Safeway Rewards 11 Top Execs

Safeway Inc. recently awarded 11 senior and executive vice presidents millions of dollars in stock grants and options under a new compensation plan that is drawing fire from labor leaders and others.

The plan came together in the wake of four high-profile corporate defections last year, including that of the chief financial officer, Vasant Prabhu, who left to join Starwood Hotels & Resorts Worldwide. A Safeway spokesman said the stock and options awards were necessary because after two years of wage freezes and undersized bonuses, it was becoming difficult to attract and keep talent.

There have been questions about the timing and the appropriateness of the move to reward upper management, given the company’s declining profitability and its demand that the next contract with workers in Central and Southern California institute a new tier of lower wages and less attractive benefits for new hires.

“I think it’s wrong as a matter of substance and appearance,” said Nell Minow, editor of the Corporate Library, which tracks executive compensation. “Why is anyone getting a bonus? The company’s performance has been poor for some time.”

Officials of the United Food and Commercial Workers union, which launched a strike against Safeway’s Vons and Pavilions stores Oct. 11, said pay should be tied to performance at Safeway.

“Executives should not be rewarded for losing money,” said Rick Icaza, president of UFCW Local 770 in Los Angeles. “It is obscene to reward executives with fat bonuses when more than 20,000 employees have given up their own paychecks.”

Safeway, based in Pleasanton, Calif., posted net income of $202.5 million, or 45 cents a share, in its third quarter ended Sept. 6, down 28% from the previous year. The firm will post fourth-quarter earnings Feb. 12.

Analysts expect the strike to cost Safeway hundreds of millions of dollars in lost sales. Albertsons Inc. and Kroger Co.-owned Ralphs supermarkets, which locked out their union workers the day after the Safeway strike began, also are forgoing sales in Southern and Central California.

Safeway spokesman Brian Dowling said the company decided to award the stock grants and options because “we are looking for ways to attract and retain the best people so we can see the company grow.”

In December, eight senior and executive vice presidents received grants of restricted stock. The 409,352 shares were worth nearly $9.4 million at Friday’s closing price of $22.95. The eight officers can sell the shares in 25% increments over the next four years.

All 11 of the vice presidents received a total of 672,865 shares of stock options at a strike price of $20.15, 12% below the current trading price. They can each exercise 20% of their options each year for the next five years.

Chief Executive Steven A. Burd wasn’t included in the stock-and-option reward plan. Burd earned $1.26 million in salary and bonus in 2002, down from $2.1 million the year before. Safeway executives’ 2003 salaries haven’t been made public.

Minow, the compensation expert, called it “unconscionable” that a company performing as poorly as Safeway would award stock options at strike prices below the current market price. Options are typically set at a price higher than where shares are trading, she said, and are supposed to be handed out to motivate managers to boost the company’s performance in the years ahead.

“Instead of setting the bar on the high jump, they are digging a trench down below,” Minnow said. “They are betting against shareholders by taking below-market options.”

Many top Safeway executives have been selling Safeway stock in recent months. Burd has earned about $15 million by cashing out stock options at regular intervals under a trading program he set up in August, before the strike started.

Larree M. Renda, an executive vice president, has been unloading Safeway shares every business day since Jan. 12 under a similar program she set up after the strike began. She has netted almost $70,000.

“I don’t think investors were expecting that executives would get options and churn them,” said Ann Yerger, co-director of the Council of Institutional Investors. “That’s not linking equity awards to long-term sustainable health of the company.”