Safeway (SWY)

Stock Options

Like many companies, we have a long-term incentive program (“LTIP”). Generally, the purpose of our LTIP is to encourage our executives to improve the Company’s long-term value, while also serving as a method for retaining our executives. Our LTIP involves annual grants of stock options to our executive officers. Compared to other LTIP programs that may involve a mix of cash and equity vehicles, we believe our stock-option-based LTIP most effectively focuses long-term performance on the objective of share price appreciation and aligns the interest of management with that of our stockholders.

Under the LTIP, the Committee makes annual grants of stock options to all executive officers based upon various factors, including the officer’s base salary, competitive levels of long-term incentive compensation and Company performance over the last several years. The Committee determines appropriate amounts of long-term incentive compensation to be paid to the CEO, the Executive Vice Presidents and the Senior Vice Presidents by examining competitive data ranges of compensation levels around the median peer group level and the binomial value of Company options, and taking into account recent Company performance. The Committee also considers individual factors, in a subjective manner, in determining amounts of long-term incentive compensation, including the executive’s experience, achievements, leadership, teamwork and value to the Company. We believe that our total direct compensation to executives in 2008 (total cash plus the expected value of these equity awards) was above the median of the peer group, reflecting the fact that we generally outperformed our peer group in recent years.

All of our stock option grants to our executive officers since 2003 have vested at the rate of 20% per year over five years. From 2003 through 2008, stock options were granted with a term of six years. Our options are granted with a per share exercise price equal to the closing price of our stock on the grant date, as determined under our equity plan (currently the 2007 Equity Plan). We believe stock options provide an incentive for our executives to increase the Company’s market value, as represented by our stock price.

A table elsewhere in this Proxy Statement shows the stock option grants made to the named executive officers in the 2008 fiscal year.

Stock Options

All of our stock option grants to our executive officers since 2003 have vested at the rate of 20% per year over five years, with a term of six years. Our options are granted with a per share exercise price equal to the fair market value of our stock on the grant date, as determined under our equity plan. We believe stock options provide an incentive for our executives to increase the Company’s market value, as represented by our stock price.

1. Stock Options.

All of our stock option grants to our executive officers since 2003 have vested at the rate of 20% per year over five years, with a term of six years. Our options are granted with a per share exercise price equal to the fair market value of the stock on the grant date, as determined under our equity plan. We believe stock options provide an incentive for our executives to increase the market value of the Company, as represented by its market price.

Long Term Incentive Plan.  Like many other companies, we have a long-term incentive plan (“LTIP”). Generally, the purpose of our LTIP is to encourage our executives to improve the long-term value of the Company, while also serving as a method for retaining our executives. Our LTIP involves annual grants of stock options to our executive officers. Compared to other LTIP programs that may involve a mix of cash and equity vehicles, we believe our stock-option-based LTIP most effectively focuses long-term performance on the objective of share price appreciation and aligns the interest of management with that of the stockholders.

Under the LTIP, the Committee makes annual grants of stock options to all executive officers based upon various factors, including the officer’s base salary, competitive levels of long-term incentive compensation and Company performance over the last several years. Examining competitive data ranges of compensation levels around the median peer group level and the Black-Scholes value of Company options, and taking into account recent Company performance, the Committee determines appropriate amounts of long-term incentive compensation to be paid to the CEO, the Executive Vice Presidents and the Senior Vice Presidents. We believe that our total direct compensation to executives in 2006 (total cash plus the expected value of these equity awards) was slightly above the median of the peer group.

A table elsewhere in this Proxy Statement shows the stock option grants made to the named executive officers in the 2006 fiscal year.

On March 27, 2007, the Board of Directors approved a new equity-based plan, subject to the approval of our stockholders. See “Proposal 2, Approval of Safeway Inc. 2007 Equity and Incentive Award Plan” for a description of this new equity plan.

New Hires/Promotions.  We typically make a grant of stock options when a new executive officer is hired, or when an existing employee is promoted into an executive officer position. No such executive officer new hire or promotion grants occurred in the 2006 fiscal year.

Timing of Stock Option Grants.  It has been our long-standing practice to set the exercise price at the closing trading price for Safeway’s Common Stock on the date of the grant. During the 2006 fiscal year, option grants to executive officers were made on one occasion only, at a regularly scheduled meeting of the Committee, and the exercise price was set at the closing trading price for Safeway’s Common Stock on the date of that meeting. Beginning with the 2007 fiscal year, our policy is to select option grant dates for existing executive officers under the LTIP program that will be the first day of our insider trading window period after the Committee meeting approving such grants, with the exercise price to be set at the closing trading price on that day. During the 2006 fiscal year, we had no program to select option grant dates for our executive officers in coordination with the release of material non-public information.

In prior years, option grant dates for newly hired or promoted executive officers were typically the first date of employment in the new position. Beginning with the 2007 fiscal year, our policy is that option grant dates for newly hired executive officers will be the first business day of the calendar month following the first date of employment. Our policy for newly promoted executive officers is that the option grant dates will be the first day of our insider trading window period following the fiscal quarter in which such promotion occurred. These option grant timing policies are generally in conformity with our policies regarding the option grant dates for employees who are not executive officers.

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The Committee has the sole authority to make stock option grants to executive officers. The Committee generally will authorize grants to such officers only at a meeting, and the option grant dates selected will be no earlier than the date of the meeting.