Safeway (SWY)

I. Overview of the Company’s Compensation Programs

A. Objectives of the Compensation Programs

Our compensation programs for our executive officers are designed to attract and retain excellent managers, and to motivate these managers to increase the market value of our stock over the long term. In support of these principal objectives, the compensation programs are designed to:

In comparison to similar companies, we believe our compensation programs place greater emphasis on the achievement of company-wide goals, rather than on the achievement of individual goals. We also believe that, in compensating our executives, we place greater emphasis than other companies on the objective of increasing the market value of our stock. We believe both of these points of difference help align the interests of our executives with those of our stockholders, promote the objective of compensating our executives for company-wide performance and advance our objective of increasing stockholder returns.

B. Elements of Compensation

The major elements of compensation for our executive officers are (1) base salary, (2) annual bonus, (3) equity awards, and (4) retirement benefits. We believe each of these elements forms an integral part of the overall compensation program and, taken together, serve to achieve our compensation objectives. We also provide certain other benefits and perquisites to our executive officers, at levels we believe to be moderate (as detailed below).

We believe each of these major elements of compensation supports the objectives of our compensation programs. Base salaries, retirement benefits and other benefits and perquisites form a stable part of the compensation package that is not dependent upon our performance. These compensation elements are necessary to provide a degree of financial certainty our executives seek when they are considering whether to join or remain with us. We believe it is important to set these elements of compensation at competitive levels so we are able to attract and retain excellent managers. We also believe bonus levels must be set at competitive levels, but the objective of our bonus programs is to reward our executives for meeting or exceeding our annual performance objectives, which, when accomplished, should have the effect of increasing our stock price. The bonus programs and annual salary increases reward short-term performance and help retain our executive officers. Equity awards, particularly stock options, reward for long-term performance and, specifically, increases

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in our stock price. We use stock options with service-based vesting because we believe this feature serves the retention objective of our compensation program. In this way, the various elements of our compensation program fit together to achieve the objectives described above.

Our principal policies with respect to these elements of compensation are: (1) to provide base salaries in the aggregate that are slightly below the median of our peer group; (2) to set target total cash compensation (salary plus bonus) at levels at, or slightly below, the peer group median; and (3) to pay performance-based compensation and long-term equity compensation in excess of the peer group median when the Company outperforms others in the industry or other appropriate measurement groups. We believe our compensation programs serve the interests of our stockholders and the Company, and substantially link the compensation of our executive officers with our financial performance. We believe, based on the advice that the Board’s Executive Compensation Committee (the “Committee”) has received from its independent consultant, our current compensation programs are in conformity with these policies.

C. Procedure for Determining Executive Officer Compensation

The base salary of Steve Burd, our Chief Executive Officer (“CEO”), is determined annually by the Board of Directors. At the end of each fiscal year, our Lead Independent Director (currently, Paul Hazen) collects information regarding Mr. Burd’s performance and discusses relevant issues and matters with him. The Lead Independent Director then reports on his findings and discussions to the Committee, which reviews the CEO’s salary each year. The Committee periodically obtains information regarding the compensation of the chief executive officers of our peer group companies. The Committee then meets, without the CEO present, and makes a recommendation to the Board about the CEO’s base salary for the next fiscal year. The Board subsequently meets in executive session, without the CEO present, and conducts a formal performance review of the CEO, and sets his base salary for the next fiscal year. Other regular elements of compensation for the CEO – bonus levels and long-term incentive equity award grants – are also established by the Committee and the Board in conformity with our general compensation principles (examining peer group levels and allowing increased compensation when the Company outperforms its peers). (See discussion below under those elements of compensation.) In a procedure that is expected to be repeated in future years, in early 2007, Mr. Burd proposed written objectives against which his performance in the 2007 fiscal year should be measured. The Committee reviewed this proposal and then established the written objectives for Mr. Burd for the 2007 fiscal year.

With respect to our Executive Vice Presidents, the Committee obtains compensation data concerning comparable positions at our peer group companies, which it reviews with Mr. Burd. Mr. Burd assesses the individual performance of each executive and proposes the base salaries for each of the Executive Vice Presidents. The Committee then sets these salaries. The procedure is similar for our other executive officers.

On at least an annual basis, the Committee reviews tally sheets for each of the named executive officers. These documents collect in one place the total compensation received by each such named executive officer, and the compensation each such named executive officer would receive under various events, including retirement, termination and change in control. The Committee reviews these tally sheets so it understands how these various events would affect the compensation received by these officers.