2018 Guide to Effective Proxies

6 TH EDITION | GUIDE TO EFFECTIVE PROXIES 362 EXECUTIVE COMPENSATION The Committee uses competitive compensation data from the annual total compensation study of peer companies to inform its decisions about overall compensation opportunities and specific compensation elements. The predominant market reference point is the 50th percentile. Importantly, the Committee does apply judgment and discretion in establishing where specific individuals are compared to the market reference points. The Committee will take into consideration not only competitive market data, but also factors such as Company, business unit and individual performance, scope of responsibility, critical needs and skill sets, leadership potential retention risks and succession planning. Our pay philosophy targets each element of compensation at the 50 th percentile of market. However, as with any company there are instances where some individuals and/or elements of pay may be above or below the 50th percentile reference point. Elements of Compensation The chart below shows the elements that make up total direct compensation for our NEOs. Base salary is fixed pay that recognizes each NEO’s role and responsibilities. Annual cash incentive awards are variable and reward achievement of annual financial, operating, and individual goals. Long-term incentives are awarded in the form of performance-based restricted stock units (”RSUs”) that support the achievement of our three-year financial plan, time-based restricted stock that supports retention and the creation of long-term stockholder value, and cash awards that serve as additional incentives to retain the NEOs services as the Company executes its strategic plan. Annual cash incentives and long- term incentives are awarded under our 2015 Long-Term Incentive Plan (“LTIP”). 2017 2018 2019 Paid throughout 2017 SHORT-TERM INCENTIVE (MIP) BASE SALARY 2017 annual cash incen�ve (determined in February 2018 based on 2017 Company and individual performance and paid in March 2018) LONG-TERM INCENTIVE (RESTRICTED STOCK) 2017 awards granted in September 2017 (vest annually in September) LONG-TERM INCENTIVE (Performance - Based RSUs) 2017 awards granted in March 2017 (cliff vest in March 2020 based on one-year corporate performance ending December 31, 2017) 1/3 vest in September 2018 1/3 vest in September 2019 1/3 vest in September 2020 LONG-TERM CASH INSTALLMENT AWARDS 2017 awards granted in September 2017 (vest annually in December) LONG-TERM CASH CLIFF AWARDS 2017 awards granted in September 2017 (cliff vest in January 2020) 1/3 vest in December 2017 1/3 vest in December 2018 1/3 vest in December 2019 32 2018 PROXY STATEMENT ESSENDANT, INC.