Safeway (SWY)

REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE

The Executive Compensation Committee of our Board of Directors has submitted the following report for inclusion in this Proxy Statement:

The Executive Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis contained in this Proxy Statement with management. Based on our Committee’s review of, and the discussions with management with respect to, the Compensation Discussion and Analysis, the Executive Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and in the 2008 10-K, for filing with the SEC.

Executive Compensation Committee:

Raymond G. Viault, Chair

Paul Hazen

Frank C. Herringer

Robert I. MacDonnell

Kenneth W. Oder

Rebecca A. Stirn

William Y. Tauscher

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Table of Contents

REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE

The Executive Compensation Committee of our Board of Directors has submitted the following report for inclusion in this Proxy Statement:

The Executive Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis contained in this Proxy Statement with management. Based on our Committee’s review of, and the discussions with management with respect to, the Compensation Discussion and Analysis, the Executive Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and in the 2007 10-K, for filing with the SEC.

Executive Compensation Committee⁽¹⁾:

Raymond G. Viault, Chair

Paul Hazen

Robert I. MacDonnell

Rebecca A. Stirn

William Y. Tauscher

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Table of Contents

REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE

The Executive Compensation Committee of the Company’s Board of Directors has submitted the following report for inclusion in this Proxy Statement:

The Executive Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis contained in this Proxy Statement with management. Based on our Committee’s review of and the discussions with management with respect to the Compensation Discussion and Analysis, the Executive Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2006, for filing with the Securities and Exchange Commission.

Executive Compensation Committee:

Raymond G. Viault, Chair

Paul Hazen

Robert I. MacDonnell

Rebecca A. Stirn

William Y. Tauscher

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REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE

The Company’s policies with respect to the compensation of executive officers, including the Chief Executive Officer (“CEO”), are approved by the Executive Compensation Committee. The policies are (1) to pay base salaries and to recommend, subject to approval by the Executive Compensation Committee, stock option and other equity awards for executive officers based on a review of competitive compensation practices of various industry groups and comparable size companies, overall financial, strategic and operational Company performance and improvement in each individual executive officer’s performance, (2) to base a significant portion of total yearly compensation of executive officers on the performance of the Company and the individual performances of the executive officers, and (3) to award the performance-based portions of compensation only when overall Company performance reaches pre-established levels. The relationship of Company performance to the compensation of executive officers, including the CEO, is as follows.

The Company undertakes an annual planning process that culminates in the adoption and approval of an operating plan for the Company. The operating plan includes a target level for Company operating performance for the following year. The specific elements of Company operating performance, as set forth in the Company’s 2001 Amended and Restated Operating Performance Bonus Plan (the “Operating Bonus Plan”), that are relevant to compensation determinations generally are: identical store sales, operating profit and working capital. Each year, an operating performance threshold based upon target level performance of one or more of the above factors is set by the Executive Compensation Committee. No operating performance-based compensation is awarded to executive officers, including the CEO, unless that operating performance threshold is met. If the operating performance threshold is met, operating performance-based compensation of a specified percentage set by the Executive Compensation Committee of the CEO’s base salary (up to a maximum bonus award of $3.0 million) is awarded to the CEO based upon the extent to which Company performance exceeds the threshold. Executive officers other than the CEO are eligible to receive operating performance-based compensation up to a specified percentage set by the Executive Compensation Committee of each such executive officer’s base salary (up to a maximum bonus award of $1.5 million), based upon the extent to which Company performance exceeds the threshold. The amount of operating performance-based compensation awarded to such executive officers may be reduced by the Executive Compensation Committee. The foregoing percentages of base salary payable to the CEO and other executive officers are established based on a review of competitive compensation levels with a view to allowing for higher than average incentive compensation to supplement lower than average base compensation. Operating performance-based compensation may, at the option of the executive, be paid in cash, in stock, or in a combination of cash and stock.

Based on actual operating results in 2005, Company performance did exceed the threshold of operating performance, entitling the CEO and other executive officers to the award of operating performance-based bonus compensation.

In addition to operating performance-based compensation, the most senior executive officers who are responsible for making capital investment decisions, including the CEO, are eligible for capital performance-based compensation, payment of which is contingent on new capital investments of the Company achieving targeted rates of return on each new store or remodel capital investment project. Capital performance generally is measured for the first and third years following completion of a particular project. With respect to each such year, if the capital performance threshold is met, the CEO is eligible for a bonus award not to exceed 30% of his base compensation (up to a maximum bonus award of $375,000). The other eligible executive officers are

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entitled to a bonus award of between 15% and 30% of each of such executive officer’s base salary (up to a maximum bonus award of $300,000), based upon the extent to which capital performance exceeded the threshold. The foregoing range of percentages was established at a level intended to emphasize the importance of capital spending to the Company’s business. Based on the results of the measured projects, which in the aggregate exceeded the pre-established targeted rates of return, the CEO and certain other executive officers earned a capital performance-based bonus in 2005 with respect to measured first and third year projects.

Base salaries are generally evaluated annually for all executive officers. Base salaries for executive officers, including the CEO, are based in part on competitive salary levels and individual performance, as well as overall financial, strategic and operational Company performance. Of these factors, the most significance is accorded to competitive salary levels, followed by overall Company performance and individual performance. The determination of whether to make certain one-time payments, such as signing bonuses, and the amount of any such payments, is evaluated on a case-by-case basis. Competitive compensation practices are reviewed by position and various industry groups, and this competitive data is used to determine appropriate ranges of base salary levels and annual increases to attract and retain qualified executives. The companies surveyed for this purpose consist of grocery companies and non-grocery companies, including major grocery chains, major food companies and major retailers. The non-grocery companies were selected because they were considered to be the significant competitors with respect to executive officer positions. The Company’s executive salary levels, including with respect to the CEO, generally are at the median of the executive compensation levels of the companies surveyed. Mr. Burd’s salary had been increased to $1.3 million effective July 2004, and remained at that level throughout 2005.

Stock option grants and other equity awards are considered periodically by the Executive Compensation Committee for all executive officers, including the CEO. A primary consideration in granting stock options is to encourage members of management to hold significant equity ownership in the Company. The aggregated option exercise table shows stock options owned by the named executive officers. The amounts of stock options granted in any given year, including those granted to the CEO and the other executive officers, are derived based upon the same factors, and with the same relative significance, as are set forth in the preceding paragraph with respect to the establishment of base salary levels.

On March 9, 2005, the Executive Compensation Committee approved a modification to the Company’s equity award program to make it comparable to and competitive with other companies’ long-term incentive programs. A study prepared by an independent compensation consultant for the Committee showed that the long-term incentive component of Safeway’s compensation program for senior executives was well below the median of its peer group. The Committee approved modifications to the equity award program that would meet competitive levels of long-term incentive compensation, thereby placing the Company’s executives at the level of senior vice president and above slightly above the median of the peer group in terms of target total direct compensation (base salary plus target annual bonus plus expected value of long-term incentives). To achieve this result, the Committee approved a program in which a specified multiplier was calculated for each level of these senior officers, and stock options will be granted to these officers based upon the multiplier applicable to their level. All stock option grants to executive officers, including the CEO, will be made by the Executive Compensation Committee. During 2005, the Executive Compensation Committee made a grant of stock options to each executive officer. The Executive Compensation Committee also will consider granting restricted stock awards in order to provide additional longer-term incentives. During 2005, the Committee did not make any grants of restricted stock to executive officers.

On March 10, 2005, the Board of Directors approved the terms of a Supplemental Retirement Benefit Agreement (the “Agreement”) between the Company and Mr. Burd. The Agreement was previously approved and recommended by the Executive Compensation Committee. In making its recommendations, the Committee reviewed comparative data from approximately 150 public companies and from certain companies in the food industry. The Committee determined that Mr. Burd’s retirement benefit was below that for chief executive officers of the companies examined. In order to retain Mr. Burd’s services and to make his retirement benefits

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comparable to those of other executives, the Committee approved the Agreement, which will place Mr. Burd approximately at the median of the executives examined.

Under the terms of the Agreement, Mr. Burd’s retirement benefit is calculated as a percentage of his final average compensation (defined as the average of Mr. Burd’s base salary and bonus for the five consecutive years during his final ten years of service during which the total of his base salary and bonus is the highest). If Mr. Burd terminates employment with Safeway at age 60, he is eligible to receive a retirement benefit equal to 55% of his final average compensation, and this percentage would increase by 1% for each full year of service thereafter up to a maximum of 60% of his final average compensation. Any amount determined pursuant to this formula will be offset by the actuarial equivalent of Mr. Burd’s benefits under the Employee Retirement Plan of Safeway Inc., the Retirement Restoration Plan of Safeway Inc. and any other of Mr. Burd’s defined benefit retirement plans or programs.

The Executive Compensation Committee believes that the executive compensation policies and programs described above serve the interests of all stockholders and the Company and substantially link compensation of the Company’s executive officers with the Company’s performance.

During 1993, the Internal Revenue Code of 1986 was amended to include a provision which denies a deduction to any publicly held corporation for compensation paid to any “covered employee” (defined as the CEO and the Company’s other four most highly compensated officers, as of the end of a taxable year) to the extent that the compensation otherwise deductible exceeds $1 million in such taxable year of the corporation beginning after 1993. Compensation which is payable pursuant to written binding agreements entered into before February 18, 1993 and compensation which constitutes “qualified performance-based compensation” is excludable in applying the $1 million limit. It is the Company’s policy to qualify all compensation paid to its top executives, in a manner consistent with the Company’s compensation policies, for deductibility under the 1993 law in order to maximize the Company’s income tax deductions. However, this policy does not rule out the possibility that compensation may be approved that may not qualify for the compensation deduction if, in light of all applicable circumstances, it would be in the best interests of the Company for such compensation to be paid.

Executive Compensation Committee:

Raymond G. Viault, Chair

Paul Hazen

Robert I. MacDonnell

Rebecca A. Stirn

William Y. Tauscher

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REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE

The Company’s policies with respect to the compensation of executive officers, including the Chief Executive Officer (“CEO”), are approved by the Executive Compensation Committee. The policies are (1) to pay base salaries and to recommend, subject to approval by the Executive Compensation Committee, stock option and other equity awards for executive officers based on a review of competitive compensation practices of various industry groups and comparable size companies, overall financial, strategic and operational Company performance and improvement in each individual executive officer’s performance, (2) to base a significant portion of total yearly compensation of executive officers on the performance of the Company and the individual performances of the executive officers, and (3) to award the performance-based portions of compensation only when overall Company performance reaches pre-established levels. The relationship of Company performance to the compensation of executive officers, including the CEO, is as follows.

The Company undertakes an annual planning process that culminates in the adoption and approval of an operating plan for the Company. The operating plan includes a target level for Company operating performance for the following year. The specific elements of Company operating performance, as set forth in the Company’s 2001 Amended and Restated Operating Performance Bonus Plan (the “Operating Bonus Plan”), that are relevant to compensation determinations generally are: identical store sales, operating profit and working capital. Each year, an operating performance threshold based upon target level performance of one or more of the above factors is set by the Executive Compensation Committee (formerly the Section 162(m) Subcommittee). No operating performance-based compensation is awarded to executive officers, including the CEO, unless that operating performance threshold is met. If the operating performance threshold is met, operating performance-based compensation of a specified percentage set by the Executive Compensation Committee of the CEO’s base salary (up to a maximum bonus award of $3.0 million) is awarded to the CEO based upon the extent to which Company performance exceeds the threshold. Executive officers other than the CEO are eligible to receive operating performance-based compensation up to a specified percentage set by the Executive Compensation Committee of each such executive officer’s base salary (up to a maximum bonus award of $1.5 million), based upon the extent to which Company performance exceeds the threshold. The amount of operating performance-based compensation awarded to such executive officers may be reduced by the Executive Compensation Committee. The foregoing percentages of base salary payable to the CEO and other executive officers are established based on a review of competitive compensation levels with a view to allowing for higher than average incentive compensation to supplement lower than average base compensation. Operating performance-based compensation may, at the option of the executive, be paid in cash, in stock, or in a combination of cash and stock.

Based on actual operating results in 2004, Company performance did exceed the threshold of operating performance, entitling the CEO and other executive officers to the award of operating performance-based bonus compensation.

The Senior Vice President, Supply, is eligible to receive an additional bonus component under the Operating Bonus Plan based on one or more supply division results. The Executive Compensation Committee determined that, for 2004, the Senior Vice President of Supply would receive his bonus under the operating performance bonus threshold, similar to the other executive officers, and would not receive an additional supply division bonus.

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In addition to operating performance-based compensation, the most senior executive officers who are responsible for making capital investment decisions, including the CEO, are eligible for capital performance-based compensation, payment of which is contingent on new capital investments of the Company achieving targeted rates of return on each new store or remodel capital investment project. Capital performance generally is measured for the first and third years following completion of a particular project. With respect to each such year, if the capital performance threshold is met, the CEO is eligible for a bonus award not to exceed 30% of his base compensation (up to a maximum bonus award of $375,000). The other eligible executive officers are entitled to a bonus award of between 15% and 30% of each of such executive officer’s base salary (up to a maximum bonus award of $300,000), based upon the extent to which capital performance exceeded the threshold. The foregoing range of percentages was established at a level intended to emphasize the importance of capital spending to the Company’s business. Based on the results of the measured projects, which in the aggregate exceeded the pre-established targeted rates of return, the CEO and certain other executive officers earned a capital performance-based bonus in 2004 with respect to measured first and third year projects.

Base salaries are generally evaluated annually for all executive officers. Base salaries for executive officers, including the CEO, are based in part on competitive salary levels and individual performance, as well as overall financial, strategic and operational Company performance. Of these factors, the most significance is accorded to competitive salary levels, followed by overall Company performance and individual performance. The determination of whether to make certain one-time payments, such as signing bonuses, and the amount of any such payments, is evaluated on a case-by-case basis. Competitive compensation practices are reviewed by position and various industry groups, and this competitive data is used to determine appropriate ranges of base salary levels and annual increases to attract and retain qualified executives. The companies surveyed for this purpose include grocery companies and non-grocery companies. The non-grocery companies were selected because they were considered to be the significant competitors with respect to executive officer positions. All grocery companies whose executive pay practices were surveyed for this purpose are included in the peer group identified in the footnote to the Stock Performance Graph set forth elsewhere in this Proxy Statement, except for those companies whose common stock was not publicly traded for the period covered by the Stock Performance Graph. The Company’s executive salary levels, including with respect to the CEO, generally are at the median of the executive compensation levels of the companies surveyed. With the assistance of an analysis prepared by an independent third party compensation consultant and in an effort to make the CEO’s compensation comparable to that of other CEOs of similarly situated public companies, the Compensation Committee increased Mr. Burd’s annual salary to $1.3 million effective July 5, 2004.

Stock option grants and other equity awards are considered periodically by the Executive Compensation Committee for all executive officers, including the CEO. A primary consideration in granting stock options is to encourage members of management to hold significant equity ownership in the Company. The aggregated option exercise table shows stock options owned by the named executive officers. The amounts of stock options granted in any given year, including those granted to the CEO and the other executive officers, are derived based upon the same factors, and with the same relative significance, as are set forth in the preceding paragraph with respect to establishment of base salary levels. In 2004, the Executive Compensation Committee modified its practice with regard to equity awards and began making smaller new hire and promotion grants in combination with annual grants based on individual performance.

On March 9, 2005, the Executive Compensation Committee approved a modification to the Company’s equity award program to make it comparable to and competitive with other companies’ long term incentive programs. A study prepared by an independent compensation consultant for the Committee showed that the long term incentive component of Safeway’s compensation program for senior executives was well below the median of its peer group. The Committee approved modifications to the equity award program that would meet competitive levels of long term incentive compensation, thereby placing the Company’s executives at the level of senior vice president and above slightly above the median of the peer group in terms of target total direct compensation (base salary plus target annual bonus plus expected value of long term incentives). To achieve this result, the Committee approved a program in which a specified multiplier was calculated for each level of these

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senior officers, and stock options will be granted to these officers based upon the multiplier applicable to their level. All stock option grants to executive officers, including the CEO, will be made by the Executive Compensation Committee. The Executive Compensation Committee also will consider granting restricted stock awards in order to provide additional longer-term incentives. During 2004, the Executive Compensation Committee made a grant of restricted stock to each of two new executive officers.

On March 10, 2005, the Board of Directors approved the terms of a Supplemental Retirement Benefit Agreement (the “Agreement”) between the Company and Mr. Burd. The Agreement was previously approved and recommended by the Executive Compensation Committee. In making its recommendations, the Committee reviewed comparative data from approximately 150 public companies and from certain companies in the food industry. The Committee determined that Mr. Burd’s retirement benefit was below that for chief executive officers of the companies examined. In order to retain Mr. Burd’s services and to make his retirement benefits comparable to those of other executives, the Committee approved the Agreement, which will place Mr. Burd approximately at the median of the executives examined.

Under the terms of the Agreement, Mr. Burd’s retirement benefit is calculated as a percentage of his final average compensation (defined as the average of Mr. Burd’s base salary and bonus for the five consecutive years during his final ten years of service during which the total of his base salary and bonus is the highest). If Mr. Burd terminates employment with Safeway at age 55, he is eligible to receive a retirement benefit equal to 50% of his final average compensation, and this percentage increases by 1% for each full year of service up to a maximum of 60% of his final average compensation. Any amount determined pursuant to this formula will be offset by the actuarial equivalent of Mr. Burd’s benefits under the Employee Retirement Plan of Safeway Inc., the Retirement Restoration Plan of Safeway Inc. and any other of Mr. Burd’s defined benefit retirement plans or programs.

The Executive Compensation Committee believes that the executive compensation policies and programs described above serve the interests of all stockholders and the Company and substantially link compensation of the Company’s executive officers with the Company’s performance.

During 1993, the Internal Revenue Code of 1986 was amended to include a provision which denies a deduction to any publicly held corporation for compensation paid to any “covered employee” (defined as the CEO and the Company’s other four most highly compensated officers, as of the end of a taxable year) to the extent that the compensation otherwise deductible exceeds $1 million in such taxable year of the corporation beginning after 1993. Compensation which is payable pursuant to written binding agreements entered into before February 18, 1993 and compensation which constitutes “qualified performance-based compensation” is excludable in applying the $1 million limit. It is the Company’s policy to qualify all compensation paid to its top executives, in a manner consistent with the Company’s compensation policies, for deductibility under the 1993 law in order to maximize the Company’s income tax deductions. However, this policy does not rule out the possibility that compensation may be approved that may not qualify for the compensation deduction if, in light of all applicable circumstances, it would be in the best interests of the Company for such compensation to be paid.

Executive Compensation Committee:

William Y. Tauscher, Chair

Paul Hazen

Robert I. MacDonnell

Rebecca A. Stirn

Raymond G. Viault

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