Beyond Prestige: Factoring in the MBA Salary and ROI

The business degree goes beyond MBA salary and ROI – it is about talent and value. 

Beyond Prestige: Factoring in the MBA Salary and ROI

When it comes to the return on investment of your MBA, you should remember that it goes far beyond mere numbers such as the MBA salary. The data available shows that even during times of uncertainty, business education is a good investment. Some 88% of employers surveyed by the Graduate Management Admissions Council (GMAC) have announced plans to hire MBAs in 2016. However, just as with any other form of education, it may take some time to reap the benefits.

Every prospective MBA student needs to carefully research the cost-reward aspect of business school. However, it is not so much a matter of prestige as it is a matter of correctly assessing the balance between expenses and expected income.

How is ROI measured?

The traditional way to calculate the return on investment on your business degree is by adding the opportunity cost for the time of your study, the fees for your 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 EUR 40,000 in fees for her one-year MBA programme. Prior to the course she earned EUR 35,000 as IT manager. By making the decision to enrol in an MBA programme she gave up her stable job and salary in order to obtain invaluable experience, a degree, and knowledge.  We also should not forget the network of acquaintances which will assist her in starting a business in cyber-security.

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

Due to the crisis she postponed her plans to start up her own firm and instead found a EUR 60,000 job as a cyber-security manager for a mid-sized bank. The difference between her previous salary and her current salary is EUR 25,000. Therefore, Sarah’s ROI is 95,000:25,000 = 3.8. This means that in less than four years she will have recouped her investment, after which she will still have 30 years of professional career during which to enjoy the difference. This backs the statistics for the top 10 MBA programmes which show an average of three years for the ROI and in all cases less than four years, according to Bloomberg Businessweek.

MBA value in monetary terms

According to a GMAC survey, 80% of companies hired MBAs in 2015. American companies reported plans to offer recent MBA grads a starting salary of USD 105,000 in 2016 - up by USD 5,000 from the previous year. At the beginning of the crisis in 2008, 70% of the polled companies declared they would hire MBAs, and during some of the most difficult moments in 2010 - only 55% of them did. For 2016, some 88% of recruiters worldwide plan to hire MBA talent. In Europe, this proportion is 71%, and in the US – 91%. The health and pharmaceuticals industries are the most optimistic about attracting talent - 100% of those polled expected to appoint newly minted MBAs. Employers in consulting (92%) and manufacturing (92%) are also looking favourably on MBAs.

Just one factor, not the absolute criterion

All data is useful until it starts being perceived as the ultimate truth. The ROI is no exception. Numbers 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. Some may refuse to engage in a competition 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. The result is a manifold salary increase and a surge in the college’s overall return on investment.

Read: Do Rankings Reflect the Quality of Business Education

Two prestigious rankings which place much emphasis on salary are the Forbes’ and The Financial Times’. The Forbes calculates ROI five years after graduation while the FT methodology gives 40% weighting to income earned by alumni three years after graduation. The Forbes’ top three US schools are Stanford, Harvard Business School and Northwestern (Kellogg). According to the magazine, the best places outside the US for the one-year programme in terms of ROI are INSEAD, IMD, and Cambridge (Judge). INSEAD topped the FT 2016 MBA ranking, followed by Harvard and the London Business School. The highest weighted salary in top three is USD 172,501 and is being earned by Harvard graduates.
Two of t FT’s sub-rankings are of particular interest: value for money and career progress. The first is formed by a number of factors, such as salary earned, fees, and opportunity cost for the period of study. The leader based on these factors, ESMT Berlin, 64th in the best-school ranking. It is followed by The Lisbon MBA and Edhec Business School.

The FT sub-ranking measuring career progress is topped by India’s IIM – Ahmedabad, followed by the Renmin University of China and Stanford. This picture highlights the fact that the best schools in the rankings are not necessarily among the leaders when it comes to careers or salary increase. Thus candidates should have a clear understanding of their own priorities and pick their schools accordingly. ROI should not take precedence over more important considerations such as individual needs, professional goals, and career aspirations.

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