Sir Peter Davis was previously at the Pru

The supermarket chain said he had agreed to extend his contract and it would be awarding him a new �3.5m shares package to cover the extended term of office.

Swapping a chief executive role chairmanship role goes against the recent Higgs proposals on corporate governance.

But Sainsbury moved to counter any criticism by announcing that it would be creating a new role for an independent non-executive deputy chairman who would eventually become non-executive chairman.

The group is currently one of the bidders for the smaller, rival chain Safeway.

Restoring fortunes

Sir Peter joined the company on a four-year contract in January 2000.

He took the chief executive's job when Sainsbury was losing ground to rivals Tesco and Asda, and struggling to maintain its profits.

Sir Peter, who was previously at the Prudential, has had a difficult time turning round the supermarket chain's fortunes.

Initially, profits continued to fall but the group managed to cut costs, improve the service and range of goods in its stores and win back customers.

The chairman, Sir George Bull, said the company's board thought Sir Peter was the ideal candidate to take over the job of chairman.

Sainsbury said it would reward Sir Peter with 1.5 million shares on July 31, 2005, depending on the achievement of profit and business recovery targets.

At the current share price of 233.75 pence the package would be worth �3.51m.

Sir George said: "The board has agreed a package for Peter that focuses on profit improvement and business recovery targets, which we believe will lead to enhanced shareholder value."