Sir Peter's bonus sparked anger from shareholders

Sir Peter left the company in July and had been locked in a legal battle with Sainsbury's over the revised terms of his salary and payoff.

Now, on top of the cash deal, he will get £0.5m a year until July 2005, when his fixed term contract was to run out.

This has been reduced from his original salary of £850,000 a year.

Sainsbury's said the £2.6m was a "significant reduction" of about £1m from what Sir Peter had originally been entitled to.

Shareholder revolt

Sir Peter came under pressure to quit the company after the UK's third-largest supermarket retailer lost market share and suffered a fall in earnings.

A shareholder revolt in July forced the board to withdraw its original payoff deal.

The supermarket chain says it hoped the new settlement would draw a line under the affair.

"Sainsbury's believes it is in the best interests of the company's shareholders to reach settlement and bring this matter to a conclusion," the grocery firm said in a statement.

Sainsbury also announced that Keith Butler-Wheelhouse, head of its remuneration committee, had resigned along with fellow non-executive director Lord Levene.

New chairman Philip Hampton is said to be keen to begin a clearout of non-executive directors responsible for signing off Sir Peter's original deal, valued at almost £4m.

Meanwhile, Sir Peter said he plans to retire from corporate life and has no intention of taking on another job at a public company.