Beyond Prestige

Factoring ROI in the Equation

When it comes to the return on investment of your MBA, you should remember that it goes far beyond mere numbers. The data available shows that even during times of crisis, business education is a good investment. Three-quarters of employers surveyed by the Graduate Management Admissions Council have confirmed their 2013 plans to hire MBAs. However, just as with any other form of education, it may take some time to reap the fruits.

Principles are principles but the bill still has to be paid. Every prospective MBA student needs carefully to research the cost-reward aspect of business school. However, it is more than a matter of prestige, it is also about correctly assessing the balance between expenses and expected income.

How ROI is measured

The traditional way to calculate the returnon-investment on your business degree is by adding the opportunity cost for the time of your study, the fees for your business degree and the other living expenses. Then the result is divided by the sum of the difference between the pre-MBA and post-MBA salary.

Let me clarify this with an example: Sarah paid 40,000 Euros in fees for her 1-year MBA course. Prior to the course she earned 35,000 Euros as an IT manager. By taking the decision to enrol into a MBA programme she gave up her stable job and salary, in order to obtain invaluable experience and a diploma, as well as knowledge of how business operates. Nor should we forget the network of acquaintances which will facilitate her plans for starting a business in cyber-security.

So, Sarah’s opportunity cost is equal to 35,000 Euros in lost salary over 1 year. Add to that the 40,000 Euro fees as well as the living expenses for that period: accommodation, food, books, etc. – another 20,000 Euros. When all is said and done at the end of the course she will have invested 95,000 Euros – a pretty costly decision. The bill may seem a bit scary but here’s what happened after her graduation.

Due to the crisis she postponed (rather than given up) her plans to start up her own firm and instead found a job as a cyber-security manager for a mediumsized bank for a salary of 60,000 Euros. The difference between her previous salary and her current salary is 25,000 Euros. Therefore, Sarah’s ROI is 95,000:25,000 = 3,8. This will mean that in less than 4 years she will have recouperated her investment, after which she will still have 30 years of professional career during which to enjoy the difference. This reflects the statistics of the top 10 MBA programmes which show an average of 3 years for ROI and in all cases less than 4 years, according to Business Week. This survey compares salary increase with total MBA costs: SDA Bocconi, HEC Paris, Manchester Business School, Cranfield and Iese occupy respectively the first 5 positions. In the long-term, alumni from Europe report a doubling of ROI within 10 years of graduation, according to GMAC.

MBA value in monetary terms

According to a GMAC survey, 2012 MBA alumni reported a 92% employment rate and 68% received a job offer before graduation. Nevertheless one should always bear in mind that not everything goes according to plan and there are unexpected, unknown and undesirable factors, such as unemployment, illnesses, etc. The full-time one-year MBA graduates from the class of 2012 reported a salary package of 65,000 US$. The salaries of their colleagues who completed a part time Executive MBA were on average 85,000 US$. This is not surprising, since many of the people in part-time courses work while studying and have more experience. Graduates from a two-year fulltime course receive greatest salaries - 95,000 US$. This data is globalized and based on the answers of 834 graduates.

However, salaries differ across the globe. In a survey of 4444 MBAs from the classes of 2000-2012 from all over the world, the average salary in Europe was reported to be 108,355 US$; in the USA - 100,000 US$; in Latin America - 73,686 US$; while the lowest-paid MBAs reside in Central Asia where they obtain 33,117 US$.

Just one factor not the absolute criterion

All statistical tools are useful until they start being perceived as the ultimate truth. The ROI of MBA is no exception. The figures do not always reflect all aspects of the quality of a given school. There are great institutions in the top 100 ranking which for myriad reasons have not moved any closer to the top; their more conservative approach, for example. Some may refuse to engage in a “free-for-all war” for a more favourable place in the rankings, artificially boosting some of the results reported by the college. An example of this is when a school enrols more international students, especially from developing countries, who previously were employed on a relatively low salary. After graduation some of these MBAs obtain fancy jobs in Wall Street companies or the City of London and reside in developed countries. The result is a manifold salary increase, and a skyrocketing of the college’s overall return on investment.

Two prestigious rankings which place more emphasis on salary are the Forbes and The Financial Times. The Forbes calculates ROI 5 years after graduation while FT methodology places 40% of weighting on income earned by alumni 3 years after graduation. The Forbes’ top 3 US schools are Harvard Business School, University of Chicago - Booth and Stanford University. According to the magazine, the best places in Europe in terms of ROI are London Business School, INSEAD and the Spanish IESE Business School. Unsurprisingly this year the Financial Times placed three American schools - Harvard, Stanford and Wharton at the top of its list. The highest weighted salary, however, goes to the alumni of the second - 194,645 US $.

Gauging salary increase percentage is not always a good manner of assessing the merits of a college. Despite the domination of American schools in the Financial Times 2013 rankings, the first five places for the greatest salary increase go to Chinese schools - Peking University: Guanghua with its 163%, being the leader. Although they are all excellent schools, sometimes great ROI figures may be a bit misleading. Institutions with smaller fees may have an advantage when it comes to calculating ROI.

The Financial Times’ two other interesting rankings are of particular interest: value for money and career progress ranking. The first of these is formed by a number of fac tors, such as salary earned, fees and opportunity cost for the period of study. The leader based on these factors Coppead – Brazil – a college which according to other factors is 66th in the best school rankings. It is followed by University of Cape Town GBS and Warwick Business School. In fourth place is Lancaster University Management School, fifth – Vlerick Business School , while The Lisbon MBA is sixth. Nanyang Business School, University of Cambridge, Judge, Mannheim Business School and Tilburg University, TiasNimbas are the remaining four in top 10.

The other FT indicator is the career progress rank. IIM – Ahmedabad is number one here, Stanford – second, while the bronze goes to ESADE, followed by Cass, Harvard, IESE, IMD, Ceibs, IE Business School and London Business School. The picture highlights the fact that the best schools in the rankings are not necessarily first placed when it comes to careers or salary increase. Thus candidates should have a clear understanding of their own priorities and pick their colleges accordingly. Return on investment should not take priority over more important considerations such as individual needs, professional goals and career aspirations. Instead of looking at the unique cost of the degree it is better to include ROI as a part of your long- term financial plan.

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