In one essential way, Safeway Inc. and Bill Zachry, the food and drug retailer’s vice president of risk management, are an ideal match. In the companies’ 1,406 stores, the potential that a fair number of its 171,000 full-time employees will slip and fall, hurt their backs or cut themselves exists every day. And Zachry is a well-respected workers’ compensation expert.

He’s so highly thought of, in fact, that he was one of the five people in the room hammering out the final details of Senate Bill 863, a massive overhaul of California’s costly and underperforming workers’ comp system. Besides Gov. Jerry Brown, who signed that bill into law in September 2012, Zachry worked closely with former governors Arnold Schwarzenegger and Gray Davis on previous bills. “I’ve got the original bills on the wall at the office, signed by the governors,” he told CFO.

The Safeway executive feels that his involvement in the legislative process gives him an edge. “Having an absolute understanding of what’s in the law, understanding the rules and regulations, is a competitive strategic advantage in terms of us achieving better results than many other people in the system,” he says. “Many of my peers do not participate on legislative or regulatory efforts. And I think, because of that, they don’t achieve the same kinds of results that we do.”

Zachry is particularly proud of how his programs have held costs down at the self-insured supeprmarket chain, and he advises CFOs to provide strong safety incentives to their companies’ managers and employees. In an interview with CFO, he gave some details of Safeway’s program and why it works. An edited version of the interview follows.

What do you see as the biggest workers’ compensation challenge at Safeway?

William Zachry, VP of risk management, Safeway

The biggest current workers’ compensation challenge we have is implementing alternative dispute resolution [instituted under SB 263]. We’ve negotiated an agreement with the United Food Workers and other unions representing all Safeway workers in southern California to proceed with alternative dispute resolution (ADR). In California, if you’re a unionized employer, you’re allowed to opt out of the workers’ compensation litigation system and go through an alternative dispute resolution program with an ombudsman and mediation-arbitration programs.

Implementing that program is going to be a big challenge, a complete change of procedures, policies and operations. We’re trying to work with the unions to do this, and it’s just a lot of work.

Are many employers in the state attempting to opt out?
It’s being done, primarily in the construction trades [which were permitted to opt out before the law was passed].  But it’s not really been done on the scale of a large retail company yet. And so we’re breaking new ground. There are certain opportunities for hiccups, but generally speaking I’m pretty optimistic it will be just fine.

What are the costs the company is seeking to avoid via ADR?
In California, particularly, one of the biggest workers’ compensation cost drivers is the litigation process. And one of the biggest problems of the U.S. workers’ compensation system as a whole is that the incentives are not in the right place to get the best possible outcomes.

For instance, if a claim is litigated, usually the applicant’s attorney is paid by how disabled they make their client appear, not their ability to get their client back to work. The ability to be represented by an attorney exists in most states right now. And that is one of the cost drivers throughout the U.S. workers’ compensation system.

What should CFOs be most alert to in terms of workers’ comp right now?
What you really want to ask yourself, is, OK, is this a risk that we can control and reduce in order to create value for the company and the bottom line? And I think many people do not focus enough on creating appropriate incentives within the organization to help drive down claims frequency and cost if there are accidents.

Describe Safeway’s own incentive program.
I think it’s actually quite unique in the United States. We have created a behavior-based program out in the stores, in which we have our employees working with each other on what’s called peer-to-peer observations. Let’s say Martha, a clerk in the deli department, sees Frank over there wearing a cut glove rather than using a bare hand to cut the sandwich. Cuts from knives represent one of the highest injury frequencies in the entire organization.

Of course we put in processes and protocols for safety. But what really, really works and drives the injury rate to zero after it soars, is when Martha will say to Frank, “Good job in using that cut glove.” Or Frank will say to Jane, “That was very good to use the ladder instead of standing on a milk crate in order to stock that shelf.”

Once employees within the operations get the knowledge of the safety standards, if you hit a 30 percent to 35 percent peer-to-peer penetration rate, the statistical frequency of injuries goes to almost zero in the stores.

And we have many stores that have gone a couple of years without a single accident. At that stage, it’s not the store manager or the assistant manager forcing something on you. It’s employees working together and making observations. We write those observations up. We’re getting 200,000 written peer-to-peer observations a week throughout the organization.

It’s very powerful, because when I say to you, “thanks for using the cut glove,” a peer is reinforcing the safety habit by noticing it and complimenting his or her co-worker on it. And that drives a lot of good behavior.

How many dollars have you’ve saved by using peer to peer in this way?
We are quantifiably driven, but I don’t think I can give you the exact dollars because that’s a strategic advantage that Safeway has. We are so far above the insurance industry it’s not even funny. My average claims cost is 40 percent below the industry.

What other incentives are in the plan?
The incentives vary. A good example involves sweeping. Two-thirds of the liability claims are slips and falls. If you inspect and sweep the stores within an hour you’re far less likely to have an accident. And if you go to court and you can prove that you’ve been sweeping that frequently, or inspecting the stores within an hour prior to the accident happening, or both, you’re still liable for the accident, but you’re not really considered negligent.

And so what we did is create a charge-back program, where the store is charged for the slip and fall. But we will give them a 100 percent pass on that charge if the internal security cameras show that the inspection is taking place and the sweep is taking place. That significantly improved the quality of the sweeps and inspections and significantly improved the accuracy of the reporting. And from that the overall litigation rate dropped dramatically on all our slips and falls, and it saved us millions.