Susanna Gallani - Faculty & Research - Harvard Business School
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Susanna Gallani

Assistant Professor of Business Administration

Accounting and Management

Susanna Gallani is an assistant professor of business administration in the Accounting and Management unit. She teaches Financial Reporting and Control in the MBA required curriculum, and in focused executive education programs.

In her research, Professor Gallani focuses on issues related to the design and effectiveness of monetary and non-monetary incentives. In recent work she has studied the influence of feedback and recognition on team performance, as well as the implications of applying subjectivity to forced-ranking performance evaluation systems. Her body of work also includes studies of the roles of external influencers, such as proxy advisory firms, compensation consultants, and institutional investors, on the design of executive compensation contracts in public firms based in the United States.

Professor Gallani holds a Ph.D. in accounting from Michigan State University, and a Master in Business Administration from Central Michigan University. Her undergraduate degree in Business Economics is from the University of Trieste, Italy. Before pursuing her doctorate, Professor Gallani was a senior manager at Honeywell, where she was involved in business transformation initiatives.  

Journal Articles
  1. Budgeting, Psychological Contracts, and Budgetary Misreporting

    Susanna Gallani, Ranjani Krishnan, Eric J. Marinich and Michael D. Shields

    This study examines the effect of psychological contract breach on budgetary misreporting. Psychological contracts are mental models or schemas that govern how employees understand their exchange relationships with their employers. Psychological contract breach leads to feelings of violation and can occur even when employees’ economic contracts are fulfilled. We study the effects of psychological contract breach on three common types of employee participation in budgeting that differ in the degree of employees’ influence over their approved budgets. These include affirmative budgeting (full influence), consultative budgeting (moderate influence), and authoritative budgeting (low influence). When organizations communicate that employees will be involved in budgeting, employees develop psychological contracts of affirmative budgeting. If employees subsequently experience authoritative or consultative budgeting, their psychological contracts are breached. Employees who experience psychological contract breach seek redress through budgetary misreporting. Experimental results indicate that psychological contract breach partially mediates the relation between budgeting type and budgetary misreporting. Results also indicate asymmetry in the effects of psychological contract breach versus repair. Effects of breach on budgetary misreporting persist even after the breach no longer occurs.

    Keywords: Budgeting; psychological contracts; misreporting; Budgets and Budgeting; Employees; Trust;


    Gallani, Susanna, Ranjani Krishnan, Eric J. Marinich, and Michael D. Shields. "Budgeting, Psychological Contracts, and Budgetary Misreporting." Management Science (forthcoming).  View Details
Working Papers
  1. Incentives and Employee-Initiated Innovation: Evidence from the Field

    Wei Cai, Susanna Gallani and Jee-Eun Shin

    Organizations often struggle with motivating employees to develop innovative ideas that may benefit the firm, especially when the standard tasks for which employees are measured and incentivized do not explicitly include innovation. Prior analytical research posits that low-powered incentives can motivate employees to generate creative ideas by diverting their attention away from fixating on performance measures associated with their standard tasks included in the incentive contract. Using data from a company that underwent an exogenous change in its employee incentive contract design towards low-powered incentives, we examine whether the design of incentive contracts for the standard tasks influences employee-initiated innovation activities. We find that employees under fixed-pay contracts are more likely to pursue innovation ideas that are valuable to the firm relative to employees under variable-pay contracts. Moreover, such efforts are concentrated on innovation ideas that are not specific to the standard task performed by the proposing employee but are applicable to issues of greater breadth for the firm and/or with a long-term view. Our findings contribute to the literature on incentives for innovation by showing how contract structure can motivate unplanned employee-initiated innovation activities that are difficult to contract upon ex ante.

    Keywords: employee driven innovation; innovation appropriability; Contract Design; creativity; low-powered incentives; Employees; Innovation and Invention; Motivation and Incentives; Creativity;


    Cai, Wei, Susanna Gallani, and Jee-Eun Shin. "Incentives and Employee-Initiated Innovation: Evidence from the Field." Harvard Business School Working Paper, No. 19-015, August 2018.  View Details
  2. Subjectivity in Tournaments: Implicit Rewards and Penalties and Subsequent Performance

    Wei Cai and Susanna Gallani

    This study extends the literature on the tradeoffs associated with subjectivity in tournament incentive systems by describing the effects of implicit penalties (rewards), whereby workers ranked at the top (bottom) of objective performance rankings fail to receive the reward (penalty) due to management’s subjective performance evaluations. Using data from a field setting where incentive contracts are structured as repeated tournaments, we find that workers respond differently to subjective versus objective awards of rewards and penalties. Additionally, workers subject to implicit rewards (penalties) exhibit performance reactions that counterbalance those of workers receiving subjective penalties (rewards), with net effects indistinguishable from zero. However, while the effects of subjective rewards and penalties reverse in the subsequent period, the performance effects of implicit rewards and penalties persist. Our study documents consequences of subjectivity that might alter the effectiveness of tournament incentives, and is relevant for the practice of incentive design.

    Keywords: tournaments; subjectivity; Relative performance evaluation; implicit rewards and penalties; reciprocity; Performance Evaluation; Motivation and Incentives;


    Cai, Wei, and Susanna Gallani. "Subjectivity in Tournaments: Implicit Rewards and Penalties and Subsequent Performance." Harvard Business School Working Paper, No. 18-070, January 2018. (Revised March 2018.)  View Details
  3. In Search of Organizational Alignment Using a 360° Assessment System: Evidence from a Retail Chain

    Carolyn Deller, Susanna Gallani and Tatiana Sandino

    We analyze the effects of increasing the salience of corporate values in an organization rewarding its employees based on financial performance. We use data from a field experiment conducted at an Indian mobile phone retail chain that implemented a 360° performance assessment system focused on organizational values. We find a counterintuitive result: the intervention drove even higher effort on dimensions of short-term financial performance associated with preexisting monetary incentives but did not substantially affect nonfinancial performance dimensions linked to long-term organizational goals. Our setting allows us to explore the effects of underlying counterbalancing mechanisms. While the 360° system drives higher effort to benefit the organization, consistent with the system improving goal clarity, activating organizational identification, or increasing implicit incentives, it may not improve all of the dimensions of performance intended to promote organizational alignment. Increasing employees’ multitasking requirements, without adequate support and training, can generate confusion, which, in turn, can drive effort away from the sources of confusion and toward known elements of performance. Our findings provide insights about benefits and pitfalls that managers may need to consider when implementing 360° performance assessment programs as a complement to incentives based on financial performance.

    Keywords: 360-degree assessments; corporate values; organizational identity; implicit incentives; multitasking; goal clarity; field experiment; Performance Evaluation; Values and Beliefs; Organizational Culture; Goals and Objectives;


    Deller, Carolyn, Susanna Gallani, and Tatiana Sandino. "In Search of Organizational Alignment Using a 360° Assessment System: Evidence from a Retail Chain." Harvard Business School Working Paper, No. 18-069, January 2018.  View Details
  4. Incentives, Peer Pressure, and Behavior Persistence

    Susanna Gallani

    Organizations often introduce temporary incentive programs with a view of establishing long lasting behaviors. Monetary payoffs are awarded upon achievement of team goals, which measure the success of the initiative. In this study I explore whether and how organizational behavior modifications introduced via temporary incentive programs persist beyond the incentive period. In many cases, achieving team goals requires the cooperation of members of the organization external to the team and not eligible to receive the monetary award. In this study I compare the persistence of behavior modifications between subjects rewarded with a monetary award with subjects that are exposed uniquely to peer pressure. Using hand hygiene performance data from a California hospital, I find that monetary incentives are associated with higher likelihood and greater magnitude of performance improvements during the incentive period, but are relatively short lived, while implicit incentives facilitate a longer persistence of the organizational behavior modification.

    Keywords: organizational behavior modification; peer monitoring; persistence of performance improvements; crowding out; implicit incentives; compensation; healthcare; Motivation and Incentives; Compensation and Benefits; Performance Improvement; Organizational Change and Adaptation; Health Care and Treatment; Health Industry; California;


    Gallani, Susanna. "Incentives, Peer Pressure, and Behavior Persistence." Harvard Business School Working Paper, No. 17-070, January 2017.  View Details
  5. Through the Grapevine: Network Effects on the Design of Executive Compensation Contracts

    Susanna Gallani

    Effective design of executive compensation contracts involves choosing and weighting performance measures, as well as defining the mix between fixed and incentive-based pay components, with a view to fostering talent retention and goal congruence. The variability in compensation design observed in practice is significantly lower than it would be predicted by contracting theory. This is likely due to indirect constraining pressures, which cannot be completely explained by industry affiliation or peer group membership. I posit that network connections involving corporate boards operate as a conduit for these pressures. Using information disclosed in proxy statements of publicly traded companies, and a vectorial approach to measure compensation similarity, I predict and find that firms that are connected by board interlocks, hiring the same compensation consulting firm, or sharing a blockholder, exhibit a higher degree of similarity in the design of executive compensation contracts than what would be predicted by similarities in organizational characteristics. The relative prominence of the connectors within the respective networks moderates the network effects on the degree of compensation similarity. Finally, I show that the market responds positively to compensation similarity, although it is associated with excess CEO compensation.

    Keywords: compensation design; board interlocks; Compensation Consultants; network centrality; homophily; Quadratic Assignment Procedure; Blockholders; Executive Compensation;


    Gallani, Susanna. "Through the Grapevine: Network Effects on the Design of Executive Compensation Contracts." Harvard Business School Working Paper, No. 16-019, August 2015. (Revised December, 2016.)  View Details
  6. Does Mandatory Measurement and Peer Reporting Improve Performance?

    Susanna Gallani, Takehisa Kajiwara and Ranjani Krishnan

    We examine the effect of mandated measurement and peer disclosure of new information on the persistence of performance improvements in a setting without performance incentives. Value of information (VOI) theory posits that information can improve the accuracy of posterior beliefs and thereby have a decision facilitating effect. These effects are more pronounced when the information is new versus an update. Using data from the Japanese National Hospital Organization, we analyze performance trends following regulation requiring standardized measurement and peer disclosure of absolute and relative patient satisfaction performance. After controlling for ceiling effects and regression to the mean, mandatory patient satisfaction measurement and peer disclosure introduce positive and significant mean shifts in performance with larger improvements for poorly performing hospitals. The largest positive effects occur when the information is new. Our study provides empirical evidence of the decision facilitating value of information without confound from its decision influencing value.

    Keywords: value of information; patient satisfaction; mandatory performance measurement; health care; Information; Health Care and Treatment; Performance Evaluation; Health Industry;


    Gallani, Susanna, Takehisa Kajiwara, and Ranjani Krishnan. "Does Mandatory Measurement and Peer Reporting Improve Performance?" Harvard Business School Working Paper, No. 16-018, August 2015. (Revised March 2017.)  View Details
  7. Applying the Fractional Response Model to Survey Research in Accounting

    Susanna Gallani and Ranjani Krishnan

    Survey research studies make extensive use of rating scales to measure constructs of interest. The bounded nature of such scales presents econometric estimation challenges. Linear estimation methods (e.g. OLS) often produce predicted values that lie outside the rating scales, and fail to account for nonconstant effects of the predictors. Established nonlinear approaches such as logit and probit transformations attenuate many shortcomings of linear methods. However, these nonlinear approaches are challenged by corner solutions, for which they require ad hoc transformations. Censored and truncated regressions alter the composition of the sample, while Tobit methods rely on distributional assumptions that are frequently not reflected in survey data, especially when observations fall at one extreme of the scale owing to surveyor and respondent characteristics. The fractional response model (FRM) (Papke and Wooldridge 1996, 2008) overcomes many limitations of established linear and non-linear econometric solutions in the study of bounded data. In this study, we first review the econometric characteristics of the FRM and discuss its applicability to survey-based studies in accounting. Second, we present results from Monte Carlo simulations to highlight the advantages of using the FRM relative to conventional models. Finally, we use data from a hospital patient satisfaction survey, compare the estimation results from a traditional OLS method and the FRM, and conclude that the FRM provides an improved methodological approach to the study of bounded dependent variables.

    Keywords: Fractional response model; bounded variables; simulation; compensation mix; Mathematical Methods; Accounting;


    Gallani, Susanna, and Ranjani Krishnan. "Applying the Fractional Response Model to Survey Research in Accounting." Harvard Business School Working Paper, No. 16-016, August 2015. (Revised January 2017.)  View Details
Cases and Teaching Materials
  1. Tapping Growth at Lord Hobo Brewing Company

    Ethan Rouen and Susanna Gallani

    Lord Hobo Brewing Company accounts for its inventory process at it prepares to create its first set of professional financial statements for investors.

    Keywords: Inventory; working capital; entrepreneurship; private equity; start-ups; craft brewing; financial statements; Investing; GAAP; brand management; Financial Statements; Working Capital; Business Startups; Business and Shareholder Relations; Food and Beverage Industry; Boston; New England; United States;


    Rouen, Ethan, and Susanna Gallani. "Tapping Growth at Lord Hobo Brewing Company." Harvard Business School Case 119-028, August 2018.  View Details
  2. (B)

    Susanna Gallani, Tiffany Y. Chang, Brian J. Hall and Jee Eun Shin

    Buffer decided to release its salaries and compensation calculation formula to the public, and the public reaction was greater and more positive than they would have imagined. The company experienced both an increase in volume and a change in the kinds of inbound applications they received. As the company continued to grow, Buffer's senior leaders continued to revise the compensation formula based on feedback both internally and from the public. Particularly, they hoped to strengthen the link between pay and performance, which in the current version of the formula was incorporated using a loosely defined "experience level" component. However, defining clear performance metrics and experience levels was not an easy task.

    Keywords: compensation; compensation design; company values; culture; transparency; attraction; selection; performance measurement; performance measures; performance metrics; startup management; Compensation and Benefits; Organizational Culture; Values and Beliefs; Performance Evaluation; Measurement and Metrics;


    Gallani, Susanna, Tiffany Y. Chang, Brian J. Hall, and Jee Eun Shin. " (B)." Harvard Business School Supplement 917-020, May 2017.  View Details

    Susanna Gallani, Tiffany Y. Chang, Brian J. Hall and Jee Eun Shin

    Social media company Buffer wanted to establish clear company values early in its growth. One of these values was a commitment to transparency in its company practices. Buffer openly shared its business strategies and fundraising decks, among lots of other information. Even when they were hacked, the company live-blogged updates to keep their users informed as the situation unfolded. Having internally released each employee's salary and equity details with no pushback, the company now contemplated sharing compensation information transparently with the general public.

    Keywords: compensation; compensation design; company values; culture; transparency; Compensation and Benefits; Organizational Culture; Values and Beliefs;


    Gallani, Susanna, Tiffany Y. Chang, Brian J. Hall, and Jee Eun Shin. "" Harvard Business School Case 917-019, May 2017.  View Details
  4. Cost Variance Analysis

    Robert S. Kaplan and Susanna Gallani

    This note was written to provide students with fundamental concepts and methods for the analysis of cost variances. It focuses on the decomposition of cost variances into price, quantity, and mix variance components, an approach that allows students to identify the root causes of differences between expected and actual costs.

    Keywords: Cost Accounting;


    Kaplan, Robert S., and Susanna Gallani. "Cost Variance Analysis." Harvard Business School Background Note 117-006, October 2016. (Revised August 2018.)  View Details
  5. Springfield Hospital

    Susanna Gallani and Robert Kaplan

    One of the key roles of costing systems is to support the evaluation of performance and facilitate appropriate resource allocations. Through participation in a comparative cost study, management at Springfield Hospital, known for its heavy focus on operational excellence, become aware of opportunities for further improvement. Analysis of the differences in costs, uses, and allocations of resources will inform management in the decision and implementation of strategic plans. This case stimulates reflections on the importance of costing systems, in particular Time-Driven Activity Based Costing, and variance analysis as decision support mechanisms.

    Keywords: Activity Based Costing and Management; Health Care and Treatment; Health Industry;


    Gallani, Susanna, and Robert Kaplan. "Springfield Hospital." Harvard Business School Case 117-025, September 2016. (Revised September 2017.)  View Details
  6. VMD Medical Imaging Center

    Susanna Gallani and Eva Labro

    VMD Medical Imaging Center addresses a number of issues related to the role of costing systems in organizations and the challenges impacting their design and maintenance as the organization grows and develops over time. This teaching note begins by offering detailed suggestions for effective class discussions centered on the main issue addressed by the case (i.e. the need to revisit the costing system in light of a change in the demand mix for the services offered by the organization). In the second part of the teaching note, the authors provide suggestions for several additional avenues along which instructors can develop further discussion about the integration points between costing systems and other important activities, such as strategy definition and execution, transfer pricing, and cross-functional coordination.

    Keywords: Strategy; Cost Management; Management Systems;


    Gallani, Susanna, and Eva Labro. "VMD Medical Imaging Center." Harvard Business School Teaching Note 117-003, August 2016. (Revised June 2018.)  View Details
  7. VMD Medical Imaging Center

    Susanna Gallani and Eva Labro

    VMD Medical Imaging Center, a local independent provider of medical imaging services, is facing some important challenges. Despite efficiency improvements and cost cutting initiatives carried out over the past few years, their profitability is shrinking; their prices are becoming uncompetitive; and their main customer, a large regional research and teaching hospital, is threatening to seek alternative, more cost-effective, suppliers. The case addresses a number of important challenges that firms typically face with respect to designing and maintaining their costing systems, including the need to keep the costing system in line with the business processes of the firm throughout its life cycle; the setting of transfer prices, which highlights the interdependencies between costing systems and pricing strategies; and the demand-induced death spiral, which is brought about by a shift in sales mix from labor intensive to technology intensive imaging services. In addition, this case offers an opportunity to develop the class discussion in multiple directions, at the discretion of the instructor, such as the role of costing systems in organizations, the relationship between costing and strategy, and the facilitating role of costing with respect to cross-functional coordination.

    Keywords: Costing; Death Spiral; Transfer Pricing; Activity Based Costing and Management; Competitive Strategy; Medical Specialties; Health Industry;


    Gallani, Susanna, and Eva Labro. "VMD Medical Imaging Center." Harvard Business School Case 117-002, August 2016.  View Details
  8. RegionFly: Cutting Costs in the Airline Industry

    Susanna Gallani and Eva Labro

    RegionFly is a small, private airline specializing in ultra-premium services. Founded shortly after the "Golden Age of airline travel," RegionFly's financial performance had been strong for several decades. More recently, however, the results have taken a downward trend, due in part to the impact of the Great Recession on the entire airline industry. Not only were premium service providers affected more significantly, but the recent wave of mergers and acquisitions involving large airlines also leveraged new economies of scale, thereby reducing costs and increasing the competitive pressure on air travel prices. As a result of the deterioration in their financial performance, RegionFly was recently acquired by a larger provider, and several top managers were replaced. The new management team, supported by an external consulting firm, introduced a series of aggressive cost-cutting measures that resulted in a downsizing of the workforce, and impacted some distinctive features of the services provided by RegionFly that had been historically associated with the success of the company. Additionally, top management introduced a new product profitability criterion to be used in support of strategic decisions related to the composition of the product mix offering. The application of the new criterion led to the elimination of two of the seven routes included in RegionFly's portfolio. To the surprise of top management, however, the cost-cutting and product-cutting measures did not result in an improvement in the profitability of the company, which, in fact, deteriorated even further. As the profitability of another route falls under the threshold, management is faced with an important decision: should the product profitability criterion be enforced, thus eliminating yet another route from the portfolio? “RegionFly: Cutting Costs in the Airline Industry” provides an introduction to costs allocations, to the evaluation of product profitability, and to the impact of the methodology used to allocate fixed costs on strategic decisions, such as eliminating product lines or firm segments.

    Keywords: Cost Management; Profit; Air Transportation Industry;


    Gallani, Susanna, and Eva Labro. "RegionFly: Cutting Costs in the Airline Industry." Harvard Business School Case 116-047, May 2016.  View Details
Other Publications and Materials
  1. Incentives Don't Help People Change, but Peer Pressure Does

    Susanna Gallani

    This article summarizes the findings of a research study that examined the effectiveness of monetary and non-monetary incentives in establishing persistent organizational behavior modifications. The results of the study highlight the interplay between monetary and non-monetary mechanisms of motivation and provide insights on the associated managerial implications.

    Keywords: Motivation and Incentives; Behavior; Change Management;


    Gallani, Susanna. "Incentives Don't Help People Change, but Peer Pressure Does." Harvard Business Review (website) (March 23, 2017).  View Details