Beginning in July the operating committee, under Glucksman’s direction, met to recommend that year’s bonuses. The six members of the operating committee, in addition to Glucksman, were Bob Rubin; Jim Boshart; Shel Gordon; Dick Fuld; and bankers François de Saint Phalle and Roger Altman. In turn, operating committee bonuses were determined by Glucksman, Rubin, Harvey Krueger, William Morris and Peter Solomon—members of the now defunct executive committee. Traditionally, the CEO at Lehman had the power, if there were disagreements, to make final decisions about the size of a partner’s bonus, including the size of the bonus of all seven members of the operating committee; in consultation with the board, he decided what percentage of the firm’s common shares (then showing a book value of $640.19 per share) each partner was entitled to.

Dividing into subcommittees, the operating committee that summer interviewed individual partners, allowing each to make a case for how much business he had brought to Lehman that year; the full committee, after receiving the recommendations of department heads, reviewed these recommendations with the CEO, and then gave its sanction to the board.

By mid-September, bonus decisions were set. Division chiefs would meet individually with their employees to relay the verdict. Despite the style of living many partners enjoyed and the ample fees Lehman was billing (merger and acquisition fees alone totaled $56 million for the fiscal year ending September 30, 1983) partners’ salaries were relatively modest, ranging at the time from $75,000 to $125,000 annually for all but Glucksman, who received $225,000, and board members, who received $150,000. Bonuses were not modest. Whereas salary and bonuses totaled an average of $166,000 in 1974 and $196,000 the next year, at least half of which was salary, by the 1980’s bonuses ranged from two to ten times salary. In 1982, to take an extreme example, Dick Fuld, then thirty-six, received a bonus of $1.6 million. Not surprisingly, partners did not take bonus or stock decisions lightly.

Bonus expectations were high among the partners, and not without reason. It had been a good year on Wall Street, with bullish trading activity swelling profits. At rival Salomon Brothers, John H. Gutfreund, the managing partner, earned $2.08 million in 1983. Lehman partners knew that executive compensation was up throughout the nation. That year, for example, the president of Apple Computer, John Sculley, earned $1.8 million; the CEO of Paramount Studios, Barry Diller, received $1.7 million. And Lehman partners knew this had been another spectacular year at Lehman, with profits climbing to $147.7 million (before taxes and bonuses). The pool of money set aside for bonuses jumped from $20.6 million in 1982 to $27 million in 1983. Most divisions, including banking, bettered their budgeted projections for the year.

Therefore, when word of the final bonus and stock decisions rumbled through Lehman’s corridors, banking partners wailed. For years they had been told that the traders were upset that their bonus and stock participation was eclipsed by the bankers’. Glucksman had warned during the 1982 bonus and stock deliberations that he believed a fundamental redistribution of the firm’s income and ownership was in order. Dick Fuld, in the time he served on the board and operating committee, had often growled about the need to redistribute the firm’s wealth to those traders who produced most of the profits. To Glucksman, and traders he had worked beside for years, this was simply a matter of justice. Between 1980 and 1983 the fixed income, or trading, divisions produced $4 of profit for every $3 brought in by banking—$210.8 million against $165 million. This reasoning, however, didn’t convince the bankers, since they knew that fee-related banking entailed low overheads and little risk or capital, unlike trading. They considered banking profits “higher-quality earnings,” and thus believed they deserved more generous bonuses than Glucksman’s mathematical formula apportioned. To alter past formulas dramatically, they warned, would leave deep scars.

Now alone at the helm, Glucksman was determined to right past wrongs; no longer would bonuses and shares be allocated according to what partners had traditionally received or to their status within the firm; rather, he strove to make decisions on what he said were “the merits” of each partner’s performance. Glucksman thought he was being objective. In fact, many banking partners believed his decisions were too personal, meant to settle old scores. They feared Glucksman was not controlling his demons.

When the tentative bonus schedule was reviewed by bankers Peter Solomon, Harvey Krueger and William Morris—who as members of the former executive committee had traditionally reviewed bonuses—they were outraged. Solomon, who had had what he considered a very good year—what he considered a $500,000-bonus year—was the firm’s premier retail-industry investment banker, and he was scheduled to get $375,000, a miserly $25,000 raise over 1982. Krueger’s bonus would drop $25,000, from $325,000. And Morris’s was scheduled to plunge from $400,000 to $300,000. On top of this, they learned that Glucksman and Rubin planned to expropriate 500 shares of Lehman stock from each of them, reducing their ownership from 2,500 to 2,000 shares apiece.

At lunch in the forty-first-floor executive dining room off the trading floor, the three banking partners expressed to Glucksman and Rubin their outrage. “This will tear the firm apart!” exclaimed Solomon. There was some shouting, and the meeting ended inconclusively. The five men agreed to meet again with Glucksman the next morning.

Working feverishly through the night, Solomon came to the meeting the next day armed with a proposed new bonus schedule. Glucksman and Rubin summarily rejected it. Their strategy was to try to break Morris and Krueger away from Solomon. Morris was Rubin’s good friend, and Krueger was Glucksman’s. In the meeting, as Glucksman and Rubin offered personal cajolery, as well as amendments to the bonus schedule, they asked repeatedly, looking only at the two bankers, “Is this okay with you guys?”

Morris and Krueger sat there tight-lipped, their expressions frozen. They said nothing.

It was not unlike an auction, in which each gesture drives the bid up. Eager to gain support, or at least acquiescence for the overall bonus package, Glucksman finally relented, agreeing to fatten each of their bonuses. Solomon got an additional $25,000, a “tip,” as he disparagingly called it; Krueger and Morris each got $100,000 more than originally offered. Glucksman also agreed to leave their stock intact, justifying their 2,500 shares—more than other bankers received—by naming them “senior bankers.” In a protest, Krueger says that he and Solomon sold back 100 shares of stock, and gave the proceeds to Jewish charities. Solomon’s stock was worth approximately $100,000. Krueger, who also sold and donated the proceeds from some of his more valuable preferred shares, says his donation to Hebrew University was worth about $200,000. Bob Rubin offers a less charitable interpretation: “The cheapest way to give to charity is to give away appreciated stock. It’s like buying something for one dollar and seeing its worth climb to a hundred dollars. The value of your gift is a hundred dollars and you don’t pay a capital gains tax.”

Solomon, outraged by the bonus schedule, gave key partners a peek, hoping to fan opposition; he warned that if the plan passed, it would “blow apart the firm.” Solomon insists that he, joined by Krueger and Morris, opposed the entire bonus and stock plan. Their opposition, he says, came in private conversations among the five men. His recollection is shared by Krueger, who insists, “I raised hell about the bonuses.” Their recollection does not square with that of the three other witnesses. “I’m not saying they were ecstatic. But they went along,” says Rubin. Morris agrees, and says of himself: “I went along. As I went along with all others.” At the September 21 board meeting, where the allocation of bonuses and shares was endorsed, neither Solomon, Morris nor Krueger dissented. Although these five partners deny that they had been given what some partners came to call “hush money,” a member of the operating committee says, “They got bought off. Lew came to the operating committee and told us, ‘These guys are bitching and moaning. I got to give them more to shut them up.’”

The September 21 board meeting featured a slide presentation by Bob Rubin. He explained that under this plan the banking division, which produced one-third of the firm’s profits, would still receive 60 percent of the bonus money (down from 67 percent the year before); and the number of nonbanking partners would rise from twenty-eight to just thirty-five, still less than half. Banking partners seemed not to hear this; instead they seized on other things, such as the fact that Lew Glucksman and a coterie of four other senior executives received 25 percent of the total bonus pool. Glucksman’s bonus jumped from $1.25 million in 1982 to $1.5 million (and since Peterson’s severance agreement guaranteed him the same bonus as his former co-CEO, that was his bonus as well); Richard Fuld, whose trading operations attained record profits, also received $1.5 million, down from $1.6 million the previous year. (Glucksman thought it would look unseemly if his protégé received more than he did.) Shel Gordon went from $400,000 to $1 million (according to Bob Rubin, Gordon complained when his bonus did not match Fuld’s); Bob Rubin’s rose from $700,000 to $900,000; Jim Boshart’s went from $300,000 to $400,000; and Henry Breck’s from $250,000 to $325,000.

The bonuses of several bankers were also sweetened. Operating committee members Roger Altman and François de Saint Phalle climbed from $350,000 to $450,000 and $500,000, respectively. Generally, however, the bonuses of various banking partners did not conform to this pattern. For example, Yves-André Istel dropped from $250,000 to $200,000; and most stunning of all, Glucksman’s ally Eric Gleacher, after a robust year of orchestrating mergers, including Allied’s merger with Bendix, was raised a mere $25,000 to $400,000—less than other M. & A. partners, particularly rival Steve Schwarzman. The recommendations were made by the banking division’s management, Rubin explained, and Lew Glucksman refused to overrule his managers. In the case of Eric Gleacher, he says, “Mr. Schwarzman’s revenues were approximately 20 percent higher than Mr. Gleacher’s in 1982 and 1983.”

These arguments did not stem the rising tide of anger. What appeared to be favoritism toward trading and sales—and “cronies”—was also noted in the way the partners’ stock was distributed. Each September, the board decided how to redivide a fixed pool of approximately 100,000 shares. The shifts in stock were usually incremental; rarely did senior partners find their shares sharply reduced or augmented. But in September 1983, past patterns were shattered. Glucksman’s shares jumped from 3,500 to 4,500; although he had once owned 4,300 shares, this move reeked of the same greed Glucksman laid at Peterson’s doorstep—“He’s the greediest man I’ve ever known,” says Glucksman. Yet Glucksman, like Peterson, had been granted, starting in 1982, 1 percent of Lehman’s profits, after both men protested that their ownership shares were puny. Now, two months on the job, Glucksman appeared to feather his own nest and the nests of his friends. Rubin went from 2,500 to 2,750 shares; Shel Gordon and Dick Fuld each rose from 2,000 to 2,750 shares—250 more shares than Solomon, Krueger or Morris. And the disparity between them would have been greater had Glucksman succeeded in reducing the three bankers’ shares by 500 each. Jim Boshart jumped from 1,500 to 2,000 shares.

It seemed that a disproportionately large number of bankers had their shares shaved and reapportioned to the trading department—including Yves-André Istel (down from 2,250 to 1,700 shares), James H. Manges (down from 1,500 to 1,000 shares), Raymond A. Charles (down from 1,000 to 500 shares) and Robert McCabe (down from 1,325 to 1,000 shares). Even popular William Welsh from the sales side relinquished 300 shares. While it is true that some bankers’ shares rose—M. & A. head Richard Bingham went from 1,800 to 2,000 shares, Roger Altman and François de Saint Phalle rose from 2,000 to 2,250 and Steve Schwarzman advanced from 1,700 to 2,000—the overall message telegraphed by Glucksman to the bankers was clear, and terrifying.

To Richard Bingham, whose compensation climbed and who tended not to get involved in Lehman’s internal feuds, the details were less important than the signal: “Glucksman had just taken control of the firm, and instead of moving to consolidate the firm and bring people together, he took steps which exaggerated that division and created more division. It didn’t matter whether he was paying me more or less. I felt he was making improper management decisions. It indicated to me that there was some question whether Lew had the ability to manage the place.”

Glucksman’s decisions jarred even some members of his own management team. Jim Boshart, who remains loyal to Glucksman, nevertheless says the stock decisions were “stupid”—too dramatic. Pete Dawkins, the new partner, was struck by how Glucksman’s actions clashed with the aims he professed when he had recruited him: “One of the ironies of all this is that what Lew said he was trying to do, and what I believe he meant, was different than what his actions led to.”

Glucksman defended his actions. The basic problem, he believes, was the greed of his partners. He says of the bankers: “Their idea was for me to lean over backward to screw the trading side … We used to joke that there was no way of making people happy who were making so much money. People were making a million and a half!”—including salary, bonus, dividends and annual appreciation of the worth of their stock.

Glucksman was reassured by Bob Rubin, who says he told Glucksman the ownership changes were, in fact, “gradual.”* If Glucksman & Company were practicing cronyism, they say, why would they hold down Gleacher’s bonus? And why would they reward Schwarzman, whom Rubin and Glucksman disliked? And, says Rubin, the 25 percent of the total bonus pool earmarked for five executives “was the same percentage paid to the five men in 1982.”

Glucksman may have failed to appreciate the anger his actions aroused because he received support from some prominent bankers, including operating-committee member Roger Altman, a former Peterson protégé eager to work closely with the new chairman. Altman cast his vote for the bonus package, describing the bonus and stock distribution plan as both “fair” and “consistent” with the changes made in prior years. The jump in Glucksman’s stock ownership was applauded by operating-committee member François de Saint Phalle, who headed a study committee that found that the CEO’s of their competitors owned 4 percent to 5 percent of the stock, not the less than 4 percent owned by Glucksman. “Compare his ownership as chief executive with other chief executives, and he was light. There was plenty of justification for his increase in stock,” says de Saint Phalle.

These views were not widely shared, certainly not within banking. Partners noted, for instance, that with 4,500 shares and 1 percent of Lehman’s profits, Glucksman’s effective ownership was between 5 and 6 percent, not the 4 to 5 percent industry standard. “It was a lost opportunity,” says Harvey Krueger, who rarely criticized Glucksman. “Everybody had a good year. It was no time to be niggardly. If that opportunity couldn’t be seized, then I had fears for the status of the banking division within the firm.” Peter Solomon, who groused openly about Glucksman, says, “My God, the first year Glucksman was in charge he should have taken less. Instead, he pigged out.”

The question of fairness that Glucksman had championed in prior years was now being asked of him. Glucksman had succeeded in creating a spirit of teamwork within the commercial paper division; now, when granted the opportunity he had craved, he was failing to extend that spirit throughout the firm. In a partnership, where the rewards are to be shared, a loss of trust can be devastating. And in his first two months at the helm of his own ship, Lew Glucksman began to lose that trust. “If you were Machiavelli, you would have hired people to do Peterson’s job,” observes one former partner. “You would have been modest in your own bonus and stock. You would have shored up your weakness in banking … Since he’s smart, my theory is that something tripped in Lew.”

*Boshart contradicts Rubin, saying, “Bob Rubin fought Lew Glucksman tooth and nail on the stock issue, saying it was too dramatic.”