating model to be leaner, more agile and more effective.  Our operating performance in fiscal 2019 was highlighted by the following achievements:



Net sales increased 5.0% to $3.36 billion in fiscal 2019 from $3.20 billion in fiscal 2018.  Average daily sales (ADS), including acquisitions, increased 5.8% in fiscal 2019, as compared to fiscal 2018.  Our operating expenses, which included $6.7 million of severance and separation benefits charges, increased as a percentage of sales to 30.7% of net sales for fiscal 2019, compared to 30.4% of net sales for fiscal 2018.  Operating income in fiscal 2019 was $400.0 million, representing a decrease of 4.9% from operating income of $420.6 million in fiscal 2018.  For fiscal 2019, the company achieved diluted earnings per share of $5.20 versus $5.80 in fiscal 2018. 



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Fiscal 2019 Compensation Highlights



Consistent with our pay-for-performance compensation philosophy, the Compensation Committee of our Board (referred to in this discussion as the Committee) took the following key actions with respect to NEO compensation for fiscal 2019:



The table below illustrates how our compensation is aligned with our performance by showing the total cash compensation and total direct compensation for each of our NEOs in fiscal 2019 against the competitive market data:





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Compensation Philosophy and Objectives



We believe that the quality, skills and dedication of our executive officers are critical factors affecting the company’s performance and, therefore, long-term shareholder value.  Our key compensation goals for our associates, including the NEOs, are to:



Accordingly, in determining the amount and mix of compensation, the Committee seeks to provide a market competitive compensation package, structure annual and long-term incentive programs that reward achievement of performance goals that directly correlate to the enhancement of sustained, long-term shareholder value, and promote executive retention.



The following table provides information about the key elements of our 2019 compensation programs:



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The Committee does not maintain policies for allocating among short-term and long-term compensation or among cash and non-cash compensation.  Instead, the Committee maintains flexibility and adjusts different elements of compensation based upon its evaluation of the company’s key compensation goals.  As a general matter, the Committee seeks to utilize equity-based awards to motivate executives to enhance long-term shareholder value and manage the dilutive effects of equity compensation through the company’s share repurchase program.



While compensation levels may differ among NEOs based on competitive factors and the role, responsibilities and performance of each NEO, there are no material differences in the compensation philosophies, objectives or policies for our NEOs.  However, as an executive assumes more responsibility, a greater percentage of total target cash compensation is allocated to annual performance bonus compensation, and a greater percentage of total direct compensation is allocated to equity compensation.  The Committee does not maintain a policy regarding internal pay equity, but the Committee considers internal pay equity as part of its overall review of our compensation programs.





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Alignment with Compensation Best Practices 



The Committee reviews our compensation programs, competitive market data and best practices in the executive compensation area.  In past years, the Committee has recommended, and our Board has approved, changes in our compensation policies and practices to align with best practices.  Beginning with fiscal 2020, we are discontinuing granting stock options, and for fiscal 2020, PSUs will represent 25% of the grant date value of equity awards to executive officers, with 75% of the grant date value represented by RSUs (which will now vest 25% on each of the 1st through 4th grant date anniversaries).  Key features of our compensation programs that the Committee believes align with best practices in executive compensation are as follows:



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Shareholder Engagement and “Say on Pay” Vote



We are committed to engaging with our shareholders.  We maintain a formal investor relations outreach program to solicit the views of institutional shareholders on a variety of topics, including executive compensation.  As part of this program, our senior management and investor relations team regularly meet with institutional investors.  During fiscal year 2019, our senior management and investor relations team met with many institutional investors, including all of our top 25 investors with actively managed funds, through investor conferences, investor roadshows, in-person meetings and telephone conferences.



We are also committed to continued engagement between shareholders and the company through the formal “say on pay” advisory vote on executive compensation.  At our 2019 Annual Shareholders Meeting held on January 29, 2019, the advisory vote received the support of 98.4% of the votes cast at the annual meeting.  In its review of our executive compensation programs, the Committee carefully considered the results of the 2019 advisory vote on executive compensation.  As previously disclosed, we plan to hold the “say on pay” advisory vote on an annual basis.  In addition, we continually monitor the views of our major institutional shareholders to assure alignment of our compensation practices with our institutional shareholders’ standards.  The Committee will consider feedback from our shareholders along with the results of the “say on pay” advisory vote as it completes its annual review of each pay element and the total compensation packages for our NEOs with respect to the next fiscal year.





Compensation Committee



The Committee is directly responsible for determining, in consultation with our Board, the goals and objectives of our executive compensation programs and for the ongoing review and evaluation of our compensation programs to determine whether our compensation programs are achieving their intended objectives.  The Committee also evaluates the design and mix of our compensation programs and makes adjustments, as appropriate, to achieve our compensation philosophy.  In consultation with our Board, the Committee has primary responsibility for overseeing and approving all compensation matters relating to, and setting the compensation levels of, the NEOs and our other executive officers and senior officers.  The Committee also administers our equity compensation plans. Members of management and independent consultants provide input and recommendations to the Committee, but decisions are ultimately made by the Committee. 





How Compensation Decisions Are Made



Each August, the Committee receives a formal presentation from FW Cook, its independent compensation consultant, on the competitiveness of the company’s compensation programs, as well as its alignment with the company’s compensation objectives.  Based on the benchmarking data prepared by the Committee’s independent compensation consultant and the consultant’s evaluation of the company’s compensation programs, our Human Resources department, with input from our Chief Executive Officer and Chief Financial Officer, compiles management’s recommendations for our annual performance bonus plan and equity award grants for the upcoming fiscal year.  The Committee generally meets in September to review and consider the preliminary management recommendations and makes its final compensation decisions at its October meeting when the company’s fiscal year financial results are being considered by our Board.  At its October meeting, the Committee also reviews achievement of the prior fiscal year’s annual performance bonus plan financial metrics and each NEO’s individual goals and objectives (G&Os), and approves the annual bonus payouts.  Base salary adjustments are made for our executive officers and other senior officers at the time of their individual performance reviews. Depending on company or individual circumstances, the Committee also may make other compensation decisions during the year. 



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Role of Executive Officers in Compensation Decisions



As part of its process, the Committee meets with our Chief Executive Officer and our Chairman to obtain recommendations with respect to the structure of our compensation programs and compensation decisions, including the performance of individual executives.  The Committee obtains our Chairman’s input on the compensation of our Chief Executive Officer, and our Chief Executive Officer provides the Committee with input on the compensation of the other NEOs and other executive officers and senior officers.  Our Human Resources department collects and analyzes relevant data, including comparative compensation data prepared by FW Cook, which is used by the Committee to inform compensation decisions.





Compensation Consultant



The Committee has the sole authority to retain and terminate any third-party compensation consultant and to obtain advice and assistance from internal and external legal, accounting and other advisors.  Since 2009, the Committee has relied on competitive market data and analysis prepared by its independent compensation consultant, FW Cook.  To assist the Committee with its compensation decisions, FW Cook recommends to the Committee peer companies and general industry survey data for benchmarking, and provides competitive compensation data, benchmarking and analysis relating to the compensation of our Chief Executive Officer and other executives and senior officers based on such market data.  Please see the section below “―Competitive Positioning” beginning on page 46 for information about our peer companies and our competitive market data.  FW Cook also furnishes the Committee with competitive compensation data and analysis for non-executive directors.  In addition, FW Cook assists the Committee with its risk assessment of our compensation programs, and advised on the methodology used for our 2019 CEO pay ratio disclosure.  FW Cook also advised the Committee on changes made to our long-term stock-based compensation program, which will include PSUs beginning with fiscal 2020.  FW Cook has not provided any other services to the company and will not provide any other services to the company without the approval of the Committee.



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Fiscal Year 2019 Executive Compensation

Summary of Fiscal Year 2019 Compensation Decisions



The Committee believes that management skillfully navigated a weakening demand and pricing environment, taking focused actions to improve profitability by accelerating new business conversions, deepening our supplier partnerships to drive future profitability and market share gains, and beginning to reshape and resize our organization.  Management also continued to expand our technological capabilities and drive increased innovation to reposition the company as a mission-critical partner for our customers, offering our customers highly technical and high-touch solutions to solve their most complex challenges on the plant floor.  Our results in fiscal 2019 reflected a soft macroeconomic environment, with industrial demand steadily decelerating as market conditions turned contractionary.  Organic revenue growth, as computed for purposes of our annual performance bonus plan, fell below the target level, and adjusted operating margin fell below the threshold level.  As a consequence, bonus payouts were substantially below target for our NEOs.



Based on company and individual performance, the Committee believes that compensation levels for fiscal year 2019 were appropriate and consistent with the philosophy and objectives of the company’s compensation programs.  The following summarizes fiscal 2019 compensation results:



Elements of Compensation



We allocate compensation among the following components for our NEOs:



Base Salary



Base salaries for our executive officers are established based on the scope of their responsibilities and considering competitive market compensation paid by other companies for similar positions, as well as salaries paid to the executives’ peers within the company.  Base salaries are reviewed each year in connection with the executives’ performance evaluations and may be adjusted based on competitive market data, individual performance and promotions or changed responsibilities.  The Committee seeks to target base salary levels at or below the market median.  However, in individual cases, base salary levels may differ based upon the executive’s experience, individual performance and other considerations.  In fiscal 2019, all NEO base salaries were increased within a range around 3.0%, consistent with the overall budget for base salary increases for executive and senior officers.  Mr. Gershwind’s base salary was increased from $748,690 to $771,151, effective January 1, 2019, and remains below the market 25th percentile.  Mr. Jilla’s base salary was increased from $503,928 to $523,278, approximating the median of the market data.  Mr. Jones’ base salary was increased from $413,285 to $423,080, approximating the market median.  Mr. Armstrong’s base salary was

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increased from $412,064 to $425,044, between the 25th percentile and median of the market data.  Mr. Baruch’s base salary was increased from $351,400 to $363,699, approximating the median of the market data.



Annual Performance Bonus Program



For fiscal year 2019, we measured financial performance under our annual performance bonus plan based on two financial metrics – organic revenue growth percentage (on an average daily sales (ADS) basis) and operating margin, weighted at 37.5% each.  These were the same financial metrics that we used for our annual performance bonus plan in fiscal year 2018.  Our performance bonus plan for fiscal 2019 fixed payout levels based on achievement of financial metrics measured against our fiscal 2019 operating plan.



As in previous years, the remaining 25% of the target bonus opportunity was based on the achievement of individual G&Os.  In addition, award opportunities were subject to an individual performance multiplier.  Maximum bonus payouts are capped at 200% of target.



Bonus award opportunities are designed to provide market based, competitive award opportunities with target amounts designed to result in total cash compensation approximating the median of the market data and payouts at stretch performance designed to result in total cash compensation approximating the 75th percentile of the market data.  The Committee retains discretion to reduce annual bonus payouts below the amounts otherwise payable under the performance bonus program where it determines that bonus amounts are not reflective of company and individual performance.  For threshold, target and maximum dollar amounts of performance bonus opportunities under our performance bonus program for the NEOs, please see the Fiscal Year 2019 Grants of Plan-Based Awards table on page 54 of this proxy statement.



Company Financial Metrics



Company financial metrics are established by the Committee based on the company’s business plan, as reviewed and approved by the Committee, and consistent with analysts’ consensus expectations.  For fiscal 2019, company financial metrics were:



The Committee continued with the same financial metrics as in prior fiscal years because these two financial metrics remain two of the most important drivers of value creation for our shareholders and the Committee believes there is a benefit in keeping consistency in metrics year to year. 



In setting award opportunities, the plan provides for four payout levels based on achievement of company financial metrics, as follows:





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The following table sets forth the payout level opportunities available for our NEOs in fiscal 2019 for each company financial metric as a percentage of the target award (with each financial metric having a weighting of 37.5%) based on different levels of performance.   No payout for any financial metric is made if the threshold performance level for that financial metric is not achieved.  For performance between the different payout levels indicated below, straight-line interpolation is used to arrive at the actual payout: 



Actual Financial Performance vs. Target Goals



The table below shows the actual performance for the company financial metrics versus target:





In calculating year-over-year organic revenue growth, we excluded post-acquisition sales of MSC Mexico, which commenced operations on February 1, 2019.  In addition, to calculate on an ADS basis, we adjusted for fiscal 2019 having two fewer sales days, which combined with excluding MSC Mexico, had the effect of increasing our year-over-year organic revenue growth to 5.1% from our reported GAAP revenue growth of 5.0%.  In calculating operating margin, we excluded the results of MSC Mexico, as well as acquisition-related costs incurred, and $6.7 million of severance and separation related costs incurred in the fourth quarter of fiscal 2019, which together had the effect of increasing operating margin from 11.9% to 12.2%.  Consistent with prior practice, the Committee set the targets to exclude these items to achieve comparability and the incentive purpose of the annual performance bonus program.



Individual Goals and Objectives (G&Os)



Achievement of individual G&Os has a 25% weighting in our performance bonus plan.  Individual G&Os are established annually and include strategic initiatives with both financial and non-financial goals. Executives are evaluated based upon achievement of these goals.  At the end of each year, our CEO evaluates performance against the pre-established individual objectives for officers other than himself and submits a recommendation to the Committee. The Committee evaluates our CEO’s performance against his pre-established individual objectives.  Based on the Committee’s evaluation of the CEO and the CEO’s recommendations, the Committee determines and approves the achievement and payout level of the G&Os for each executive officer.  The following table sets forth the payout level opportunities for our NEOs as a percentage of the target award for the individual G&Os based on different levels of performance.  No payout is made if the threshold (partially meets) performance level is not achieved:





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Achievement of Individual G&Os

For fiscal 2019, the Committee determined that each of Messrs. Gershwind and Jones achieved his individual G&Os, resulting in a payout of 25.0% of target; Mr. Jilla partially met his individual G&Os, resulting in a payout of 18.75% of target; Mr. Armstrong exceeded achievement of his individual G&Os, resulting in a payout of 31.25% of target; and Mr. Baruch partially met his individual G&Os, with an adjustment reflecting his leadership and team building, resulting in a payout of 23% of target.  The Committee considered each NEO’s individual performance goals and performance, including the following:

Individual Performance Multiplier



Payout levels based on achievement of the company financial metrics and individual G&Os are subject to an individual performance multiplier.  We designed our performance bonus plan with this individual performance multiplier to provide greater weighting based on individual performance, consistent with our performance based compensation philosophy.  The individual performance multiplier evaluation differs from the evaluation of individual G&Os and is based on an evaluation of the executive’s overall leadership and effectiveness.  Based on the Committee’s evaluation of the CEO and the CEO’s recommendations, the Committee determines and approves the individual performance multiplier for each executive officer.  The individual performance multiplier is as follows:





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As set forth in the following section, the Committee determined an individual performance multiplier of 100% for each of the NEOs, other than Mr. Armstrong whose individual performance multiplier was determined to be 110%.

Fiscal 2019 Performance Bonuses for NEOs



The following table summarizes the computations for the NEOs’ performance bonuses for fiscal 2019:



The Committee retains discretion to reduce annual bonus payouts below the amounts otherwise payable under the performance bonus program where it determines that bonus amounts are not reflective of company and individual performance.  The Committee did not make any such adjustments for fiscal year 2019.



The Committee believes that bonuses awarded under our annual performance bonus program appropriately reflected the company’s performance and appropriately rewarded the performance of the NEOs.





Long-Term Stock-Based Compensation



The Committee has granted stock options and RSUs under our 2015 Omnibus Incentive Plan to provide competitive compensation, promote retention, and align the interests of our executives with those of our shareholders.  We believe that providing combined grants of stock options and RSUs has effectively focused our executives on delivering long-term value to our shareholders.  Stock options motivate our executives to increase shareowner value because the options only have value to the extent the company’s stock price increases over the term of the award.  RSUs reward and retain the executives by offering them the opportunity to receive MSC shares on the date the restrictions lapse so long as they continue to be employed by the company.  Dividends are not paid on unvested RSUs; instead, dividend equivalent units accrue on unvested RSUs and vest at the same times as the underlying RSUs.  The Committee does not have a fixed policy on allocating between options and RSU awards, but seeks to balance the retentive value of RSU awards which have a more stable value as compared with options.  The mix of fiscal year 2019 grants was 55% RSUs and 45% stock options, based on their respective grant date values.  Beginning with fiscal 2020, in order to further align executive compensation with Company performance, the Committee determined to discontinue granting stock options, and for fiscal 2020, PSUs will represent 25% of the grant date value of equity awards to executive officers, with 75% of the grant date value represented by RSUs. The PSUs cliff vest after three years, with payouts ranging from 0% to 200% of target (with straight line interpolation used for determining payouts with achievement between performance levels) based upon our average adjusted operating profit growth for the three fiscal years from fiscal year 2020 through fiscal year 2022.  



The Committee’s policy has been for stock options to vest in four equal increments on each of the first four anniversary dates of the date of grant, which is longer than the median 3-year vesting period of our peer companies, and for stock options to have terms of seven years.  For grants of RSUs, the Committee’s policy provides for vesting in five increments of 20% on each of the first through fifth anniversaries of the grants, which also is longer than the median 3-year vesting period of our peer companies.  Beginning with fiscal 2020, RSUs will vest 25% over four years.  The Committee believes that this aspect of our equity compensation package promotes executive retention and management stability, and fosters focus on long-term growth aligned with building shareholder value.



In granting equity awards, the Committee takes into consideration the dilutive effect on earnings to our shareholders once the shares are issued or vested, and we seek to mitigate this effect by repurchasing shares from time to time under the company’s share buyback program. We also evaluate and benchmark the company’s annual equity grants as a percentage of outstanding shares and the fully diluted overhang of outstanding equity awards plus shares available for grant.  Our burn rate (or the number of shares of Class A common stock subject to equity awards granted during the fiscal year as a percentage of the weighted-average outstanding shares of common stock) for fiscal 2019 was 1.04%, between the median and 75th percentiles of our peer companies; our 3-year average burn rate for fiscal 2017 through fiscal 2019 was 1.13%, also between the median and 75th percentiles of our peer companies.  Our fully diluted equity overhang as of the fiscal 2019 year end approximated the 25th percentile of our peer companies.  Our fully diluted overhang attributable to grants outstanding as of the fiscal 2019 fiscal year end approximated the median of our peer companies.



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As discussed below under “Change of Control Arrangements,” the vesting of unvested stock options, restricted stock and RSUs only accelerates if there is both a change in control of the company and if such awards are not continued, assumed or substituted in connection with the transaction or if there is a termination of employment without cause (or for executives with change in control agreements or who participate in our executive change in control severance plan, a termination by the executive for good reason) within one year (two years for executives with change in control agreements or who participate in our executive change in control severance plan) following the change in control.  Because there is no acceleration of awards unless there is both a change in control and either the awards would be terminated or the grantee’s employment is terminated following the change in control, our outstanding equity awards are subject to “double trigger” accelerated vesting.



Equity Grants During Fiscal Year 2019



The number of stock options and RSUs granted to the NEOs in fiscal year 2019, and the grant-date fair value of these awards determined in accordance with FASB ASC Topic 718, are shown in the Fiscal Year 2019 Grants of Plan-Based Awards table on page  54 of this proxy statement.  Equity awards granted in October 2018 were benchmarked against the competitive market data and resulted in target total direct compensation approximating the 25th percentile for Mr. Gershwind, approximating the median for Messrs. Jilla and Baruch, between the median and 75th percentile for Mr. Jones, and approximating the 25th percentile for Mr. Armstrong.



Administration of Equity Award Grants



Prior to fiscal 2020, the Committee granted options with exercise prices set at the market price on the date of grant, based on the closing market price on the date of grant.  Our policy has been that options and RSU awards to executive officers and other senior officers are granted on an annual basis at the October meeting of the Committee, which occurs when our Board reviews annual financial results and when the Committee completes its annual compensation review process.  Beginning with fiscal 2020, RSU and PSU awards to executive officers and other senior officers are approved on an annual basis by the Committee in early November.  The approval process specifies:



Grants for associates other than officers also are approved by the Committee, and the Committee does not delegate authority for making grants to any member of management.  Our current policy provides that off-cycle grants and promotion and new hire grants may be approved at regularly scheduled or special Committee meetings.  We do not time our equity award grants relative to the release of material non-public information.



Hedging Policy; Pledging



Under our insider trading policy which applies to all associates (including executive officers) and board members, short-selling, margin transactions, trading in exchange-traded options and engaging in hedging or monetization transactions such as zero-cost collars and forward sale contracts are prohibited with respect to our common stock.  Our insider trading policy also prohibits pledging company shares in margin accounts.  Associates and directors may only pledge company shares as collateral for a loan outside of a margin account up to 10% of their ownership of company shares (excluding options and unvested RSUs, PSUs and restricted shares), provided that shares required to be held pursuant to our stock ownership guidelines may not be pledged.  Our Nominating and Corporate Governance Committee retains discretion to permit limited exceptions to the 10% restriction.  None of our executive officers or directors currently has pledged any company shares.

 

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Benefits and Perquisites



We provide our executives with certain health and insurance benefits, as well as travel and other perquisites.  Our executives can participate in our 401(k) plan (which includes company matching contributions of 50% up to the first 6% of a participant’s contributions), our Associate Stock Purchase Plan and our health benefit and insurance programs on the same basis as our associates.  We also provide our executives with either a car allowance or a leased vehicle.



We do not provide any other executive perquisites such as supplemental life insurance, financial planning, country club membership, or special health benefits.



Change of Control Arrangements



Our current NEOs, other than Mr. Jilla, participate in our executive change in control severance plan, and Mr. Jilla is a party to a “change in control” severance agreements. For a description of our executives’ change in control arrangements, please see the section entitled “Executive Compensation — Potential Payments Upon Termination or Change in Control” beginning on page 59 of this proxy statement.



We believe that such arrangements are important to promote the stability of our business and our key personnel during the transition period surrounding a change in control transaction, and to keep our executives focused on the business rather than on their employment prospects.  These arrangements serve to assure the retention of key executives in order to successfully execute a change of control transaction. To this end, the change of control benefits only are provided if the executive remains with the company through the change of control and if there is a termination of employment without cause or by the executive for good reason, commonly referred to as a “double trigger.”  Please see the section entitled “Executive Compensation — Potential Payments Upon Termination or Change in Control — Change in Control Arrangements” beginning on page 59 of this proxy statement. 



As discussed in more detail in the section entitled “Executive Compensation — Potential Payments Upon Termination or Change in Control — Equity Award Plans” on page 60 of this proxy statement, since January 2006, all stock options and RSU and restricted stock awards have been made under our 2005 and 2015 Omnibus Incentive Plans.  Under our Omnibus Incentive Plans and the form of PSU awards, in the event of a change in control transaction pursuant to a merger agreement, outstanding stock options and restricted stock, RSU and PSU awards shall be continued, assumed or substituted if so provided in the merger agreement. In the case of PSUs, if the merger agreement provides for assumption, then the PSUs would convert to RSUs based on the target level of performance, provided that if the change in control occurs after the first full year of performance and the performance level is higher than the target level, the PSUs would convert to RSUs at such higher level.  If the merger agreement does not provide for continuation, assumption or substitution of equity awards, the vesting of outstanding options shall accelerate, the restrictions applicable to all restricted stock and RSU awards shall lapse and PSUs will vest and be earned at the target level of performance, provided that if the change in control occurs after the first full year of performance and the performance level is higher than the target level, the PSUs would vest and be earned at such higher level.  In addition, following any change in control, if an associate’s employment is terminated without cause within one year following the change in control, vesting shall also accelerate.  For executive officers with change in control agreements or who participate in our executive change in control severance plan, the protection period is extended to two years and vesting also accelerates in cases of termination by the executive for good reason.  The Committee believes that these provisions provide our Board with appropriate flexibility to address the treatment of options and restricted stock, RSU and PSU awards in a merger or similar transaction that is approved by our Board, while providing appropriate protections to our executives and other associates in transactions which are not approved by our Board.  Because there is no acceleration of awards unless there is both a change in control and either the awards are terminated or the grantee’s employment is terminated following the change in control, our outstanding equity awards are subject to “double trigger” accelerated vesting.



Executive Severance Plan



Under our Executive Severance Plan, adopted in October 2016, Vice Presidents, Senior Vice Presidents and Executive Vice Presidents of the Company are eligible to receive certain severance benefits in the event of limited qualifying termination events.  Please see the section entitled “Executive Compensation — Potential Payments Upon Termination or Change in Control — Executive Severance Plan” on page 60 of this proxy statement.



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Competitive Positioning



In determining the amounts of base salary, performance bonus plan opportunities and stock-based compensation for the NEOs, and other executive officers and senior officers, the Committee reviewed and benchmarked the compensation levels of the NEOs and other executive officers and senior officers against competitive market data developed by FW Cook.  Market data developed by FW Cook was comprised of peer group compensation data for the CEO, CFO and three other most highly compensated executives, as reported in the proxy statements of peer companies, together with compensation data by functional position derived from two third-party general industry surveys, with the peer data and industry surveys each weighted one-third for the NEOs.  Survey data for each position was based on functional matches and interpolated using MSC’s revenue.



In developing our peer group of companies, FW Cook consults with the company’s Human Resources department and the Committee to identify companies similar in size and business mix.  In addition, by balancing the peer company data with compensation data from two broad general industry surveys, the Committee believes that the benchmarking data is more representative of the market for executive talent and less subject to distortion. 



Peer companies and the two broad general industry survey sources were the same as used for fiscal 2018.  In this Compensation Discussion and Analysis, references to our NEOs’ actual fiscal 2019 compensation in relation to the market data are based on the market data presented by FW Cook to the Committee in August 2019.  The Committee believes that the competitive market data compiled by FW Cook provides an appropriate benchmarking resource.



The fiscal 2019 peer group is listed in the chart below, together with comparative information about revenue, net income, market capitalization, total assets and number of employees compiled by FW Cook based on publicly available information: 

(Dollars in millions)

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The Committee generally seeks to set base salary, total target cash compensation (the sum of base salary and target annual performance bonus) and total target direct compensation (the sum of total target cash compensation and long-term equity compensation) at the median, or 50th percentile, of the market data.  Total cash compensation based on achievement of stretch performance goals under our performance bonus generally is targeted to approximate the 75th percentile of the market data.  Long-term equity compensation in the form of stock options and RSUs (PSUs and RSUs beginning with fiscal year 2020) generally are targeted to approximate the median of the market data.  The Committee believes that this competitive positioning is consistent with the goals of the company’s compensation programs, by linking pay to performance and providing top-tier compensation only when the company achieves superior performance.



 

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Executive Incentive Compensation Recoupment Policy



The Company has an Executive Incentive Compensation Recoupment Policy which covers all executive officers of the company, as well as the company’s corporate controller, and applies to incentive awards under our annual performance bonus plan and equity awards under our equity plans, granted or awarded after the adoption of the policy. The policy provides our Board with discretion to obtain recoupment of awards as follows:



The Board may only seek recoupment in cases of a Restatement if either the Restatement shall have occurred within 36 months of the publication of the audited financial statements that have been restated, or the Audit Committee of the Board shall have taken steps to consider a Restatement prior to the end of such 36 months and the Restatement occurs within 48 months of the publication of the audited financial statements.



In addition, our equity award documents provide for forfeiture of awards in cases where a grantee violates a confidentiality, non-competition or non-solicitation covenant or agreement and for recoupment in cases where, following a termination of employment, the company determines that a termination for cause would have been justified prior to such termination.



In the event of a change in control, as defined in our Omnibus Incentive Plans, the company’s right to seek recoupment shall terminate.

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Executive Stock Ownership Guidelines 



To more closely align the interests of our management with those of our shareholders, our Board of Directors, upon the recommendation of the Nominating and Corporate Governance Committee, adopted in November 2011 stock ownership guidelines for our executive officers.  The ownership guidelines require that each of our executive officers own a minimum number of shares having a value equal to the following:







All shares held by our executives, including unvested restricted shares and RSUs, but not including unearned PSUs or shares underlying unexercised stock options, count toward these guidelines.  The guidelines provide for our executives to reach these goals within five years from the date on which the executive is appointed (or three years in the case of a promotion).  Once an executive has attained his or her minimum ownership requirement, he or she must maintain at least that level of ownership.  If an executive has not satisfied his or her proportionate minimum stock ownership guideline, the executive must retain an amount equal to 100% of the net shares (i.e., after tax withholding and shares sold to pay the exercise price of option) received as a result of the exercise of stock options or the vesting of restricted shares, PSUs or RSUs.  All of our executive officers are in compliance with their current stock ownership guidelines.  In addition to our stock ownership guidelines, we believe that our long-term stock-based compensation program properly aligns the interests of our executives with those of our shareholders, and encourage and incentivize long-term planning and strategic initiatives to enhance shareholder value.







Federal Income Tax Deductibility of Executive Compensation



For fiscal years beginning prior to December 31, 2017, Section 162(m) of the Internal Revenue Code of 1986 established a $1 million limit on the amount that a publicly held corporation may deduct for compensation paid to the chief executive officer and the next three most highly paid NEOs (other than the chief financial officer) in a taxable year.  This limitation did not apply to any compensation that is “qualified performance-based compensation” under Section 162(m).  In the past, stock options granted, and annual performance bonuses paid under, our omnibus incentive plans were intended to qualify as performance-based compensation for purposes of Section 162(m), but annual RSU awards under such plans did not qualify as performance-based compensation, and were therefore subject to the $1 million limit on deductible compensation.  Section 162(m) of the Internal Revenue Code was amended by the Tax Cuts and Jobs Act of 2017 (the “TCJA”). Effective for taxable years beginning after December 31, 2017, the TCJA eliminated the Section 162(m) exception for performance-based compensation (other than with respect to payments made pursuant to certain “grandfathered” arrangements entered into prior to November 2, 2017) and expands the definition of “covered employee” to include a company’s chief financial officer and any individual who was a covered employee of the company in any taxable year beginning after December 31, 2016.  As a result of the changes to Section 162(m), compensation paid to our named executive officers in excess of $1 million is not deductible, unless it qualifies for the transition relief applicable to the “grandfathered” arrangements in place as of November 2, 2017.  While the Committee considers the deductibility of compensation as one factor in determining executive compensation, the Committee believes that it is in the best interests of our shareholders to maintain flexibility in our approach to executive compensation in order to structure a program that we consider to be the most effective in attracting, motivating and retaining key executives.



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COMPENSATION RISK ASSESSMENT



The Compensation Committee engaged FW Cook to conduct a comprehensive risk assessment of our incentive-based compensation plans in 2019 to assist the Compensation Committee in its compensation risk assessment.  In its report to the Compensation Committee, FW Cook determined that our incentive plans were well-aligned with sound compensation design principles and that there were no significant areas of concern from a compensation risk perspective.  Based on the Compensation Committee’s review, the Compensation Committee believes that our compensation programs do not encourage excessive or inappropriate risk-taking on the part of our associates, including our executive and senior officers.  The Compensation Committee believes that the design and mix of our compensation programs appropriately encourage our executive and senior officers to focus on the creation of long-term shareholder value.  In its review, the Compensation Committee noted the following features:



In addition to the design and mix of our compensation programs, to further align our executive officers’ interests with our shareholders and mitigate risk relating to our compensation programs, we have adopted an Executive Incentive Compensation Recoupment Policy, which is described in the section entitled “Compensation Discussion and Analysis — Executive Incentive Compensation Recoupment Policy,” and stock ownership guidelines for all of our executive officers, which is described in the section entitled “Compensation Discussion and Analysis — Executive Stock Ownership Guidelines.”

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COMPENSATION COMMITTEE REPORT



The information contained under this “Compensation Committee Report” shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any filings under the Securities Act, or under the Exchange Act, or be subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically incorporate this information by reference into any such filing.



The Compensation Committee of our Board has reviewed and discussed with management the Compensation Discussion and Analysis that precedes this report.  Based on this review and discussion, the Committee recommended to our Board that the Compensation Discussion and Analysis be included in this proxy statement.



Submitted by the Compensation Committee of the Board,



Denis Kelly (Chairperson)

Roger Fradin

Louise Goeser

Michael Kaufmann

Steven Paladino

 

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EXECUTIVE COMPENSATION



Summary Compensation Table



The table below sets forth the compensation of the following named executive officers for services rendered to the company during the fiscal years ended August 31, 2019, September 1, 2018 and September 2, 2017:



A detailed description of the plans and programs under which our named executive officers received the following compensation can be found in the section entitled “Compensation Discussion and Analysis” beginning on page 32 of this proxy statement.  Additional information about these plans and programs is included in the additional tables and discussions which follow the Summary Compensation Table.





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Fiscal Year 2019 All Other Compensation





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Fiscal Year 2019 Grants of Plan-Based Awards



The following table shows the stock option and RSUs granted to our named executive officers in fiscal year 2019 and the estimated possible payouts under the performance bonus awards granted to our named executive officers in respect of fiscal year 2019 performance.





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Dividends are not paid on unvested RSUs; instead, dividend equivalent units accrue on unvested RSUs and vest at the same times as the underlying RSUs.  The quarterly dividend rate for the first, second and third quarters of fiscal year 2019 was $0.63 per share, and the quarterly dividend rate for fourth quarter of fiscal year 2019 was $0.75 per share.

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Outstanding Equity Awards at 2019 Fiscal Year-End Table



The following table shows the amount of outstanding stock option, restricted stock and RSU awards previously granted and held by the named executive officers as of August 31, 2019.



The market value of the stock awards is based on the closing price of a share of our Class A common stock as of August 30, 2019, the last business day of fiscal year 2019, which was $67.62.







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Fiscal Year 2019 Option Exercises and Stock Vested



The following table shows (i) the number of shares of our Class A common stock acquired upon the exercise of stock options by the named executive officers in fiscal year 2019, (ii) the number of shares of restricted stock and/or the number of RSUs held by the named executive officers which vested in fiscal year 2019, and (iii) the value realized upon the exercise of such stock options and the vesting of such shares or units, in each case before payment of any applicable withholding tax and broker commissions.





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Pension Benefits and Nonqualified Deferred Compensation



Our named executive officers do not receive any compensation in the form of pension benefits or nonqualified deferred compensation.





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Potential Payments Upon Termination or Change in Control

Change in Control Arrangements



Each of our current named executive officers, other than Mr. Jilla, participates in the MSC Industrial Direct Co., Inc. Executive Change in Control Severance Plan.  Mr. Jilla is a party to a “change in control” severance agreement.  These arrangements provide for payment of certain benefits to the named executive officers upon a qualifying termination following a change in control of our company.  The terms of these arrangements are discussed below.  In addition to these arrangements, each of our current named executive officers executed a confidentiality, non-solicitation and non-competition agreement under which each of them agreed not to use or disclose any confidential information relating to the company during his employment and after termination.  Each of them also agreed not to compete with the company or to solicit any employees of the company during his employment and for two years following termination of his employment.  All payments under the change in control arrangements are contingent on them complying with the foregoing obligations.



Under the terms of these arrangements, “cause” is generally defined to include (i) the willful and continued failure by the executive to substantially perform his duties (other than any such failure resulting from his incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the executive by the company, (ii) the willful engaging by the executive in conduct which is demonstrably and materially injurious to the company, monetarily or otherwise, or (iii) the executive’s conviction of, or entering a plea of nolo contendere to, a felony.  A change in the executive’s “circumstances of employment” will generally be deemed to have occurred if there is (a) a material reduction or change in the executive’s employment duties or reporting responsibilities, (b) a reduction in the executive’s annual base salary, (c) a material diminution in the executive’s status, working conditions or other economic benefits, or (d) the company requiring the executive to be based at any place outside a 30-mile radius from the company’s offices where the executive was based prior to a change in control.



A change in control of the company will generally be deemed to have occurred under these arrangements if (i) a person or entity, other than members of the Jacobson or Gershwind families, acquires beneficial ownership of 50% or more of the combined voting power of the company’s voting securities, (ii) there is a change in the Board as a result of which the Board members cease to constitute a majority of the Board, (iii) there is a consummation of a merger or consolidation, other than a merger or consolidation that results in our shareholders holding more than 50% of the combined voting power of the voting securities of the surviving entity, (iv) there is a liquidation or dissolution approved by our shareholders, or (v) there is a consummation of a sale of all or substantially all of the company’s assets.



Mr. Jilla has a change in control agreement with the company.  Mr. Jilla’s agreement was entered into in September 2015 and has a term of three years.  The term of his agreement automatically renews for successive three-year terms unless terminated by us, in our sole discretion, upon notification to the executive at least 18 months prior to the end of the then current term.  Each of Messrs. Gershwind, Jones, Armstrong and Baruch participate in our Executive Change in Control Severance Plan.



These arrangements provide that if, within two years after the occurrence of a change in control of the company, (a) we terminate the executive’s employment other than for cause or (b) the executive terminates his employment following a change in the executive’s “circumstances of employment,” then we will be obligated to pay the executive a severance payment equal to (i) two times the executive’s annual base salary, plus (ii) two times the executive’s targeted annual cash incentive bonus, plus (iii) the pro rata portion of the executive’s targeted annual cash performance bonus.  In addition, any unvested stock options and stock awards would accelerate.  As a condition to receiving his severance payments and benefits, the executive would be required to execute a general release in favor of the company.



In addition, if the executive’s employment is terminated after the occurrence of a change in control as described above, we are obligated to provide the executive with outplacement services for up to six months and a lump sum payment equal to 18 months of healthcare coverage (or in the case of Mr. Jilla, healthcare coverage for up to 18 months), and the executive is entitled to receive, at our expense, an automobile allowance for the lesser of two years or the remainder of the automobile lease in effect following the termination of his employment.

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Under these arrangements, the amount of severance benefits for these executives would be subject to reduction to the extent that the after-tax payments would be increased as a result of the payments being classified as “excess parachute payments” under Section 280G of the Internal Revenue Code of 1986.



Equity Award Plans



The number of outstanding equity awards held by each named executive officer under our Omnibus Incentive Plans as of August 31, 2019 is listed above in the Outstanding Equity Awards at 2019 Fiscal Year-End table.  All unvested equity awards at the end of fiscal year 2019 were granted to the named executive officers under our 2005 and 2015 Omnibus Incentive Plans, which provides certain benefits to plan participants in the event of the termination of such participant’s employment or a change in control of the company.  The terms of these benefits are described below.



In connection with their long-term incentive awards, the named executive officers are required to sign an agreement containing confidentiality and non-competition provisions designed to protect the company’s confidential and proprietary information and to preserve the company’s competitive advantages.



Omnibus Incentive Plans



Each of our 2005 and 2015 Omnibus Incentive Plans is a “double trigger” plan, meaning that unvested stock options and unvested RSU and restricted stock awards vest if there is a change in control of our company only if both (i) a change in control occurs and (ii) such options or awards are not continued, assumed or substituted in connection with the transaction or if there is a termination of employment without cause (or for executives with change in control arrangements, a termination by the executive for good reason) within one year (two years for executives with change in control arrangements) following the change in control.  A change in control of the company will be deemed to have occurred for purposes of our Omnibus Incentive Plans in the same circumstances as described above under the section entitled “– Change in Control Arrangements.”



Under our Omnibus Incentive Plans and awards thereunder, in the event that the employment of a named executive officer is terminated by reason of death, disability or retirement, all unvested stock options held by the named executive officer become immediately exercisable until the first anniversary of such termination or until the stock options expire by their terms, whichever is shorter, and the restrictions on outstanding restricted stock and RSUs shall lapse and the shares shall become fully vested.  The named executive officer will be deemed to have retired if his employment is terminated without cause, death or disability, on or after age 65, provided the named executive officer has a total of five years of service with the company.



Executive Severance Plan



Our Board adopted, upon the recommendation of our Compensation Committee, the MSC Executive Severance Plan. Under the MSC Executive Severance Plan, Vice Presidents, Senior Vice Presidents and Executive Vice Presidents of the company are eligible to receive certain severance benefits in the event of a qualifying termination.  For purposes of the MSC Executive Severance Plan, a “qualifying termination” means the occurrence of any of (i) the involuntary termination of a participant’s employment by the company as a result of the elimination of such participant’s job or position with the company because of reorganization, job elimination, or site closure, (ii) the termination of a participant’s employment with the company upon the participant’s failure to accept a material change in the geographic location where such participant is required to primarily perform his services for the company, such that the distance between the previous geographic location and the new geographic location exceeds 50 miles (one way); or (iii) the termination of a participant’s employment with the company upon the participant’s failure to accept a reduction in such participant’s base salary of 20 percent or more.

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Severance benefits consist of a severance allowance, a benefits credit payment, a vesting acceleration benefit and, at the discretion of the plan administrator, outplacement services.  The severance allowance generally will be (i) 18 months of base pay for executive vice presidents, (ii) 15 months of base pay for senior vice presidents and (iii) 12 months of base pay for vice presidents, plus in each case a pro rata bonus (based on the average bonus paid for the prior three fiscal years).  The benefits credit will be an amount equal to the credit provided by the company toward the cost of the participant’s coverage under our healthcare exchange for 18 months in the case of executive vice presidents, 15 months in the case of Senior Vice Presidents and 12 months in the case of Vice Presidents.  The vesting acceleration benefit will be the acceleration of equity awards that otherwise would have vested on the next scheduled vesting date after a participant’s termination date.  Finally, the plan administrator may, in its discretion, provide outplacement services for such duration as the plan administrator may determine.



As a condition of receiving any severance benefit under the MSC Executive Severance Plan, a participant will be required to execute and not revoke a severance and release agreement in favor of the company in such form and of such content as the plan administrator, in its sole discretion, may require.



Under the MSC Executive Severance Plan, no participant will be entitled to receive severance benefits in the event that the plan administrator determines, in its sole discretion, among other things, that at the time of the participant’s qualifying termination, we had cause to terminate the participant due to failure to meet our established performance criteria, the participant’s misconduct, or the participant’s violation of any applicable company policy. In addition, if a participant incurs a qualifying termination, and the plan administrator determines, in its sole discretion, that thereafter (i) the participant breached any provision(s) of his severance and release agreement, or (ii) the participant breached any provision(s) of any confidentiality, non-compete, non-solicitation, non-disparagement or other restrictive covenant or similar agreement with the company, any unpaid or unused severance benefits will be immediately forfeited, and the participant will be required to repay to us severance allowance amounts previously paid to such participant.



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Potential Payments Upon Termination or Change in Control Table as of August 30, 2019



The following table sets forth the estimated amounts that would be payable to each of our named executive officers upon the termination of his employment under certain circumstances or upon a change in control in limited circumstances, assuming that the termination of employment or change in control had occurred on August 30, 2019 (which was the last business day of fiscal year 2019) and based on the price per share of our Class A common stock on that date, which was $67.62.  The actual amounts payable can only be calculated at the time of the event.  None of the named executive officers would have been eligible for retirement under the terms of our equity grant agreements as of August 30, 2019.





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Indemnification Agreements; Directors and Officers Liability Insurance



We have entered into indemnification agreements with each of our directors and executive officers.  The indemnification agreements clarify and enhance the rights and obligations of the company and the indemnitee with respect to indemnification and advancement of expenses already provided for in our Certificate of Incorporation and Amended and Restated By-laws.  The indemnification agreements provide that we will indemnify the indemnitee to the fullest extent permitted by New York law against all indemnifiable losses relating to, resulting from or arising out of any threatened, pending or completed action, suit or proceeding, or any inquiry or investigation that the indemnitee in good faith believes might lead to the institution of any such action, suit or proceeding.  The indemnification agreements also provide for the advancement of expenses.  In addition, we have entered into indemnification agreements with certain of our officers who serve as members of the Administrative Committee of our 401(k) plan.  These indemnification agreements provide such officers with indemnification to the maximum extent permitted by law in connection with any actions or omissions such officers take or fail to take in their capacity as members of the Administrative Committee.



On May 12, 2019, we renewed our policies for directors and officers liability insurance.  The policies are issued by St. Paul Fire & Marine Ins. Co. (Travelers), Zurich American Insurance Co., Allied World Assurance Co., ACE American Insurance Co. (Chubb) and XL Specialty, Insurance Co.  The policies expire on May 12, 2020, and the total annual premium is approximately $391,678.  On May 12, 2019, we also renewed our fiduciary liability insurance policy, which covers directors and associates who serve as fiduciaries for our employee benefit plans.  The policy is issued by St. Paul Fire & Marine Ins. Co. (Travelers), expires on May 12, 2020, and the annual premium is approximately $15,516.

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CEO PAY RATIO



As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 402(u) of Regulation S-K, we are providing the following information about the relationship of the annual total compensation of our median associate and the annual total compensation of our Chief Executive Officer.



For fiscal year 2019:

Based on this information, the ratio of the annual total compensation of our Chief Executive Officer to the annual total compensation of our median associate for fiscal year 2019 was estimated to be 71:1.



As permitted under SEC rules, we are using the same median employee identified for purposes of our fiscal 2018 CEO pay ratio, as we believe there have been no changes in our employee population or compensation arrangements (including those of the median employee) that would result in a significant change to our pay ratio disclosure. To identify the median of the annual total compensation of all our associates for our fiscal 2018 CEO pay ratio, as well as to determine the annual total compensation of our median associate, the methodology and the material assumptions, adjustments, and estimates that we used were as follows:

Once we identified our median associate, we then determined our median associate’s annual total compensation for fiscal year 2019 in the same manner that we determine the annual total compensation of our named executive officers for purposes of the Summary Compensation Table appearing under “Executive Compensation.”  The annual total compensation of our median associate for fiscal year 2019 was determined to be $54,425, which was then compared to the annual total compensation of our Chief Executive Officer, as reported in the Summary Compensation Table appearing under “Executive Compensation.”

The SEC’s rules for identifying the median compensated employee and calculating the pay ratio based on that employee’s annual total compensation allow companies to adopt a variety of methodologies, to apply certain exclusions, and to make reasonable estimates and assumptions that reflect their employee populations and compensation practices.  Accordingly, the pay ratio reported by other companies may not be comparable to the pay ratio reported above, as other companies have different employee populations and compensation practices and may use different methodologies, exclusions, estimates and assumptions in calculating their own pay ratios.



We believe this pay ratio is a reasonable estimate calculated in a manner consistent with applicable rules of the SEC.  This information is being provided for compliance purposes.  Neither the Compensation Committee nor management of the company used the pay ratio measure in making compensation decisions for fiscal year 2019.



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APPROVAL, ON AN ADVISORY BASIS, OF THE COMPENSATION OF NAMED EXECUTIVE OFFICERS (PROPOSAL NO. 3)



The Dodd-Frank Wall Street Reform and Consumer Protection Act requires that we provide our shareholders with the opportunity to vote to approve, on a non-binding, advisory basis, the compensation of our named executive officers as disclosed in this proxy statement in accordance with the compensation disclosure rules of the SEC.



As described in greater detail in the section entitled “Compensation Discussion and Analysis,” our key compensation goals are to: create a performance driven culture based on personal accountability by linking rewards to company and individual performance; provide a market competitive compensation opportunity to enable the company to attract, retain and motivate highly talented associates; and recruit, retain and motivate highly talented executives, align our executives’ interests with those of our shareholders and provide performance-based compensation that appropriately rewards our executives.  Our compensation programs include a number of key features designed to accomplish these objectives.



Our Board urges our shareholders to read the section entitled “Compensation Discussion and Analysis,” which describes in detail how our executive compensation practices operate and are designed to achieve our key compensation goals, as well as the Summary Compensation Table and other related compensation tables and narrative discussion appearing under “Executive Compensation,” which provide detailed information about the compensation of our named executive officers.  Based on company and individual performance, the Compensation Committee believes that compensation levels for fiscal year 2019 were appropriate and consistent with the philosophy and objectives of the company’s compensation programs.



This vote is advisory, which means that this vote on executive compensation is not binding on the company, our Board or our Compensation Committee.  The vote on this resolution is not intended to address any specific element of compensation, but rather relates to the overall compensation of our named executive officers, as disclosed in this proxy statement in accordance with the compensation disclosure rules of the SEC.  To the extent there is any significant vote against our named executive officers’ compensation as disclosed in this proxy statement, our Compensation Committee will consider our shareholders’ concerns and evaluate whether any actions are necessary to address those concerns.



The affirmative vote of a majority of the votes cast in person or by proxy at the annual meeting is required to approve, on an advisory basis, the compensation of our named executive officers as disclosed in this proxy statement.



Accordingly, we ask our shareholders to vote on the following resolution at our 2020 annual meeting of shareholders:



“RESOLVED, that the Company’s shareholders hereby approve, on an advisory basis, the compensation of the Named Executive Officers, as disclosed in the Company’s Proxy Statement for the 2020 Annual Meeting of Shareholders pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, the Summary Compensation Table and the other related tables and disclosure.”



As previously disclosed, we plan to hold the “say on pay” advisory vote on an annual basis.  The next shareholder advisory vote on executive compensation will occur at our 2021 annual meeting of shareholders.



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EQUITY COMPENSATION PLAN INFORMATION



Information for our equity compensation plans in effect as of August 31, 2019 is as follows:

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



The information set forth in the following tables is furnished as of October 31, 2019, except as otherwise noted, regarding the beneficial ownership of our Class A common stock and our Class B common stock by:



 

Beneficial ownership is determined in accordance with the rules of the SEC that deem shares to be beneficially owned by any person who has or shares voting or investment power with respect to such shares.  Shares of Class A common stock subject to options that are exercisable as of October 31, 2019 or are exercisable within 60 days of October 31, 2019 are deemed to be outstanding and to be beneficially owned by the person holding such options for the purpose of calculating the percentage ownership of such person but are not treated as outstanding for the purpose of calculating the percentage ownership of any other person.  In addition, since all of the shares of Class B common stock are convertible at the option of the holder into Class A common stock on a share-for-share basis, the beneficial owner of shares of Class B common stock is deemed to be a beneficial owner of the same number of shares of Class A common stock.  In indicating below the amount and nature of a person’s beneficial ownership of Class A common stock and the percentage of the class owned by such person, it has been assumed that such person has converted into Class A common stock all shares of Class B common stock of which such person is a beneficial owner.  Furthermore, such shares of Class A common stock are deemed outstanding for the purpose of calculating the percentage ownership of such person, but are not treated as outstanding for the purpose of calculating the percentage ownership of any other person.



In the tables below, percentage ownership is based on 45,142,992 shares of our Class A common stock and 10,193,348 shares of our Class B common stock outstanding as of October 31, 2019.  Except as otherwise indicated, the persons listed in the tables below have advised us that they have sole voting and investment power with respect to the shares listed as owned by them.



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Security Ownership of Certain Beneficial Owners





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Security Ownership of Management



The address of each individual named below is as follows: c/o MSC Industrial Direct Co., Inc., 75 Maxess Road, Melville, New York 11747.  All fractional shares reported in the table below have been rounded to the nearest whole share.







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*Less than 1%

   

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SHAREHOLDER PROPOSALS FOR NEXT ANNUAL MEETING



Proposals of shareholders submitted under SEC Rule 14a-8 and intended for inclusion in our proxy statement for our 2021 annual meeting of shareholders must be received by us no later than August 21, 2020.  Any such shareholder proposals may be included in our proxy statement for our 2021 annual meeting of shareholders so long as they are provided to us on a timely basis and satisfy the other conditions set forth in the applicable rules and regulations of the SEC.  For shareholder proposals submitted outside the processes of SEC Rule 14a-8 which are not included in our proxy statement and which may properly be presented for consideration at our 2021 annual meeting of shareholders, and in accordance with SEC Rule 14a-4(c), the proxy or proxies designated by us will have discretionary authority to vote on any such matter unless notice of the matter is received by us not later than November 4, 2020.  Shareholder proposals should be directed to our Corporate Secretary at MSC Industrial Direct Co., Inc., 75 Maxess Road, Melville, New York 11747.





INFORMATION ABOUT THE MEETING



When and where is the annual meeting?



Our 2020 annual meeting of shareholders will be held at the Hilton Long Island/Huntington, 598 Broad Hollow Road, Melville, New York 11747, on January 29, 2020 at 9:00 a.m., local time.



What am I voting on?



You are voting on the following proposals:



What are the voting recommendations of the Board of Directors?



Our Board recommends that you vote “FOR” each of the director nominees, “FOR” the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for fiscal year 2020 and “FOR” the approval, on an advisory basis, of the compensation of our named executive officers as disclosed in this proxy statement.



Who is entitled to vote?



Only shareholders of record of our Class A common stock and our Class B common stock at the close of business on December 11, 2019, the record date, are eligible to vote at the annual meeting. On that date, we had outstanding 45,195,351 shares of our Class A common stock and 10,193,348 shares of our Class B common stock.



What is a shareholder of record?



You are a shareholder of record if you are registered as a shareholder with our transfer agent, Computershare Trust Company, N.A.



What is a beneficial shareholder?



You are a beneficial shareholder if a brokerage firm, bank, trustee or other agent holds your shares in their name for your benefit.  This form of ownership is often called ownership in “street name,” since your name does not appear in our records.  If you are a beneficial shareholder, you may vote by following the voting instructions provided by your broker, bank, trustee or other nominee included with your proxy materials or with the instructions on how to access the proxy materials electronically.

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What is a broker non-vote?



If you hold shares beneficially in street name and do not provide your broker, bank or other agent with voting instructions, your shares could constitute “broker non-votes.”  Generally, broker non-votes occur on a matter when a broker is not permitted to vote on that matter without instructions from the beneficial owner and the beneficial owner does not provide instructions.



If you are a beneficial owner whose shares are held in the name of a broker, and you do not provide your broker with voting instructions, the broker has the authority to vote your shares for or against certain “routine” matters.  The proposal to ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for fiscal year 2020 is the only routine matter being considered at the 2020 annual meeting.



We encourage you to provide instructions to your broker or other nominee so that your shares may be voted.  If you do not provide instructions to your broker or other nominee, your shares will not be voted in the director elections or on the advisory vote on executive compensation.



What is a quorum?



A quorum is the minimum number of shares required to hold a shareholders meeting.  Under New York law and our By-Laws, the presence in person or by proxy of the holders of a majority of the total shares of our Class A common stock and our Class B common stock that are entitled to vote is necessary to constitute a quorum at the annual meeting.



What is the vote required for each proposal?



The election of each nominee for director requires the affirmative vote of a plurality of the votes cast in person or by proxy at the annual meeting.  The approval of the proposal to ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for fiscal year 2020 and the approval, on an advisory basis, of the compensation of our named executive officers as disclosed in this proxy statement each requires the affirmative vote of a majority of the votes cast in person or by proxy at the annual meeting. Abstentions will not affect the outcome of any matter being voted on at the meeting, assuming that a quorum is obtained. Broker non-votes are not counted for any purpose in determining whether a matter has been approved, but, along with abstentions, are considered present and entitled to vote for purposes of determining a quorum.



On all matters to be voted upon at the annual meeting and any adjournments or postponements thereof, the record holders of our Class A common stock and our Class B common stock vote together as a single class, with each holder of Class A common stock entitled to one vote per share of Class A common stock and each holder of Class B common stock entitled to ten votes per share of Class B common stock.



How do I vote?



If you are a shareholder of record, you may vote in person at the 2020 annual meeting, on the Internet, by telephone or by signing, dating and mailing your proxy card.  Detailed instructions for Internet voting are provided in the Notice of Internet Availability and instructions for Internet voting and telephone voting are provided in the printed proxy card.  If you are a beneficial shareholder, you must follow the voting procedures provided by your broker, bank, trustee or other nominee included with your proxy materials or with the instructions on how to access the proxy materials electronically.



If you are a record holder and you sign your proxy card without giving specific instructions, your shares will be voted in accordance with the recommendations of our Board (“FOR” all eight of our nominees to the Board, “FOR” the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for fiscal year 2020 and “FOR” the approval, on an advisory basis, of the compensation of our named executive officers as disclosed in this proxy statement).



If your shares are held in the MSC Industrial Direct 401(k) Plan, the enclosed proxy will serve as a voting instruction card for the trustee of the MSC Industrial Direct 401(k) Plan, T. Rowe Price Trust Company, who will vote all shares of Class A common stock of the company allocated to your 401(k) account in accordance with your instructions.  If the voting instruction card is returned without choices marked, and if not otherwise directed, the shares in your 401(k) account that are represented by the voting instruction card will not be voted.



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What will happen if another matter properly comes before the annual meeting?



Our Board does not intend to bring any matter before the annual meeting except as specifically indicated in the accompanying notice and these proxy materials, nor does our Board know of any matters that anyone else proposes to present for action at the annual meeting.  However, if any other matters are properly presented at the meeting for a vote, the enclosed proxy card confers discretionary authority to the individuals named as proxies to vote the shares represented by proxy as to those matters.



If I plan to attend the annual meeting, should I still vote by proxy?



All shareholders are cordially invited to attend the annual meeting.  However, to assure your representation at the annual meeting, we urge you to vote your shares as promptly as possible either by Internet, by telephone or by completing, signing and dating a printed proxy card and returning it in the postage-paid envelope provided.  Any shareholder attending the annual meeting may vote in person, even if he or she has already voted or returned a proxy card.

If you vote by Internet, telephone or proxy and also attend the meeting, you do not need to vote again at the meeting, unless you want to change your vote.  Written ballots will be available at the meeting for shareholders of record.  Beneficial shareholders who wish to vote in person at the meeting must request a proxy from their broker or other nominee and bring that proxy to the annual meeting.



Who pays the cost for the solicitation of proxies?



We will pay any expenses for the solicitation of proxies for the annual meeting.  Such solicitation may be made in person or by telephone by officers and associates of the company.  Upon request, we will reimburse brokers, dealers, banks and trustees, or their nominees, for reasonable expenses that they incur in forwarding material to the beneficial owners of shares of our Class A common stock.



How do I change my vote?



Shareholders of record may revoke their proxies and change their vote by giving written notice of revocation to our Corporate Secretary before the annual meeting, by delivering later-dated proxies (either in writing, by telephone or over the Internet), or by voting in person at the meeting.  Beneficial shareholders may change their vote by following the instructions of their broker, bank, trustee or other nominee.



How may I obtain a separate set of proxy materials or request a single set for my household?



For registered shareholders who receive paper copies of this proxy statement, copies of our 2019 annual report to shareholders are being mailed simultaneously with this proxy statement.  All other registered shareholders will receive a Notice of Internet Availability of Proxy Materials containing instructions on how to access our proxy materials and annual report online and how to request paper copies of our proxy materials and annual report.  If you are a registered shareholder and want to save us the cost of mailing more than one copy of our proxy materials and annual report or Notice of Internet Availability of Proxy Materials, as applicable, to the same address, we will discontinue, at your request to the Corporate Secretary of the company, mailing the duplicate copy to the account or accounts you select.  Beneficial owners sharing an address who are receiving multiple copies of proxy materials and annual reports or Notice of Internet Availability of Proxy Materials, as applicable, and who wish to receive a single copy of such materials in the future, will need to contact their broker, bank or other nominee to request that only a single copy of each document be mailed to all shareholders at the shared address.



If you are the beneficial owner, but not the record holder, of shares of our Class A common stock, your broker, bank or other nominee may deliver only one copy of this proxy statement and our 2019 annual report or instructions on how to access the proxy materials electronically, as applicable, to multiple shareholders who share an address, unless that nominee has received contrary instructions from one or more of the shareholders.  If you are a beneficial holder and wish to receive multiple copies of such materials in the future, you will need to contact your broker, bank or other nominee to request multiple copies.



We will deliver promptly, upon written or oral request, a separate copy of this proxy statement and our 2019 annual report or Notice of Internet Availability of Proxy Materials, as applicable, to any registered shareholder at a shared address to which a single copy of the document or documents was delivered.  A registered shareholder who wishes to receive a separate copy of the proxy statement and annual report or Notice of Internet Availability of Proxy Materials, as applicable, now or in the future, should submit this request by writing to Corporate Secretary, MSC Industrial Direct Co., Inc., 75 Maxess Road, Melville, New York 11747, or calling (516) 812-2000.



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What is the address of your principal executive office?



The mailing address of our principal executive office is 75 Maxess Road, Melville, New York 11747.  We also maintain a co-located headquarters at 525 Harbour Place Drive, Davidson, North Carolina 28036.





OTHER MATTERS



We will provide to each shareholder, without charge and upon written request, a copy of our Annual Report on Form 10-K for the fiscal year ended August 31, 2019 and any exhibit thereto.  Any such written request should be directed to the office of our Chief Financial Officer, c/o MSC Industrial Direct Co., Inc., 75 Maxess Road, Melville, New York 11747.



Note Regarding Forward-Looking Statements



Statements in this document may constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995.  All statements, other than statements of historical fact, that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the expectations expressed by these forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The inclusion of any statement in this document does not constitute an admission by MSC or any other person that the events or circumstances described in such statement are material. Factors that could cause actual results to differ materially from those in forward-looking statements include: general economic conditions in the markets in which we operate; changing customer and product mixes; competition, including the adoption by competitors of aggressive pricing strategies and sales methods; industry consolidation and other changes in the industrial distribution sector; volatility in commodity and energy prices; the outcome of government or regulatory proceedings or future litigation; credit risk of our customers; risk of customer cancellation or rescheduling of orders; work stoppages or other business interruptions (including those due to extreme weather conditions) at transportation centers, shipping ports, our headquarters or our customer fulfillment centers; dependence on our information systems and the risks of business disruptions arising from changes to our information systems and disruptions due to catastrophic events, power outages, natural disasters, computer system or network failures, computer viruses, physical or electronic break-ins and cyber-attacks; retention of key personnel; retention of qualified sales and customer service personnel and metalworking specialists; risk of loss of key suppliers, key brands or supply chain disruptions; risks associated with changes to trade policies, including the impact from significant restrictions or tariffs; risks associated with opening or expanding our customer fulfillment centers; litigation risk due to the nature of our business; risks associated with the integration of acquired businesses or other strategic transactions; financial restrictions on outstanding borrowings; failure to comply with applicable environmental, health and safety laws and regulations; goodwill and intangible assets recorded as a result of our acquisitions could be impaired; risks associated with the volatility of our common stock; and our principal shareholders exercise significant control over us. Additional information concerning these and other risks is described under "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the reports on Forms 10-K and 10-Q that we file with the SEC. We assume no obligation to update any of these forward-looking statements

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It is important that your shares be represented at the meeting, regardless of the number of shares which you hold.  If you are a registered shareholder, we urge you to vote promptly by Internet, by telephone or by dating, signing and mailing a printed proxy card.  If you are a beneficial shareholder, we urge you to vote promptly by following the instructions provided by your broker, bank, trustee or other nominee.