UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.     )

Filed by the Registrant  ☒                             Filed by a Party other than the Registrant  ☐

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Illinois Tool Works Inc. Notice of 2019 Annual Meeting And Proxy Statement

Illinois Tool Works Inc. ITW Notice of 2018 Annual Meeting And Proxy Statement

Illinois Tool Works Inc.

Notice of Annual Meeting of Stockholders

RECORD DATE

Only stockholders of record at the close of business on March 4, 2019 are entitled to vote.

ANNUAL REPORT

Our Annual Report to stockholders for fiscal year 2018 is enclosed if you received proxy materials by mail and is accessible on the Internet at www.proxyvote.com if you received the Notice of Internet Availability of Proxy Materials or previously consented to electronic delivery of proxy materials.

March 22, 2019

If you plan to attend the meeting, you must be a holder of Illinois Tool Works Inc. shares as of the record date of March 4, 2019, and obtain a registration confirmation (“Ticket”) in advance. Tickets can be printed by accessing Shareholder Meeting Registration at www.proxyvote.com and following the instructions provided. You will need the 16-digit control number that is printed in the box marked by the arrow à included on your proxy card or Notice of Internet Availability of Proxy Materials. Tickets will be available to registered and beneficial owners and to one guest accompanying each registered and beneficial owner. You must bring your ticket to the meeting to gain access. Requests for admission tickets will be processed in the order in which they are received. Please note that seating is limited and requests for tickets will be accepted on a first-come, first-served basis.

*Enter the campus from 150 Waukegan Road at Overlook Drive. Signage will direct you to the meeting location.

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD MAY 3, 2019: The Illinois Tool Works Inc. 2018 Annual Report to Stockholders, including the Annual Report on Form 10-K, and this 2019 Proxy Statement are available on the Company’s website at www.itw.com under the “Investor Relations” link. Paper copies are available without charge upon written request to the Company’s address above, Attention: Secretary.

Table of Contents

Corporate Governance Highlights

Board Composition

Governance Profile

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Director Nominees

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Proposal 1 - Election of Directors

Stockholders are being asked to elect the eleven directors named in this proxy statement at our Annual Meeting. The individuals listed below have been nominated by the Board of Directors as recommended by the Corporate Governance and Nominating Committee. See “Corporate Governance Policies and Practices” for more information regarding our candidate selection process. Each director will serve until the May 2020 Annual Meeting, until a qualified successor director has been elected, or until he or she resigns or is removed.

We will vote your shares as you specify on the proxy card, by telephone, by Internet or by mail. If you do not specify how you want your shares voted, we will vote them “FOR” the election of all the nominees listed below. If unforeseen circumstances (such as death or disability) make it necessary for the Board of Directors to substitute another person for any of the nominees, we will vote your shares “FOR” that other person. The Board of Directors does not anticipate that any nominee will be unable to serve.

Each nominee for director brings a strong and unique background and set of skills to the Board, giving the Board as a whole competence and experience in a variety of areas. Set forth below is biographical information provided by the nominees, as well as a description of the experiences, qualifications, skills and attributes that led the Corporate Governance and Nominating Committee and the Board to conclude that each nominee should serve as a director of the Company.

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Susan Crown   Executive Committee Chair   Chairman & CEO of Owl Creek Partners, LLC   Director since: 1994   Age: 60		Ms. Crown has served as Chairman and CEO of Owl Creek Partners, LLC, a private equity firm, since 2008. She is also the founder of Susan Crown Exchange Inc., a social investment organization. She served two terms as a Fellow of the Yale Corporation, and is currently Chairman of Rush University Medical Center and a director of The Brookings Institution as well as several other civic and not-for-profit organizations. From 1984 to 2015, Ms. Crown served as Vice President of Henry Crown and Company, a business with diversified investments. She has served as a director of ITW since 1994 and currently serves as a director of Northern Trust Corporation. She has not served as a director of any other publicly traded company in the last five years. Ms. Crown’s experience includes executive experience in diversified manufacturing, management, strategy, and real estate.   Skills and Qualifications:   Ms. Crown’s long-standing board service at a global banking and financial institution and her extensive board service with many civic and not-for-profit organizations bring valuable perspectives to our Board.
James W. Griffith   Retired President & Chief Executive Officer of The Timken Company   Director since: 2012   Age: 65		Mr. Griffith retired as President and Chief Executive Officer of The Timken Company, a manufacturer of bearings, alloy and specialty steels and components, having served in that capacity from 2002 to 2014. From 1999 to 2002 he served as Timken’s President and Chief Operating Officer. Mr. Griffith joined Timken in 1984 and held positions in various functional areas of Timken with increasing levels of responsibility, including purchasing and logistics, manufacturing and international operations. From 1996 to 1999, he led Timken’s automotive business in North America and Timken’s bearing business activities in Asia and Latin America. Mr. Griffith is currently a director of AB Volvo, a commercial transport solutions company, and has served as a director of ITW since 2012. He previously served as a director of The Timken Company and Goodrich Corporation. He has not served as a director of any other publicly traded company in the last five years. He also previously served as a director of the US China Business Council and a number of other industry and not-for-profit organization boards.   Skills and Qualifications:   Mr. Griffith’s extensive experience as Chief Executive Officer of a global industrial manufacturer, along with his international business and engineering experience, bring valuable perspectives to our Board.

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Jay L. Henderson   Retired Vice Chairman, Client Service PricewaterhouseCoopers LLP   Director since: 2016   Age: 63		Mr. Henderson retired as Vice Chairman, Client Service of PricewaterhouseCoopers LLP (“PwC”), a global professional services firm, in June 2016, having served in that capacity since 2007. He also served as PwC’s Greater Chicago Market Managing Partner from 2003 to 2013 and, prior thereto, Managing Partner of the Cleveland Office. During his career at PwC, Mr. Henderson gained significant broad-based experience working with boards and audit committees of Fortune 500 global organizations across multiple markets and industry sectors. Mr. Henderson has been a Certified Public Accountant since 1977. He has served as a director of ITW since 2016 and currently serves as a director of The J.M. Smucker Company, where he serves as the Chairman of the Audit Committee, and Northern Trust Corporation, where he serves on the Audit Committee, Capital Governance Committee and previously on the Business Risk Committee. He has not served as a director of any other publicly traded company in the last five years. Mr. Henderson also has significant expertise as a participating board member of a number of professional, civic and not-for-profit organizations.   Skills and Qualifications:   Mr. Henderson’s extensive experience in managing and overseeing businesses, working with the boards and audit committees of large public companies, as well as his leadership roles at a major professional services firm and experience with risk oversight, bring valuable perspectives to our Board.
Richard H. Lenny   Compensation Committee Chair   Non-Executive Chairman of Conagra Brands, Inc.   Director since: 2014   Age: 67		Mr. Lenny has served as non-executive Chairman of Conagra Brands, Inc. since May 2018. Previously, he served as Chairman of Information Resources, Inc., a privately held producer of market and shopper information, from 2013 to 2018 and senior advisor of Friedman Fleischer & Lowe LLC, a private equity firm, from 2014 to 2016, after serving as an operating partner of that firm. From 2001 through 2007 he served as Chairman, President and Chief Executive Officer of The Hershey Company, a manufacturer, distributor and marketer of candy, snacks and candy-related grocery products. Prior thereto, he served as President, Nabisco Biscuit Company, and President of Pillsbury, North America. He has served as a director of ITW since 2014 and currently serves as a director of Conagra Brands, Inc. and McDonald’s Corporation, and previously served as a director of Discover Financial Services. He has not served as a director of any other publicly traded company in the last five years.   Skills and Qualifications:   Mr. Lenny’s experience as Chief Executive Officer of a global Fortune 500 company and diverse board experience bring valuable perspectives to our Board.

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E. Scott Santi   Chairman & CEO of Illinois Tool Works Inc.   Director since: 2012   Age: 57		Mr. Santi has served as Chairman of ITW since May 2015 and as Chief Executive Officer since November 2012. He served as President and Chief Executive Officer of ITW from November 2012 to May 2015 and as President and Chief Operating Officer from October to November 2012. Prior thereto, he served as Vice Chairman from December 2008 to October 2012 and Executive Vice President from October 2004 to December 2008. Mr. Santi also serves on the boards of numerous civic and not-for-profit organizations. He has served as a director of ITW since November 2012 and currently serves as a director of W.W. Grainger, Inc. He has not served as a director of any other publicly traded company in the last five years.   Skills and Qualifications:   Mr. Santi’s deep understanding of the Company’s business operations, operating philosophy and culture, his expertise in the application of ITW’s business model, as well as his demonstrated success and proven quality of leadership, bring indispensable perspectives to our Board and strong leadership as Chairman.
James A. Skinner   Independent Lead Director and Corporate Governance & Nominating Committee Chair   Retired Vice Chairman And Chief Executive Officer of McDonald’s Corporation   Director since: 2005   Age: 74		Mr. Skinner retired as Vice Chairman and Chief Executive Officer of McDonald’s Corporation, a global restaurant chain, having served in those positions from 2004 to June 2012. Previously, Mr. Skinner served as Vice Chairman; as President and Chief Operating Officer of McDonalds’ Restaurant Group; as President and Chief Operating Officer of McDonald’s-Europe, Asia/Pacific, Middle East and Africa; and as President of McDonald’s-Europe. Mr. Skinner is currently the Executive Chairman of the Board of Walgreens Boots Alliance, Inc. and previously served as a director of Hewlett-Packard Company and McDonald’s Corporation. He has served as a director of ITW since 2005 and currently serves as our Independent Lead Director. He has not served as a director of any other publicly traded company in the last five years.   Skills and Qualifications:   Mr. Skinner’s extensive experience as Chief Executive Officer of a major global corporation and diverse board experience bring valuable perspectives to our Board.

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David B. Smith, Jr.   Finance Committee Chair   Executive Vice President for Policy & Legal Affairs and General Counsel of Mutual Fund Directors Forum   Director since: 2009   Age: 52		Mr. Smith has served as Executive Vice President for Policy & Legal Affairs and General Counsel of Mutual Fund Directors Forum, a not-for-profit membership organization for independent investment company directors and an advocate on important policy matters, since 2005. From 1996 to 2005, Mr. Smith held several positions with increasing levels of responsibility at the Securities and Exchange Commission, serving as Associate Director, Division of Investment Management, from 2001 to 2005. He has served as a director of ITW since 2009 and currently serves as a director of Northern Trust Corporation, where he serves as the Chairman of the Audit Committee. He has not served as a director of any other publicly traded company in the last five years. Mr. Smith is a nephew of Mr. Harold B. Smith, an emeritus director of ITW.   Skills and Qualifications:   Mr. Smith’s extensive leadership experience in the finance industry and executive experience with a mutual fund industry organization, along with his legal and regulatory experience, bring valuable perspectives to our Board.
Pamela B. Strobel   Audit Committee Chair   Retired Executive Vice President and Chief Administrative Officer of Exelon Corporation and President of Exelon Business Services Company   Director since: 2008   Age: 66		Ms. Strobel retired as Executive Vice President and Chief Administrative Officer of Exelon Corporation and President of Exelon Business Services Company, an electric and gas utility company, in October 2005, a position she had held since 2003, previously serving as Chairman and Chief Executive Officer of Exelon Energy Delivery from 2000 to 2003. Prior thereto, she served as Executive Vice President of Unicom and its chief subsidiary, ComEd, having joined ComEd as General Counsel in 1993, where her experience included supervision and oversight of legal matters and risk management. Ms. Strobel has served as a director of ITW since 2008 and is currently a director of Domtar Corporation and State Farm Mutual Automobile Insurance Company. She has not served as a director of a publicly traded company other than Domtar and ITW in the last five years.   Skills and Qualifications:   Ms. Strobel’s executive and legal experience with a leading energy provider, experience with risk oversight and other board experience bring valuable perspectives to our Board.

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Kevin M. Warren   Chief Marketing Officer of UPS International   Director since: 2010   Age: 56		Mr. Warren has been Chief Marketing Officer, UPS International, a global package delivery, supply chain management and freight forwarding company, since June 2018. Prior to joining UPS International, he served as the Executive Vice President & Chief Commercial Officer of Xerox Corporation, a global business services, technology and document management company, from January 2017 to May 2018. Mr. Warren had over 34 years of experience at Xerox Corporation, serving in various areas with increasing levels of responsibility, including as President, Commercial Business Group; President, Industrial, Retail and Hospitality Business Group; President of Strategic Growth Initiatives; President, U.S. Client Operations; Chairman, President and Chief Executive Officer of Xerox Canada; Senior Vice President, Acquisition Transition Office; and Senior Vice President, U.S. Eastern Sales, U.S. Solutions Group. He also serves as a director of a number of professional, civic and not-for-profit organizations. Mr. Warren has served as a director of ITW since 2010 and has not served as a director of any other publicly traded company in the last five years.   Skills and Qualifications:   Mr. Warren’s significant strategic and operational leadership experience with a major global company, along with his significant international experience and commercial acumen, bring valuable perspectives to our Board.
Anré D. Williams   Group President, Global Merchant & Network Services of American Express Company   Director since: 2010   Age: 53		Mr. Williams has been Group President, Global Merchant & Network Services, of American Express Company, a global services company, since February 2018 and is a member of American Express’ Executive Committee, which is responsible for developing the company’s strategic direction and determining key policies. He was President, Global Merchant Services & Loyalty Group, from 2015 to 2018; and from 2011 to 2015 he was President, Global Merchant Services. Mr. Williams has over 28 years of experience at American Express, serving in various capacities with increasing levels of responsibility, including President, Global Commercial Card; Executive Vice President, U.S. Commercial Card; Senior Vice President, U.S. Middle Market; Vice President and General Manager, Western Region, Corporate Services, and Vice President, Acquisition and Advertising. Mr. Williams has served as a director of ITW since 2010 and is a former director of Ryerson Inc. Mr. Williams has not served as a director of any other publicly traded company in the last five years.   Skills and Qualifications:   Mr. Williams’ significant strategic and operational leadership experience with a major global financial services company, along with his global business experience, bring valuable perspectives to our Board.

The Board of Directors recommends a vote “FOR” the election of all of the above nominees.

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Board of Directors and Its Committees

The Company’s Board of Directors met five times during 2018. In addition to these Board meetings, directors attended meetings of Board committees. Non-employee directors, all of whom are independent, met five times in regularly scheduled executive sessions in conjunction with regular Board meetings. The Company strongly encourages its directors to attend all Board and committee meetings and the Annual Meeting of Stockholders. In 2018, all of the directors attended 100% of the meetings of the Board and the committees on which they serve and the Annual Meeting of Stockholders. See “Corporate Governance Highlights — Director Nominees” for more information about meeting attendance.

Role of Chairman and CEO

Pursuant to the Company’s Corporate Governance Guidelines, the Board examines whether the role of chairman and chief executive officer should be combined each time the Board elects a new CEO, and may determine to separate or combine the offices of chairman and CEO at such other times as it deems appropriate. E. Scott Santi was elected President and CEO in November 2012, and the Board decided to separate the roles of CEO and Chairman at that time. Given Mr. Santi’s successful transition into the CEO role and his deep knowledge and understanding of the Company’s business model, operations and culture, the Board determined that he is best positioned to lead the Board in its ongoing oversight of the Company’s operations and strategy. In May 2015, the Board elected Mr. Santi Chairman of the Board and CEO. The Board continues to believe that Mr. Santi is best positioned to lead the Board, given his demonstrated success and quality of leadership.

Strong Independent Lead Director

Since the roles of Chairman and CEO were combined in 2015, the Board has elected a strong independent director as Lead Director. James A. Skinner has served as the independent Lead Director of the Board since May 2017. The Board believes that this structure, which calls for a strong, independent and highly experienced lead director with well-defined responsibilities, along with the Company’s experienced and engaged independent directors, provides effective oversight of the Company’s management. In conjunction with the Board’s role in overall strategy and succession planning as described below, our lead director actively engages with our Chairman/CEO on such matters. In addition, the Corporate Governance Guidelines state that the lead director will:

The Board of Directors has standing audit, compensation, corporate governance and nominating, finance, and executive committees. Under the terms of the respective charters, each member of the audit, compensation, and corporate governance and nominating committees must meet applicable New York Stock Exchange (“NYSE”) and Securities and Exchange Commission (“SEC”) independence requirements.

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Board’s Role in Company Strategy and Executive Succession Planning

The Board has an active role in the Company’s overall strategies. Each year, the Board conducts a comprehensive, in-depth review of the Company’s long-term strategy and annual operating plan and actively monitors and reviews management’s progress in executing both throughout the year. The Board also conducts an annual review of the Company’s corporate governance practices. In addition, throughout the year the Board conducts individual segment strategy reviews with segment leadership. The Board also periodically reviews the Company’s Corporate Social Responsibility (CSR) strategy.

The Board recognizes that one of its most important duties is to ensure continuity in the Company’s senior leadership by overseeing the development of executive talent and planning for the effective succession of the Company’s CEO and the executive leadership team. In order to ensure that the succession planning and leadership development process supports and enhances ITW’s strategic objectives, the Board regularly consults with the CEO on the Company’s organizational needs, its leadership pipeline and the succession plans for critical leadership positions. On an annual basis, the Board also conducts a detailed review of executive succession plans, in addition to addressing the Company’s talent management initiatives and discussing individuals who are considered potential future senior executives of the Company. Similarly, leadership development, including succession planning, is a top priority of the CEO and the senior executive team.

Board’s Role in Risk Oversight

The Board of Directors is responsible for the overall risk oversight of the Company. The Board has delegated to the Audit Committee the responsibility to review and evaluate the Company’s overall financial and compliance risk policies and practices, including certain environmental, safety and health matters and related policies, has delegated to the Finance Committee the responsibility for the review and evaluation of risks relating to financings, capital structure and other treasury functions, and has delegated to the Compensation Committee the responsibility for the review and evaluation of risks arising from the Company’s compensation policies and practices. The Compensation Committee also advises management on whether the Company’s compensation policies and practices may have a material adverse effect on the Company.

The Company has identified key business risks of the Company, including, but not limited to, legal/compliance/reputation, controllership/tax, key leader continuity/succession, supply chain integrity/continuity, data security risks and risk of recession and significant external events. The Board has a formal process for continuous review of such risks. Certain risks are reviewed and discussed at least annually, while others are considered on a rotating basis. Company management routinely presents on these risks at meetings of the Company’s Board and Board committees, providing them with an opportunity to discuss the risks and the Company’s risk mitigation processes.

In instances where a particular committee reviews certain risks, that committee reports on those risks to the full Board on a regular basis. The Company believes that because each of these committees is comprised solely of independent directors, the Chairman and CEO of the Company is subject to the risk oversight of independent directors.

The committee descriptions below provide more detail regarding the risk oversight delegated to each committee by the Board.

Audit Committee

The Audit Committee is responsible for the integrity of the Company’s financial statements, compliance with legal and regulatory requirements, the independence and performance of ITW’s independent registered public accounting firm, and the performance of the Company’s internal audit function. In addition, the Committee is responsible for the engagement of our independent registered public

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accounting firm and assists the Board with respect to matters involving and overseeing accounting, financial reporting and internal audit functions. In addition, as required by the Company’s Corporate Governance Guidelines and Audit Committee charter, the Audit Committee annually reviews legal affairs and environmental, safety and health matters that may have a material impact on the Company’s financial statements or the Company’s compliance policies. Finally, the Audit Committee, as requested by the Board of Directors, reviews and evaluates certain of our policies and practices with respect to risk assessment and risk management and steps taken by management to monitor and control such exposures. Additional information on the Audit Committee and its activities is set forth under “Audit Committee Report” below.

Compensation Committee

The Compensation Committee establishes and oversees the Company’s executive compensation philosophy, programs and policies, including ensuring that executive compensation is aligned with Company and individual performance. The Compensation Committee recommends to the other independent directors compensation for the chief executive officer, reviews and approves the chief executive officer’s recommendations regarding the compensation of our other executive officers, and makes recommendations regarding new incentive compensation and equity-based plans or amendments to any existing plans. The Compensation Committee also is responsible for reviewing and evaluating risks arising from our compensation policies and practices and providing input to management on whether such policies and practices may have a material adverse effect on the Company.

Under its charter, the Compensation Committee may retain an independent compensation consultant or other advisors. The Compensation Committee engaged Frederic W. Cook & Co., Inc. (“Cook”), an independent consultant, as its independent advisor to review the Company’s overall executive compensation program, review the peer group of companies used by the Compensation Committee for comparison purposes and assess our compensation governance process. Based on representations from Cook and executive officers and directors of the Company, the Compensation Committee has determined that Cook and its individual compensation advisor to the committee are independent. See “Compensation Discussion and Analysis — How We Make Compensation Decisions — Role of the Compensation Consultant.”

Additional information on the Compensation Committee, its activities, its relationship with its compensation consultant and the role of management in setting compensation is provided under “Compensation Discussion and Analysis” below.

Corporate Governance and Nominating Committee

The Corporate Governance and Nominating Committee identifies, evaluates and recommends director candidates; develops, administers and recommends corporate governance guidelines; oversees the evaluations of the performance and procedures of the Board and individual directors; makes recommendations as to Board committees and Board size; and makes a recommendation to the Board regarding the Board’s determination of director independence for the Board, the Audit Committee and the Compensation Committee. It is also responsible for identifying qualification criteria for Board members. This committee also oversees and makes recommendations to the independent directors regarding non-employee director compensation. See “Corporate Governance Policies and Practices — Director Candidate Selection Process” below for a description of the director selection process.

Finance Committee

The Finance Committee reviews, evaluates and recommends management’s proposals to the Board relating to the Company’s financings and dividend policy, and reviews and evaluates an annual summary of the funding and investment status of significant benefit plans sponsored by the Company

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globally. The Finance Committee also periodically reviews and evaluates the Company’s capital structure and capital allocation strategy as well as risks arising from the Company’s treasury function.

Executive Committee

The Executive Committee may act on behalf of the Board if a matter requires Board action between meetings of the full Board. The Executive Committee’s authority in certain matters is limited by law and our by-laws.

Committee Memberships

The following table shows the current committee memberships and the number of meetings held by each committee during 2018.

Corporate Governance Policies and Practices

General

One of our core values is integrity, and we have long believed that good corporate governance is important to assure that the Company is managed for the long-term benefit of its stockholders. Accordingly, we continuously review our corporate governance policies and practices not only for compliance with applicable law, the rules and regulations of the SEC, and the listing standards of the NYSE, but also for good corporate governance and social responsibility principles and standards of behavior.

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The Audit, Compensation and Corporate Governance and Nominating Committees each review their Committee charters annually and recommend that the Board of Directors approve any changes. Our website includes the charters of these committees, the Company’s Corporate Governance Guidelines, the Statement of Principles of Conduct (our code of business conduct and ethics for directors, officers and employees), the Global Anti-Corruption Policy, the Code of Ethics for the Chief Executive Officer and key financial and accounting personnel, our Corporate Social Responsibility reports, Modern Slavery and Human Trafficking Statement, Conflict Minerals Policy, Supplier Code of Conduct and Supplier Expectations. In addition, we will promptly post any amendments to or waivers of the Code of Ethics on our website. You can find this and other corporate governance information at www.itw.com. We also will provide copies of this information upon request.

Board Independence

Our Corporate Governance and Nominating Committee conducts an annual review and makes a recommendation to the full Board as to whether each of our directors meets the applicable independence standards of the NYSE. In accordance with the NYSE listing standards, our Board of Directors has adopted categorical standards for director independence, including heightened standards applicable to members of our Audit and Compensation Committees. A copy of the Company’s Categorical Standards for Director Independence is attached as Appendix A. A director will not be

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considered independent unless the Board of Directors determines that the director has no material relationship with the Company (directly, or as a partner, stockholder or officer of an organization that has a material relationship with the Company).

The Board has determined that each of the current directors, except E. Scott Santi, has no material relationship with the Company other than as a director and is independent within the meaning of the Company’s Categorical Standards for Director Independence and the listing standards of the NYSE. In making its independence determinations, the Board of Directors has broadly considered all relevant facts and circumstances including that: (1) Ms. Crown and Messrs. Henderson and Smith serve as directors of Northern Trust Corporation and its subsidiary, The Northern Trust Company, with which the Company has a commercial banking relationship as described under “Certain Relationships and Related Party Transactions” below; (2) Messrs. Brutto, Griffith, Henderson, Lenny, Skinner and Ms. Strobel serve as directors of companies that have an existing customer or supplier relationship with the Company; (3) Mr. David B. Smith, Jr. is the nephew of Harold B. Smith, emeritus director of the Company; and (4) each of Messrs. Warren and Williams are officers of companies with which we conduct business. The Board has concluded that these relationships are not material and, therefore, do not impair the independence of these directors.

Board Evaluations

The Board of Directors and the Audit, Compensation, and Corporate Governance and Nominating Committees conduct annual self-evaluations that assess the effectiveness, processes, skills, functions and other matters relevant to the Board as a whole or to the particular committee. Results of the evaluations are summarized and discussed at Board and committee meetings. In addition, the Board conducts a peer review evaluation whereby each Board member evaluates the contributions of the other Board members, and each director receives a summary of the results of the peer review regarding himself or herself.

Director Qualifications and Succession Planning

The Corporate Governance and Nominating Committee periodically reviews the skills, experience and characteristics required of Board members in the context of the current make-up of the Board and screens and recommends nominees for director to the full Board. Its assessment includes the skills of Board candidates, such as an understanding of technologies pertinent to the Company’s businesses, manufacturing, marketing, finance, regulation and public policy, international background and experience, age, diversity and ability to provide strategic insight and direction on the Company’s key strategic initiatives. In addition to skills and experience, Board candidates are considered based upon various criteria, such as their personal integrity and judgment, global business and social perspective, and concern for the long-term interests of our stockholders. Although there is no specific policy regarding Board diversity, racial, ethnic and gender diversity are important factors considered in the director selection process. Of the eleven director nominees, two are female and two are African-American men. In addition, directors must have time available to devote to Board activities and to enhance their knowledge of the global manufacturing environment. Accordingly, we seek to attract and retain a diverse board composed of highly qualified directors who have sufficient time to attend to their duties and responsibilities to the Company. After receiving recommendations for nominations from the Corporate Governance and Nominating Committee, the Board nominates or elects candidates for director.

Pursuant to ITW’s Corporate Governance Guidelines, a director may not stand for re-election after his or her 75th birthday, except in rare circumstances approved by the Board. The Committee believes it is important to replace skills that would be lost as directors approach retirement age and to identify skills to supplement existing board experience. The Committee discusses with the full Board its analysis of the characteristics and key attributes for future Board candidates.

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Director Candidate Selection Process

The Corporate Governance and Nominating Committee, or other members of the Board of Directors, may identify a need to add new members to the Board of Directors with specific skills or to fill a vacancy on the Board. At that time, the Corporate Governance and Nominating Committee would initiate a search, seeking input from Board members and senior management and, to the extent it deems appropriate, engaging a search firm. An initial qualified candidate or a slate of qualified candidates would be identified and presented to the Committee for its evaluation and approval. The Committee would then seek full Board approval of the selected candidate(s).

Our by-laws permit any stockholder or group of up to 20 stockholders meeting our continuous ownership requirement of 3% or more of our common stock for at least 3 years to nominate a candidate or candidates for election and require us to include such nominees in our proxy statement and form of proxy. All such proxy access nominations must be accompanied by information about the nominating stockholders as well as the nominees and meet the requirements as specified in Article II, Section 12 of the Company’s by-laws. For a description of the process for submitting a director candidate through the use of proxy access, see “Other Information — Submitting Proxy Proposals and Director Nominations for the 2020 Annual Meeting — How do I use proxy access to nominate a director candidate to be included in ITW’s 2020 Proxy Statement?”

Our by-laws also permit stockholders to nominate directors for consideration at an annual meeting of stockholders without requiring that their nominees be included in our proxy statement and form of proxy. The policy of the Corporate Governance and Nominating Committee is to consider such nominations as are properly submitted pursuant to Article II, Section 10 of the Company’s by-laws. Assuming that a properly submitted stockholder recommendation for a director candidate has been received, the Corporate Governance and Nominating Committee will evaluate that candidate by following substantially the same process, and applying substantially the same criteria, as for candidates submitted by other sources, but the Committee has no obligation to recommend that candidate for nomination. For a description of the process for submitting a director candidate without proxy access, see “Other Information — Submitting Proxy Proposals and Director Nominations for the 2020 Annual Meeting — How do I nominate a director candidate who would not be included in ITW’s Proxy Statement?”

Director Election

Our by-laws provide for the election of directors in uncontested elections by majority vote. Under this majority vote standard, each director must be elected by a majority of the votes cast with respect to that director. For this purpose, a majority of the votes cast means that the number of shares voted “for” a director exceeds the number of shares voted “against” that director. In a contested election, directors will be elected by a plurality of the votes represented in person or by proxy at the meeting. An election is contested if the number of nominees exceeds the number of directors to be elected. Whether an election is contested or not is determined ten days in advance of when we file our definitive proxy statement with the SEC. This year’s election is uncontested, and the majority vote standard will apply.

If a nominee who is serving as a director is not elected at an annual meeting, Delaware law provides that the director would continue to serve on the Board as a “holdover director” until his or her successor is elected. Our Corporate Governance Guidelines, however, require any nominee for director who fails to receive a majority of the votes cast for his or her election to tender his or her resignation. The Corporate Governance and Nominating Committee of the Board will consider the resignation and recommend to the Board whether to accept or reject it. In considering the resignation, the Committee will take into account such factors as any stated reasons why stockholders voted against the election of the director, the length of service and qualifications of the director, the director’s contributions to the Company, and our Corporate Governance Guidelines. The Board will consider the

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Committee’s recommendation, but no director who failed to receive a majority of the votes cast will participate. We will disclose the results of the Committee’s review within 90 days of such annual meeting. At our 2018 Annual Meeting, each director received a majority of the votes cast for his or her election.

Shareholder Engagement

Shareholder Outreach Activities

We believe regular, proactive communications with our shareholders to be in the long-term best interests of the Company. Our investor communications and outreach include annual investor day meetings, investor conferences and quarterly conference calls. These calls are open to the public and are available live and as archived webcasts on our website. Additionally, we annually reach out to our largest shareholders to obtain feedback on corporate governance matters. In 2019, we invited holders of approximately 53% of our shares, represented by 26 investors, to engage with us. Fourteen investors, holding in the aggregate approximately 40% of our shares, accepted our invitation. Our engagement topics included the Company’s business model, strategy and performance, our strong governance profile and diverse board, the shareholder proposal to permit shareholder action by written consent and the shareholder proposal to adopt time-bound, Company-wide greenhouse gas (GHG) emissions targets consistent with the goals of the Paris Climate Agreement. We held meaningful discussions with our investors on these topics. Overall, the discussions were very positive, with investors expressing support for the Company’s governance practices.

A majority of the investors who engaged with us informed us that they do not support or are leaning against support for the granting of written consent rights to shareholders, particularly when there is a right to call special meetings, which our by-laws provide. Similarly, a majority of these investors either do not support the GHG emissions proposal or are inclined not to support it. These holders generally expressed the view that the GHG proposal is too prescriptive and that management and the Board are in the best position to determine the Company’s corporate social responsibility strategy.

We share feedback from these engagements with our Board.

How to Communicate with Our Directors

Shareholders and other interested parties may communicate with any of our directors, including our independent Lead Director, or with the independent directors as a group by sending an e-mail to independentdirectors@itw.com or by writing to the independent directors as a group or to any of our directors c/o Illinois Tool Works Inc., 155 Harlem Avenue, Glenview, IL 60025, Attention: Secretary, with a designation on the outside of the envelope as a “Board Communication.” Relevant communications will be forwarded by the Secretary to the appropriate directors depending on the facts and circumstances outlined in the communication.

Director Compensation

Our directors receive retainer-only compensation with no fees for attending meetings, which is an expected part of Board service. Our committee chairs and Lead Director receive additional retainers for their service in these capacities, and all Board members receive an annual equity grant based on a fixed-value amount with immediate vesting that avoids entrenchment. Our directors’ compensation is compared to that of the same peer group of companies used for executive compensation comparisons.

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The Corporate Governance and Nominating Committee oversees and makes recommendations to the Board regarding non-employee director compensation based on comparisons of financial performance and median compensation levels of our peer group. Peer group directors’ compensation data is prepared by Frederic W. Cook & Co., Inc., the independent compensation consulting firm that advises the Compensation Committee.

Annual Fees

The following table shows the non-employee director compensation for 2018. Non-employee directors were given the opportunity to elect to receive all or a portion of their annual cash retainer, including chair fees, in an equivalent value of ITW common stock pursuant to our 2015 Long-Term Incentive Plan. The number of ITW shares to be issued to a director is determined by dividing the dollar amount of the fee subject to the election by the fair market value of ITW common stock on the date the fee otherwise would have been paid in cash.

Directors’ Deferred Fee Plan

Non-employee directors can defer receipt of all or a portion of their annual cash retainer, including chair/lead director fees, and/or stock grant until retirement or resignation. Deferred cash amounts are credited with interest quarterly at 120% of the applicable federal long-term rate for the quarter. Cash fees may be deferred as cash or ITW common stock. If a director elects to defer receipt of any ITW common stock to be received in lieu of a cash payment and/or any portion of his or her stock grant, the deferred shares are credited as stock units to an account in the director’s name. The account receives share-equivalent credit for cash dividends and is adjusted for stock dividends, splits, combinations or other changes in ITW common stock upon retirement, resignation or a corporate change (as defined in our 2015 Long-Term Incentive Plan), with any fractional shares paid in cash.

ITW Common Stock Grant

The Company grants stock to its non-employee directors under our 2015 Long-Term Incentive Plan, which links this element of compensation to long-term performance. Under our director compensation program, non-employee directors serving in 2018 received an annual stock grant equivalent in value to approximately $145,000.

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Director Compensation in Fiscal Year 2018

The following table summarizes the compensation for our non-employee directors who served during 2018.

Ownership of ITW Stock

Directors and Executive Officers

The following table shows the amount of ITW common stock beneficially owned by each director, each named executive officer, and all directors and executive officers as a group as of December 31, 2018, except as otherwise noted. The “named executive officers” as shown in the table are our Chief Executive Officer, our Chief Financial Officer, and the next three most highly-compensated executive officers who were serving at the end of the last fiscal year (based on total compensation, less the increase in pension value and nonqualified deferred compensation earnings). The “percent of class” calculation is based on 328,094,747 shares of ITW common stock outstanding as of December 31, 2018. Beneficial ownership is a technical term broadly defined by the SEC to mean more than ownership in the usual sense. In general, beneficial ownership includes any shares a director or executive officer can vote or transfer and stock options and restricted stock units that are currently vested or that become vested within 60 days. Except as otherwise noted, the stockholders named in this table have sole voting and investment power for all shares shown as beneficially owned by them.

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The number of the directors’ phantom stock units disclosed in the table represents an equivalent number of shares of ITW common stock as of December 31, 2018. Because the granting of phantom stock units was discontinued in May 2012, Messrs. Henderson and Lenny, who joined the Board after that date, were not awarded phantom stock units upon joining the Board. Phantom stock units are not transferable and have no voting rights. The units are payable in cash and are not included in the “percent of class” calculation.

*Less than 1%

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Other Principal Stockholders

The following table shows, as of December 31, 2018, the only stockholders that we know to be beneficial owners of more than 5% of ITW common stock. The “percent of class” calculation is based on 328,094,747 shares of ITW common stock outstanding as of December 31, 2018. See “Certain Relationships and Related Party Transactions” for a description of the commercial banking services provided by The Northern Trust Company and its subsidiaries to the Company and the amount paid by the Company for those services.

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Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires that the Company’s executive officers, directors and greater than 10% stockholders file reports of ownership and changes of ownership of ITW common stock with the SEC and the NYSE. Based on a review of copies of these reports provided to us during fiscal 2018 and written representations from executive officers and directors, we believe that all filing requirements were timely met during 2018.

Availability of Form 10-K and Annual Report

The Company is providing its Annual Report and its Annual Report on Form 10-K to stockholders who receive this proxy statement. The Company will provide copies of these reports to brokers, dealers, banks, voting trustees and their nominees for the benefit of their beneficial owners of record. Additional copies of this proxy statement, the Annual Report and the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 are available without charge upon written request to Illinois Tool Works Inc., 155 Harlem Avenue, Glenview, IL, 60025, Attention: Secretary. You may also review the Company’s SEC filings by visiting the Company’s website at www.itw.com.

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Compensation Discussion and Analysis

The Compensation Discussion and Analysis provides detailed information about our 2018 compensation programs, policies and practices, as well as the principles and philosophy utilized by the Compensation Committee (the “Committee”) regarding these programs for the named executive officers (“NEOs”) in the Summary Compensation Table. For 2018, our NEOs are:

Executive Compensation Table of Contents

Defined Terms

*See Appendix B for reconciliation of GAAP to non-GAAP measures.

Executive Overview

ITW Delivered Another Year of Strong Performance in 2018

2018 was another year of solid execution and strong performance for ITW. We delivered earnings per share, operating income, and after-tax return on invested capital results that were all at the highest levels in the history of the Company. Successful execution of ITW’s long-term strategy and the strength of the highly differentiated ITW Business Model continue to be the primary drivers of ITW’s financial performance.

The Company delivered strong earnings growth, with earnings per share of $7.60, up 15 percent* from 2017, and achieved the following key performance metrics in 2018:

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We also continued to generate strong operating cash flow in 2018, which was utilized to reinvest in the growth and productivity of our high-quality business portfolio, and to support the ongoing execution of our long-term strategy. We also returned $3 billion to shareholders, including a 28 percent dividend increase.

* After-tax ROIC, 2017 adjusted EPS, and 2017 adjusted operating income and margin are non-GAAP measures. See Appendix B for information regarding these non-GAAP measures, including reconciliations to the most comparable GAAP measures.

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Continued Solid Progress on ITW’s Enterprise Strategy

Since 2013, we have been executing a long-term strategy focused on positioning the Company to leverage the performance power of the ITW Business Model to its full potential, and over the last six years we have made significant progress:

*As reported in the 2012 Annual Report on Form 10-K.

**After-tax ROIC and 2012 adjusted EPS are non-GAAP measures. See Appendix B for information regarding these non-GAAP measures, including reconciliations to the most comparable GAAP measures.

*** As of December 31, 2012 and December 31, 2018.

In addition, we have delivered total returns to our stockholders of 138 percent versus 98 percent for our proxy peer group and 76 percent for the S&P 500 over this six-year period.

*Total shareholder return for the Company’s peer group is calculated using a simple average. Although Fortive Corporation was added to the Company’s peer group in 2017, it was excluded from the calculation of total shareholder return due to its spin-off from Danaher in 2016.

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Throughout this period, the CEO’s compensation has been closely aligned to the Company’s cumulative TSR performance.

ITW 5-Year CEO Pay Versus Cumulative TSR*

Note: Mr. Santi was named Chief Executive Office in November, 2012. His compensation totals above are based upon his total compensation as reported in the Summary Compensation Table, except that his option award amount is valued using ISS’ methodology.

Each element of the Company’s compensation structure plays an integral role in motivating our executives to maximize ITW’s long-term performance potential. Importantly, more than 75 percent of the CEO’s compensation is tied to ITW’s successful achievement of its long-term performance objectives.

During the first five years of the enterprise strategy through 2017, we made significant progress in achieving our key performance goals set in connection with the strategy’s implementation. In December 2018, the Company updated these goals for its performance through 2023. The performance objectives of our executive compensation plans, annual and long-term, are closely aligned with these goals.

ITW’s 2023 Annual Performance Targets

Alignment of Executive Incentives with ITW’s Strategy

Our Board of Directors and Compensation Committee are responsible for aligning executive incentives with the Company’s strategy and the best interests of our stockholders. The Board believes that the Company has a strong track record of thoughtful and diligent governance and execution with respect to aligning executive incentives, as evidenced by the consistently favorable outcome of the annual advisory stockholder vote on executive compensation (95.9 percent favorable in 2016, 97.2 percent favorable in 2017 and 95.5 percent favorable in 2018).

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Since the initiation of our current strategy in 2012, the Committee has regularly reviewed incentive plan performance metrics, both annual and long-term, to ensure ongoing alignment with the strategy’s performance objectives. In the earlier years of the strategy, when we focused on the divestiture of our commoditized businesses and the restructuring of our businesses, EPS growth was a significant portion of overall incentive compensation. In 2016, as we shifted our focus to organic revenue growth, EPS was removed as a performance metric in the annual incentive plan, while organic revenue growth became a substantive annual performance measure. Beginning in 2017, we increased options to 50 percent of the long-term incentive award value. The other 50 percent of the award is tied to the average three-year performance of operating margin, after-tax ROIC and EPS growth, payable half in cash and half in stock. Also, the three-year performance goals set in 2017 for after-tax ROIC and EPS growth are based on a fixed tax rate to avoid any tax rate benefit from new U.S. tax legislation. We believe that these performance metrics and the design of the executive incentive plans continue to support the achievement of the current phase of our strategy and, as such, we are not making any plan design changes in short-term or long-term executive incentives for 2019.

The following table shows the percent of average incentive pay for our corporate NEOs tied to each of the financial metrics in our annual and long-term incentive plans for 2018, which remains unchanged from 2017:

Executive Compensation Highlights

Compensation Philosophy

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Compensation Objectives

We emphasize a total compensation approach in establishing individual executive compensation levels with each element of compensation serving a specific purpose. In addition to paying a competitive base salary, we use a mix of different performance-based elements of compensation that reward different aspects of both Company and individual performance. Our 2018 executive compensation program consisted primarily of three compensation elements: fixed (base salary), variable (annual cash incentives and long-term incentive compensation, including stock options, performance share units and performance cash awards), and retirement and change-in-control benefits, as illustrated below:

2018 Compensation Elements

Overview of Key Compensation Performance Metrics

The following table reports the financial performance metrics for the NEOs used in the Company’s 2018 annual EIP and 2018-2020 PSU and Performance Cash Awards granted under the long-term incentive plan. As described above, these metrics are closely aligned to our strategic objectives and recognize and reward superior Company, business segment and individual performance.

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For the 2018 EIP, the performance measures for corporate executives were based solely on Company results. For operating executives, the measures were based 50 percent on Company performance and 50 percent on the performance of their respective segment. The payout range for the EIP was zero to 200 percent of target. For the 2018-2020 PSU and Performance Cash Awards for both corporate and operating executives, the measures were based solely on Company performance. The payout range for these awards is zero to 200 percent.

2018 Target Compensation

Our total target compensation (base salary, EIP and long-term incentives) is intended to create a strong correlation between the executive’s compensation and Company and/or business segment performance. The compensation elements based on Company or business segment performance include EIP, Performance Cash, and equity incentives. Ninety-one percent of 2018 total compensation for the CEO is tied to performance, with 58 percent in the form of equity and 33 percent in cash awards. Eighty-one percent of 2018 total compensation for the other NEOs (on average) is tied to performance, with 48 percent delivered through equity awards and 33 percent in the form of cash awards. Our equity and long-term cash awards have multi-year vesting schedules to align the interests of our executive officers with the long-term interests of our stockholders. The following charts illustrate the allocation of our total target compensation opportunity for 2018 between fixed (base salary), equity (options and PSUs) and variable (EIP and long-term incentives) components.

Allocation of 2018 Total Target Compensation*

*Total target compensation as used in the charts above is the sum of base salary, target EIP and the grant date fair value of long-term cash and equity incentives.

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Ongoing Best Practices

We regularly review and refine our executive compensation program to ensure that it continues to address practices and policies that are aligned with our pay-for-performance philosophy and the interests of our stockholders. In this regard, our 2018 compensation program reflects the following:

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Say on Pay Advisory Voting Results

In 2016, 2017 and 2018, 95.9 percent, 97.2 percent and 95.5 percent, respectively, of stockholder votes were cast to approve the compensation of our NEOs. The Committee believes that this favorable vote is confirmation that our stockholders believe that the pay of our NEOs is appropriately aligned with the performance of the Company and the interests of our stockholders. The Committee therefore determined that it was not necessary to make any changes to our executive compensation practices as a result of the Say on Pay votes.

How We Make Compensation Decisions

Role of the Compensation Committee

The Committee conducts an annual review of ITW’s practices and the compensation of our executive officers to ensure:

In making its executive compensation decisions and recommendations, the Committee is guided by the following factors:

In addition, the Committee engaged an independent advisor, Frederic W. Cook & Co., Inc. (“Cook”), to work directly on its behalf and in cooperation with management to review ITW’s executive compensation program, confirm appropriateness of our peer companies, and assess our compensation governance process.

See “Board of Directors and Its Committees — Compensation Committee” under “Proposal 1 — Election of Directors” for more information about the function of the Committee.

Role of the Compensation Consultant

As previously stated, the Committee has engaged Cook as its independent compensation consultant. In 2018, Cook conducted a marketplace review of the compensation we pay to our executive officers. Cook provided the Committee with relevant market data, including a review of our pay and performance and that of our peers, reviewed the peer companies we use for comparison purposes, and benchmarked our compensation against our peer companies. Cook also assisted the Committee with its assessment of compensation-related risk.

With respect to CEO compensation, on an annual basis, Cook provides an independent recommendation to the Committee for its consideration. In developing its recommendation, Cook relies

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on its understanding of ITW’s business, strategy and compensation programs, as well as its own independent research and analysis including ITW’s peer group. Cook does not meet with the CEO with respect to his compensation.

Peer Companies

For 2018 the Committee confirmed the following 17 companies to be used as the Company’s peer group:

The revenue median of the peer group was $20.8 billion based on the twelve-month average of reported financial results through May 31, 2018, and the median market capitalization was $34.5 billion, versus $14.59 billion and $52.5 billion, respectively, for ITW.

The nature of our decentralized and diverse lines of business presents challenges in identifying similar organizations for comparison purposes; however, we believe that the peer group selected provides relevant comparisons.

Compensation Decisions and Individual Compensation Levels

On an annual basis, the CEO reviews the total compensation of the NEOs and makes recommendations to the Committee based on his assessment of each executive’s individual performance and peer group compensation information. The Committee makes recommendations to the independent directors regarding the CEO’s compensation based on an assessment of the CEO’s performance and peer group compensation information. There are no material differences in the policies and decision processes used in setting compensation for the CEO and the other NEOs. However, the different levels of compensation for the NEOs, as shown in the Summary Compensation Table of this proxy statement, reflect internal factors such as each executive’s scope of responsibility,

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performance, impact on profitable growth and breadth of experience, as well as compensation data from the peer group.

Components of the 2018 Executive Compensation Program

Base Salary

In determining base salary, the CEO and the Committee consider the size and scope of the executive officers’ responsibilities, experience, performance, market data and the median base salary of similar positions at our peer group companies. The Committee believes that median base salary is an appropriate general reference point to use for encouraging solid performance. Base salaries are reviewed annually, and adjustments are intended to recognize performance and contributions over the prior year, as well as any significant changes in duties or scope of responsibility.

In February 2018, the Committee reviewed Mr. Santi’s performance and recommended for approval a base salary merit increase to $1,315,000 from $1,261,146 (4.3 percent), which in turn was approved by the Board’s independent directors. For the other NEOs, the Committee approved recommended base pay merit increases that ranged between 3 percent and 3.8 percent. Mr. O’Herlihy received an additional 8.9 percent increase to recognize an increased scope in responsibilities and his strong performance. Mr. Nagarajan also received an additional 4.1 percent increase to recognize his strong performance in leading our largest business segment. These base salary increases were effective February 26, 2018.

Annual Executive Incentive Plan

We believe that executives generally should be rewarded for their contributions to the overall financial success measured by income and organic growth of the Company as a whole, and, if applicable, the business segment he or she leads. Achieving our annual financial objectives is important to executing our current strategic objectives and delivering long-term value to stockholders.

The Committee determines and approves the performance results and awards for the NEOs and recommends for approval, and the independent directors of the full Board approve the annual incentive award amount for the CEO. EIP is composed solely of financial performance measures for our NEOs. The financial metric weighting for Mr. Santi, Mr. O’Herlihy and Mr. Larsen was based 60 percent on Company operating income growth and 40 percent on Company organic revenue growth. For Mr. Martindale, the weighting of the financial measures was based 60 percent on operating income growth and 40 percent on organic revenue growth, with 50 percent of each metric based on Company results and 50 percent on results of his business segment. For Mr. Nagarajan the weighting of the financial measures was based 30 percent on Company operating income, 30 percent on Automotive Segment operating income, 20 percent on Company organic revenue growth and 20 percent on Automotive Segment 2018 sold orders. The financial measures were recommended by management and approved by the Committee at the start of the 2018 performance year. While the Committee has the discretion to make adjustments in the calculation of financial performance to eliminate factors beyond the control of management and to eliminate possible disincentives to act in the long-term best interests of the Company and our stockholders, no such adjustments were made to the 2018 financial results.

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2018 EIP Financial Measures

For 2018, executive officers were eligible to earn a payment according to the performance scales below.

2018 EIP Company Financial Targets

*Operating income growth payout uses interpolation for achievement between threshold and target and target and maximum. Organic revenue growth payout uses interpolation for achievement between 1.5 and 5.5 percent, resulting in payouts between 0 and 200 percent.

The following table shows the actual goal achievement for the corporate NEOs.

2018 EIP Company Performance Results

*Operating income growth and organic revenue growth were calculated on a constant currency basis. Operating income for 2017 excludes the favorable impact of a $95 million legal settlement.

2018 Annual Cash Incentive Total Payouts

The total 2018 payouts to the NEOs ranged from 71.5 percent to 94.5 percent of target award level.

Payouts for Named Executive Officers

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Long-Term Incentives

As noted earlier, beginning in 2017, we changed the components of our long-term incentive award program to increase the performance-based elements. In 2018, the NEOs received 50 percent of their award in stock options and 50 percent in other performance-based awards (25 percent payable in PSUs and 25 percent payable in cash). We believe that stock options are an effective incentive because they directly align the interests of the executives with those of our stockholders, as an unexercised stock option has no realizable value if our stock price falls below the exercise price, while the value increases along with increases in our stock price above the exercise price. The stock option awards are combined with the other performance-based awards to closely align long-term incentives with the financial performance objectives of the Company’s strategy. The weightings of the total target values of the 2018 long-term incentive equity and cash awards are as follows:

2018 Long-Term Incentive Award Weightings

The Committee has established specific vesting and expiration provisions associated with termination of employment due to death, disability and retirement, as defined in the applicable awards, and forfeiture provisions upon other termination of employment. The Committee, in its sole discretion, may deem a long-term incentive award, whether vested or unvested, to be immediately forfeited if the recipient competes with the Company, engages in gross misconduct or conduct that is against the business interests of the Company, or divulges confidential information about the Company to others.

2018 Stock Option Awards

The 2018 stock options vest in equal installments over a four-year period ending in 2022. Stock options are awarded with an exercise price equal to the fair market value of the common stock on the date of grant and normally expire ten years after the award date. In recent years, including 2018, we awarded only non-qualified stock options because we believed that the tax benefits to the Company of non-qualified stock options outweighed the potential tax benefits to the NEOs of incentive stock options.

2018 Performance Share Units and Performance Cash Awards

The PSUs and Performance Cash awards vest three years from the date of award, subject to the achievement of the performance goals set at the beginning of the performance period. PSUs are

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awarded based on the fair market value of one share of ITW common stock on the date of award. Dividend equivalents are accrued and added to the original grants as reinvested dividends for all PSU grants since 2017. These reinvested dividends are paid only on PSUs earned at the end of the performance period.

The goals for the 2018 PSUs and Performance Cash awards are equally weighted and based on operating margin, after-tax ROIC and EPS growth. The payout range is 50 percent to 200 percent of the target award. Performance below threshold results in no payout for the weighted portion for that metric. The payout at the end of the performance period will be based on the following sliding payout scale:

2018 PSU and Performance Cash Payout Scale

Note: Interpolation is used for measuring achievement between threshold and target and maximum and target.

2016 Long-Term Incentive Cash Award Payouts

In 2016, executives were awarded a long-term incentive cash (LTI Cash) award under the Long-Term Incentive Cash Plan in effect at that time. This award had a three-year performance period from January 1, 2016 to December 31, 2018. The LTI Cash award had three financial metrics that were equally weighted: operating margin, after-tax ROIC and EPS growth (calculated using a simple average as reported in our financial statements as of the time financial results for each year were publicly released). The impact of the 2017 U.S. tax legislation is included in the three-year financial results for the 2016 long-term incentive cash awards, but it did not have an impact on the overall payout percentage due to the strong operating performance of the Company. The payout range for the awards had a threshold of 50 percent and a maximum of 150 percent of target.

Percentage Payout of 2016 LTI Cash Awards

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The following table shows the individual payout level for each NEO:

Payout Amounts of 2016 LTI Cash Awards

Timing of Long-Term Incentive Awards

The Committee meets in February of each year following the Company’s public release of its earnings results for the recently completed fiscal year to consider and act with respect to long-term incentive awards for the executive officers. Long-term awards are made in compliance with the Long-Term Incentive Plan, including the requirement that stock options may not be awarded at less than 100 percent of the fair market value of ITW’s common stock on the date of award. The exercise price of the awards is based on the closing price of ITW’s stock on the date of award. We do not time awards for the purpose of enhancing the value of executive compensation.

Compensation Governance

Stock Ownership Guidelines and Anti-Hedging and Pledging Policies

We believe that stock ownership is important because it aligns the interests of our management and directors with those of our stockholders and mitigates compensation-related risk. Because of the importance of stock ownership, the Board of Directors and the Committee have adopted stock ownership guidelines for executive officers and directors. The 2018 guidelines for stock ownership as a multiple of executive officers’ base salaries and of directors’ annual retainers are as follows:

The Committee expects that an executive officer or non-employee director will achieve the applicable ownership level within five years. The achievement of these guidelines is reviewed annually. The Board of Directors believes that its stock ownership guidelines are appropriate, reasonable and attainable given the responsibilities and compensation levels of our executive officers and directors and has not deemed it necessary to impose a holding period requirement for shares owned by our executive officers and directors.

All NEOs and directors who have been in their positions for five or more years have met or exceeded the applicable 2018 stock ownership guidelines.

All recipients of Company equity-based awards, which include key employees and all officers and directors, are subject to our policy against options trading and short sales of ITW stock. In addition, all

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executive officers and directors are prohibited from trading in derivatives linked to Company stock, and since April 2013, our executive officers (including NEOs) and directors are prohibited from pledging Company stock, and pledged shares are excluded from ownership for purposes of our stock ownership guidelines.

Compensation Recovery Policy

We maintain a Compensation Recovery Policy (a “clawback policy”) applicable to all executive officers of the Company subject to Section 16 of the Securities Exchange Act of 1934. Under the policy, the Committee will seek reimbursement of incentives paid to executive officers where the payment was predicated upon the achievement of certain financial results with respect to the applicable performance period that was subsequently the subject of a material restatement due to material non-compliance of the Company with any financial reporting requirement under the U.S. securities laws. The reimbursement amount is equal to the excess of the gross incentive payment made over the gross payment that would have been made if the original payment had been determined based on the restated financial results. Further, following a material restatement of our financial statements, we will seek reimbursement of compensation and profits from trading in Company stock received by our CEO and CFO to the extent required under Section 304 of the Sarbanes-Oxley Act of 2002.

2018 Risk Assessment

The Committee, together with management and Cook, annually considers potential risks when reviewing our compensation programs for all employees, including our executive officers. Based on this assessment, the Committee concluded that our 2018 compensation programs do not create risks that are reasonably likely to have a material adverse effect on ITW. In making this determination, the Committee reviewed the key design elements of our compensation programs, as well as the means by which any potential risks may be mitigated, including:

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Section 162(m) and Regulatory Considerations

Internal Revenue Code Section 162(m) limits the deductibility of compensation in excess of $1,000,000 paid to any one NEO in any calendar year. Under the tax rules in effect prior to 2018, compensation that qualified as “performance-based” under Section 162(m) was exempt from this $1 million limit. However, the Tax Cuts and Jobs Act, which was signed into law December 22, 2017, eliminated this performance-based compensation exception effective January 1, 2018, subject to a special rule for certain awards and arrangements that were in effect on or before November 2, 2017. The Company has determined that only the stock option awards that were in effect as of November 2, 2017, are intended to qualify as performance-based under the special grandfather rules.

From and after January 1, 2018, compensation awarded in excess of $1,000,000 to our NEOs generally will not be deductible. The Committee will, consistent with its past practice, continue to retain flexibility to design compensation programs that are in the best long-term interests of the Company and our stockholders, with deductibility of compensation being one of a variety of considerations taken into account.

Committee’s Independent Consultant

Cook, the independent compensation consultant, has been retained by and reports directly to the Committee. It also provides peer group directors’ compensation data to the Corporate Governance and Nominating Committee; it does not have any other consulting engagements with management or ITW. Based on its consideration of factors under NYSE listing standards, the Committee concluded that the work performed by Cook and its senior advisor involved in the engagement did not raise any conflict of interest or independence concerns.

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NEO Compensation

The following tables provide information regarding the compensation of our NEOs.

Summary Compensation Table

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Footnote 4 Table