PARKER-HANNIFIN CORPORATION 6035 PARKLAND BOULEVARD - MAYFIELD HEIGHTS, OHIO 44124-4141 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS OCTOBER 28, 1998 The annual meeting of shareholders of Parker-Hannifin Corporation will be held at the Corporation's headquarters at 6035 Parkland Boulevard, Mayfield Heights, Ohio 44124, on Wednesday, October 28, 1998, at 9:00 a.m., Eastern Standard Time, for the following purposes: 1. Electing four Directors in the class whose three-year term of office will expire in 2001; 2. Electing one Director in the class whose term of office will expire in 2000; 3. Appointing PricewaterhouseCoopers LLP as independent public accountants for the fiscal year ending June 30, 1999; and 4. Transacting such other business as may properly come before the meeting. Shareholders of record at the close of business on August 31, 1998, are entitled to vote at the meeting. Please sign and return the enclosed Proxy promptly. A return envelope is enclosed for your convenience. By Order of the Board of Directors THOMAS A. PIRAINO, JR. THOMAS A. PIRAINO, JR. Secretary September 28, 1998 PARKER-HANNIFIN CORPORATION 6035 Parkland Boulevard - Mayfield Heights, Ohio 44124-4141 PROXY STATEMENT This Proxy Statement is furnished in connection with the solicitation by the Board of Directors of the Corporation of proxies to be voted at the annual meeting of shareholders scheduled to be held on October 28, 1998, and at all adjournments thereof. Only shareholders of record at the close of business on August 31, 1998 will be entitled to vote. On that date, 109,307,965 Common Shares were outstanding and entitled to vote at the meeting, each share being entitled to one vote. This Proxy Statement and the form of Proxy are being mailed to shareholders on September 28, 1998. Shareholders of the Corporation have cumulative voting rights in the election of Directors, provided any shareholder gives notice in writing to the President or a Vice President or the Secretary of the Corporation not less than 48 hours before the time fixed for holding the meeting that cumulative voting at such election is desired and an announcement of the giving of such notice is made upon the convening of the meeting by the Chairman or the Secretary or by or on behalf of the shareholder giving such notice. In such event, each shareholder has the right to cumulate votes and give one nominee the number of votes equal to the number of Directors to be elected multiplied by the number of votes to which the shareholder is entitled, or distribute votes on the same principle among two or more nominees, as the shareholder sees fit. In the event that voting at the election is cumulative, the persons named in the Proxy will vote Common Shares represented by valid Board of Directors' Proxies on a cumulative basis for the election of the nominees named below, allocating the votes of such Common Shares in accordance with their judgment. ELECTION OF DIRECTORS The Directors of the class elected at each annual election hold office for terms of three years. The Board of Directors of the Corporation presently consists of 14 members divided into three classes. The class whose term expires in 1998 consists of four members and the classes whose terms expire in 1999 and 2000 each consist of five members. Frank A. LePage, formerly a member of the class whose term expires in 1999, retired from the Board of Directors in October 1997. Shareholder approval is sought to elect John G. Breen, Hector R. Ortino, Patrick S. Parker and Dennis W. Sullivan, Directors whose terms of office expire in 1998, to the class whose term will expire in 2001. Shareholder approval is also sought to elect Klaus-Peter Muller to the class whose term will expire in 2000. The addition of a director in this class is desirable due to the anticipated retirement of several Directors in this class in the near future. A plurality of the Common Shares voted in person or by proxy is required to elect a Director. Should any nominee become unable to accept nomination or election, the proxies will be voted for the election of such other person as a Director as the Board of Directors may recommend. However, the Board of Directors has no reason to believe that this contingency will occur. 1 NOMINEES FOR ELECTION AS DIRECTORS FOR TERM EXPIRING IN 2001 JOHN G. BREEN, 64, has served as a Director of the Corporation since 1980. He is Chairman of the Compensation and Management Development Committee and a member of the Nominating and Retirement Planning Committees. Mr. Breen is the Chairman of the Board and Chief Executive Officer of The Sherwin Williams Company (paints and coatings). Mr. Breen is also a Director of National City Corporation, Mead Corporation and Goodyear Tire and Rubber Company. HECTOR R. ORTINO, 56, was elected to the Board of Directors in January 1997. He is Chairman of the Audit Committee and a member of the Nominating Committee. Mr. Ortino has been the President and Chief Operating Officer of Ferro Corporation (specialty materials) since February 1996. He was previously Executive Vice President and Chief Financial Administrative Officer of Ferro Corporation from May 1993 to February 1996. Mr. Ortino is also a Director of Ferro Corporation and Bunge International. PATRICK S. PARKER, 68, has served as a Director of the Corporation since 1960. Mr. Parker is the Chairman of the Board of Directors of the Corporation. DENNIS W. SULLIVAN, 59, has served as a Director of the Corporation since 1983. Mr. Sullivan is Executive Vice President and, since April 1996, a member of the Office of the President of the Corporation. Mr. Sullivan is also a Director of Ferro Corporation and KeyCorp. NOMINEE FOR ELECTION AS DIRECTOR FOR TERM EXPIRING IN 2000 KLAUS-PETER MULLER, 54, has been a member of the Board of Managing Directors of Commerzbank AG in Frankfurt, Germany since May 1992. Mr. Muller is also a member of the Supervisory Boards of the following companies: Hypothekenbank in Essen AG, Hannover Papier AG, ABB Asea Brown Boveri AG, Bank Rozwoju Eksportu S.A., Ford-Werke AG, Honsel AG, and Thyssen Handelsunion AG. PRESENT DIRECTORS WHOSE TERMS EXPIRE IN 2000 DUANE E. COLLINS, 62, has served as a Director of the Corporation since 1992. Mr. Collins is President and Chief Executive Officer of the Corporation. Mr. Collins is also a Director of National City Corporation and The Sherwin Williams Company. ALLEN H. FORD, 70, has served as a Director of the Corporation since 1975. He is a member of the Audit, Nominating, and Retirement Planning Committees. Now a Consultant, Mr. Ford was formerly the Senior Vice President-Finance and Control of The Standard Oil Company (diversified natural resources). Mr. Ford is also a Director of First Union Real Estate Investments. ALLAN L. RAYFIELD, 63, has served as a Director of the Corporation since 1984. He is a member of the Audit, Compensation and Management Development, and Nominating Committees. Now retired, Mr. Rayfield previously served as President, Chief Executive Officer and Director of M/A-COM, Inc. (microwave manufacturing) from November 1993 to December 1994, and President and Chief Operating Officer of M/A-COM, Inc. from March 1991 to November 1993. Mr. Rayfield is also a Director of Acme Metals Inc. and Arch Communications Group, Inc. PAUL G. SCHLOEMER, 70, has served as a Director of the Corporation since 1982. He is a member of the Nominating Committee. Now retired, Mr. Schloemer was President and Chief Executive Officer of the Corporation from 1984 to 1993. Mr. Schloemer is also a Director of Rubbermaid Incorporated, AMP Incorporated and Esterline Technologies Corporation. MICHAEL A. TRESCHOW, 55, has served as a Director of the Corporation since 1996. He is a member of the Audit and Nominating Committees. Mr. Treschow has been the President and Chief Executive of AB Electrolux (electrical appliances) in Sweden since April 1997. He was previously the President and Chief Executive Officer of Atlas Copco AB from 1991 to 1997. Mr. Treschow is also a Director of SKF AB and Saab Automobile AB. 2 PRESENT DIRECTORS WHOSE TERMS EXPIRE IN 1999 PAUL C. ELY, JR., 66, has served as a Director of the Corporation since 1984. He is Chairman of the Retirement Planning Committee and a member of the Nominating Committee. Now retired, Mr. Ely was a General Partner of Alpha Partners (venture capital seed financing) from July 1989 to May 1998. Mr. Ely is also a Director of Tektronix, Inc. and The Sabre Group. PETER W. LIKINS, 62, has served as a Director of the Corporation since 1989. He is Chairman of the Nominating Committee and a member of the Audit and Compensation and Management Development Committees. Dr. Likins is President of the University of Arizona. He was previously the President of Lehigh University from July 1982 to October 1997. Dr. Likins is also a Director of Consolidated Edison Company of New York, Inc., Comsat Corporation and Safeguard Scientifics, Inc. WOLFGANG R. SCHMITT, 54, has served as a Director of the Corporation since 1992. He is a member of the Compensation and Management Development and Nominating Committees. Mr. Schmitt is the Chairman of the Board and Chief Executive Officer of Rubbermaid Incorporated (manufacturer of rubber and plastic products). Mr. Schmitt is also a Director of Kimberly-Clark Inc. DEBRA L. STARNES, 45, was elected to the Board of Directors in July 1997. She is a member of the Compensation and Management Development, Nominating and Retirement Planning Committees. Ms. Starnes is the Senior Vice President, Petrochemicals of Lyondell Petrochemical Company (petrochemical production). She was previously Senior Vice President, Polymers of Lyondell from May 1995 to January 1997 and Senior Vice President, Petrochemical Management and Marketing at Lyondell from May 1992 to May 1995. STEPHANIE A. STREETER, 41, has served as a Director of the Corporation since 1996. She is a member of the Audit and Nominating Committees. Ms. Streeter is the Group Vice President of Worldwide Office Products of Avery Dennison Corporation (adhesives and office products). She was previously Vice President and General Manager of Avery Dennison Brands from November 1993 to May 1996 and Vice President and General Manager of Office Labels at Avery Dennison from June 1991 to November 1993. No Director of the Corporation is related to any other Director. During the fiscal year ended June 30, 1998, there were five meetings of the Corporation's Board of Directors. Each Director attended at least 75% of the meetings held by the Board of Directors and the Committees of the Board on which he or she served. THE AUDIT COMMITTEE, which met twice during the fiscal year ended June 30, 1998, is responsible for reviewing with the Corporation's financial management and its independent auditors the proposed auditing program (including both the independent and the internal audits) for each fiscal year, the results of the audits and the adequacy of the Corporation's internal control structure. This Committee recommends to the Board of Directors the appointment of the independent auditors for the fiscal year. THE RETIREMENT PLANNING COMMITTEE, which met once during the fiscal year ended June 30, 1998, is responsible for reviewing with the Corporation's management the funding and investment policies for defined benefit plans and defined contribution plans sponsored by the Corporation. THE COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE, which met twice during the fiscal year ended June 30, 1998, is responsible for annually reviewing and fixing the salaries and other compensation of the officers of the Corporation, deciding upon the grant of stock options to the officers and other employees of the Corporation and reviewing corporate policies and programs for the development of management personnel. THE NOMINATING COMMITTEE, which met once during the fiscal year ended June 30, 1998, is responsible for evaluating and recommending to the Board qualified nominees for election as Directors of the Corporation and considering other matters pertaining to the size and composition of the Board. The Nominating Committee will give appropriate consideration to qualified persons recommended by shareholders for nomination as Directors of the Corporation, provided that such recommendations are accompanied by information sufficient to enable the Committee to evaluate the qualifications of the nominee. Nominations should be sent to the attention of the Secretary of the Corporation. COMPENSATION OF DIRECTORS. The Corporation compensates Directors, other than officers who are Directors, for their services. The annual retainer for such Directors was increased from $24,000 to $26,000 effective April 1, 1998. The fee for attending each Board and Committee meeting is $1,000 for all such Directors other than Committee Chairmen, whose fee is $1,500 for chairing committee meetings. Patrick S. Parker, Chairman of the Board of 3 Directors, receives an annual retainer of $135,000, plus meeting fees, club memberships and the use of a leased automobile. Directors may elect to defer all or a portion of their fees under the Corporation's Deferred Compensation Plan for Directors or to elect to receive all or a portion of their fees in Common Shares of the Corporation pursuant to the Corporation's Non-Employee Directors' Stock Plan. The Board of Directors adopted the Non-Employee Directors Stock Option Plan in August 1996. Each Director who is not a current or retired employee of the Corporation ("Non-Employee Director") was granted 750 stock options, adjusted for the 3-for-2 Common Shares stock split paid on September 5, 1997, under the Plan in August 1997 at an option price equal to the then current fair market value of the Corporation's Common Shares. Such options have a ten-year term and vest following one year of continued service as a Director. In August 1998, each Non-Employee Director was granted an additional 1,000 stock options upon identical terms. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. The following Directors serve as members of the Corporation's Compensation and Management Development Committee: Messrs. Breen, Likins, Rayfield and Schmitt and Ms. Starnes. Mr. Collins, the President and Chief Executive Officer of the Corporation, serves on the Compensation Committee of The Sherwin Williams Company. Mr. Breen is the Chairman and Chief Executive Officer of The Sherwin Williams Company. COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation and Management Development Committee of the Board of Directors (the "Committee") has furnished the following report on executive compensation. The Committee, which consists entirely of five outside non-employee Directors, has overall responsibility to: * review the performance and long-term management potential of the executive officers of the Corporation; and * review and fix the salaries and other compensation of the executive officers of the Corporation. Following review and approval by the Committee, all issues pertaining to executive compensation are submitted to the full Board of Directors in conjunction with its approval and review of the Corporation's strategies and operating plans, thereby assuring that the Corporation's system of executive compensation is reasonable and appropriate, meets its stated purpose and effectively serves the interests of the shareholders and the Corporation. The Corporation's executive compensation programs are designed to attract and retain key executives critical to the long-term success of the Corporation by remaining competitive with other multinational diversified manufacturing companies of similar size. Comparative compensation information is used by the Committee to establish competitive salary grade ranges at the market median for base pay, annual bonus and long-term compensation. The group of companies used for compensation comparison purposes is not the same as the S&P Manufacturing (Diversified Industrials) Index, which is the peer group of companies included in the performance graph on page 11. Comparative compensation information is obtained by the Committee from independent surveys of numerous diversified manufacturers, which the Committee believes is important in order to establish competitive compensation ranges at the appropriate levels. On the other hand, the S&P Manufacturing (Diversified Industrials) Index utilized in the performance graph contains data only with respect to a limited number of companies that are in businesses similar to the Corporation, which data is theoretically reflective of the stock performance of all diversified manufacturers as a whole. The Corporation's executive compensation programs also are intended to reward executives commensurate with performance and attainment of pre- determined financial objectives. Accordingly, compensation of executive officers is directly and materially linked to both operating and stock price performance, thus aligning the financial interests of the Corporation's executives with those of its shareholders. Compensation for the Corporation's executives consists of three primary elements: 1. A BASE SALARY within a competitively established range. The specific base salary within the range is determined by length of service and individual contributions and performance as measured against pre- established goals and objectives. Goals and objectives for each executive vary in accordance with each executive's responsibilities and are established by each executive's supervisor. 4 2. An ANNUAL CASH INCENTIVE BONUS that is comprised of two components: a. An amount that is determined by the Corporation's pre-tax return on average assets as compared to the Corporation's annual plan established at the beginning of the fiscal year (the "Target Incentive Bonus"); and b. An amount that is determined based on the return on division net assets for the divisions in each executive's individual operating unit (or the average return for all divisions for corporate staff executive officers) (the "RONA Bonus"). The target amounts of the annual cash incentive bonuses are established in such a manner that base salary plus the target bonuses will be within the competitively determined total annual compensation range mentioned above. Target annual cash incentive bonuses represent approximately 35-45% of total targeted annual compensation for the executive officers with operational profit and loss responsibility (including the Chief Executive Officer) and 25-35% of total targeted annual compensation for the other executive officers. The Chief Executive Officer, with the approval of the Committee, also has the authority to establish additional annual incentive programs for operating executives. In fiscal year 1998, under a Volume Incentive Plan, operating group presidents had the opportunity to earn an additional bonus of 1% of base salary for each 1% of sales by which their group exceeded their previous year's sales by between 7.5% and 12.5%, and an additional bonus of 2% of base salary for each 1% of sales by which their group exceeded their previous year's sales by more than 12.5%; subject, however, to an overall maximum of 15% of the participant's base salary. Acquisitions may only account for up to 5% of the increase in sales. Also, sales growth above 12.5% resulted in additional payments under the Plan only if the group exceeded corporate goals with respect to its return on sales and its assets/sales ratio. An identical Volume Incentive Plan has been adopted for fiscal year 1999. 3. LONG-TERM INCENTIVE COMPENSATION that is comprised of two components: a. A long-term incentive plan ("LTIP") award that is based upon the Corporation's actual average return on equity for a three fiscal year period, payable in restricted stock (unless the participant elects to receive cash under the Corporation's Executive Deferral Plan). The amount of the LTIP award in shares is calculated by dividing a target LTIP dollar value (adjusted for risk of forfeiture) by the market price of the Corporation's Common Shares at the beginning of the three-year performance period. The target LTIP value is established by the Committee at the market median of comparative LTIP compensation. b. A stock option grant determined by utilizing the Black-Scholes valuation model to convert a target stock option dollar value (adjusted for risk of non-vesting) into the number of stock options to be granted. The target stock option value is established by the Committee at the market median of comparative stock option compensation. Stock options are granted with an exercise price equal to the fair market value of the Corporation's Common Shares on the day of grant and grants are generally exercisable between one and ten years from the date granted. In July 1998, the Committee approved a Stock Option Deferral Plan which permits executives to defer the recognition of gain upon the exercise of stock options under the Plan. Incentive compensation for the Corporation's executives is significantly "at risk", based upon the financial performance of the Corporation. Indeed, more than one-half of each executive's targeted total compensation (including base salary, annual bonus, LTIP payouts and stock options) may fluctuate significantly from year to year because it is directly tied to business and individual performance. Long-term incentive programs are designed to link the interests of the executives with those of the shareholders. LTIP awards focus on long-term return on equity and provide an incentive to increase the stock price during the three year performance period. Restricted stock awards build stock ownership and encourage a long-term focus on shareholder value, since the stock is restricted from being sold, transferred or assigned for a specified period. Stock option grants provide an incentive that aligns the executive's interests with those of the shareholders, since stock options will provide value to the executive only when the price of the Corporation's stock increases above the option grant price. In August 1996, the Board of Directors, at the recommendation of the Committee, adopted stock ownership guidelines that are designed to encourage the accumulation and retention of the Corporation's Common Shares by its Directors, executive officers and other key executives. These guidelines, stated as a multiple of executives' base 5 salaries and of Directors' annual retainer, are as follows: Chief Executive Officer: three times; Vice Presidents: two times; other executive officers and group presidents: one time; and non-officer Directors: four times. The recommended time period for reaching the above guidelines is five years. The Chief Executive Officer reviews compliance with this policy with the Committee on an annual basis. The Corporation's executive compensation philosophy is specifically evident in the compensation paid during the most recent fiscal year to the Corporation's President and Chief Executive Officer, Duane E. Collins. Mr. Collins' increase in base salary from fiscal 1997 to fiscal 1998 of 9.88% is reflective of his "outstanding" performance rating for fiscal 1997. In addition, based on the Corporation's fiscal 1998 operating plan, Mr. Collins was entitled to receive 100% of his Target Incentive Bonus of $300,000 if the Corporation's actual pre-tax return on average assets, adjusted primarily for acquisitions and currency transactions, was 16%. A minimum payout of 15% of the Target Incentive Bonus was established at a 3.6% pre-tax return on average assets and a maximum payout of 150% of the Target Incentive Bonus was established at a 19.3% pre-tax return on average assets. During the fiscal year ended June 30, 1998, the Corporation's adjusted pre-tax return on average assets was 16.8% and each executive officer, including Mr. Collins, received an amount equal to 112.7% of his Target Incentive Bonus, which is included in the "Bonus" column of the Summary Compensation Table on page 7. Mr. Collins' RONA Bonus was targeted at $426,188 based upon an approximate 32.7% average return on division net assets. The average return on division net assets was 35.95%, resulting in a RONA Bonus payment to Mr. Collins of $462,708, which is included in the "Bonus" column of the Summary Compensation Table on page 7. The other executive officers also received RONA Bonuses based upon the return on division net assets by their respective operating units (or the average return for all divisions for corporate staff executive officers). Based on the Corporation's average return on equity of 19.03% for the three fiscal years ended June 30, 1998, Mr. Collins and the other executive officers received a payment under the 1996-97-98 Long Term Incentive Plan in the form of either restricted shares or contributions to their Executive Deferral Plan accounts in an amount equal to the value of the restricted shares earned, as reported in the "LTIP Payouts" column of the Summary Compensation Table on page 7. Such payment represents 184% of the target payment that would have been achieved had the Corporation merely achieved its return on equity goal of 14% during such period. During fiscal year 1998, Mr. Collins and the other executive officers also received a long-term incentive award as described in the LTIP Table on page 9 and a stock option grant as reported in the Option Grants Table on page 8. During the past fiscal year, the Corporation once again reported all-time sales and earnings records, exceeding the prior year's record performance as well as forecasted performance. Accordingly, incentive compensation payable to each executive, including Mr. Collins, exceeded the target levels of annual compensation established by the Committee at the beginning of the fiscal year and greatly exceeded the 1996-97-98 LTIP target compensation. During 1993, the Omnibus Budget Reconciliation Act of 1993 (the "Act") was enacted by Congress. The Act includes potential limitations on the deductibility of compensation in excess of $1 million paid to the Corporation's Chief Executive Officer and four other highest paid executive officers beginning in fiscal year 1995. The Committee has taken the necessary actions to ensure the deductibility of compensation paid by the Corporation to such individuals. JOHN G. BREEN DR. PETER W. LIKINS JOHN G. BREEN DR. PETER W. LIKINS ALLAN L. RAYFIELD WOLFGANG R. SCHMITT ALLAN L. RAYFIELD WOLFGANG R. SCHMITT DEBRA L. STARNES DEBRA L. STARNES 6 EXECUTIVE COMPENSATION The following table summarizes compensation paid by the Corporation for each of the last three fiscal years to its Chief Executive Officer and each of the other four most highly compensated executive officers: