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Salvaging turns Equipments into Crafting Materials which may be used for Augmentation. To salvage an item, right click on it in the inventory and then click Salvage or press F.

The higher the quality of the item, the more Crafting Materials you can get. The resulting material is determined by the slot and type of the item:

Item Material
Weapon Slot Iron Bar
Neck Slot Iron Bar
Trinket Slot Essence
Finger Slot Iron Bar
Tools(fishing rod) Slot Cerulean Pearls

For other items, the material of the armor determines the result of salvaging:

Item Subgroup Material
Plate Iron Bar
Cloth Cloth Scraps
Leather Leather Scraps
Scale Leather Scraps

Runes can also be salvaged, and will give essence based on the rarity of the rune.

Item Material
Rune Essence