Is An Elite MBA Degree Still Worth The Cost?

by John A. Byrne on

IS THE WORLD FLAT?

Which brings us back to the question: Does it pay to get an elite MBA degree? The answer is an unqualified yes.

First off, there’s a massive amount of evidence that anyone who gets an advanced degree in any field is much better off. New research published last year by Robert Barro of Harvard and Jong-Wha Lee of the Asian Development Bank found that the return from investing in a year of graduate education averages 17.9%. “Compare that to the returns from investing in real estate, stocks, bonds, or most other asset classes, and you conclude that investing in your own human capital is about the best investment you can make,” says Robert F. Bruner, dean of the University of Virginia’s Darden School of Business. “The rate of return is high. Some Nobel Laureates and others have examined this, controlling for many attributes. They look at large samples over many years. If you take data from the trough of an economic cycle you will almost always find that the return is lower and the payback is longer than if you look at other points in the cycle. The finding may merely be an artifact of the sample period.”

Secondly, and more specifically regarding elite MBA degrees, the BusinessWeek analysis is so faulty that if the same rigor had been applied to astronomy, everyone would still believe the world is flat.

Dig into the methodology of the study and make your own conclusion. To calculate it’s ROI numbers, BusinessWeek first took the total dollar amount the average student spends on a degree (tuition, fees, living expenses). That sum was added to the total salary a student gave up to attend B-school. The median pre-MBA salary was then subtracted from the median post-MBA salary, and the difference was divided into the total amount spent on the MBA. The resulting number represents the length of time, in years, it will take the average student to make a return on their investments.

THE FLAWS IN THE RETURN-ON-INVESTMENT ANALYSIS.

That’s it. The analysis failed to account for starting bonuses, year-end guaranteed bonuses, relocation allowances or tuition reimbursement plans. It also failed to figure in the value of pay increases or performance bonuses through those 10 and one-half years during which a Harvard or Stanford MBA is supposedly waiting for the payoff of the degree. Nor does the analysis include stock options or other equity grants.

The impact of these numbers, particularly on MBAs from the top schools, would completely reverse the findings of the study. McKinsey & Co., the largest single recruiter of elite MBAs, typically pays starting base salaries of $125,000 to graduating MBAs. That is the number BusinessWeek is using to make its ROI calculation. But the MBA lucky enough to land a job with McKinsey has total first-year compensation of about $190,000—52% higher than the base pay. That comes from the median signing bonus of $20,000, a performance bonus of up to $40,000 in the first year, and relocation allowances between $2,000 and $5,0000. This higher $190,000 number doesn’t even include McKinsey’s contribution into a retirement fund that equals 12% of the MBA’s salary and bonus—another $19,000 or so.

Then, you have the salary and bonus increases that will occur every year along with the promotions that bring even larger jumps in pay. It turns out that elite MBAs don’t get 3% pay rises. Within two or three years at any major consulting firm, whether it’s McKinsey, Boston Consulting Group, Bain, Booz, Accenture or a dozen others, an MBA’s base salary is usually $175,000 to $250,000—not the entry level base of $125,000–as he or she takes on the role of a project leader or engagement manager.

For MBAs from the best schools, these jobs are not only within reach. They’re fairly common. One in four of the graduates from Harvard’s Class of 2010 went into consulting. At both Stanford and Wharton, roughly 30% of the latest graduating classes accepted jobs in consulting.

What happens when you plug these other sums into BusinessWeek’s math? Currently, BW claims that the average Harvard MBA quit a job that paid him or her $80,000 and ended up with another job that paid $110,000, or just $30,000 more. If you still use the pre-MBA salary of $80,000 to the consulting example above, the gain in annual compensation would be $110,000–not $30,000. And the payback period would shrink to 2.9 years from 10.6. Admittedly, this is back-of-the-envelope math because MBAs headed into consulting could very well have made more than the $80,000-a-year median pay before setting foot on the Harvard campus. They also could have had a small bonus, too. On the other hand, we’re still not adding in the annual payments to the retirement fund, or an increase in the base after 12 months on the job, or larger bonuses in the second year. My hunch is that if you tossed those numbers into the equation the payback period could shrink to about two years or so, especially given the very big upside after your first couple of years.

Interestingly, the latest analysis by BusinessWeek even contradicts another study published by BW last year. In that analysis, done in conjunction with the consulting firm PayScale, BW estimated the lifelong earnings of MBAs. Guess who was at the top? Harvard Business School, Wharton, Columbia, Stanford, Dartmouth’s Tuck School, and Kellogg. The estimated career pay of a Harvard MBA was $3.9 million, and the elite schools completely dominated the top of these numbers: Wharton ($3.5 million); Columbia ($3.3 million); Stanford ($3.2 million); Tuck and Kellogg ($3.1 million). And how do these numbers compare with one of BusinessWeek’s best ROI schools? Let’s take Michigan State, which is ranked seventh in ROI (see below). The estimated career pay of a Michigan State MBA is $2.1 million, according to the BW analysis. That’s not bad–but it’s $1.8 million below Harvard and $1.4 million less than Wharton.

THE ELITE BUSINESS SCHOOL DOMINATE THE LIST OF MBAS WHO EARN THE HIGHEST PAY OVER THEIR CAREERS.

School & Rank Estimated Career Pay
1. Harvard Business School $3,867,903
2. Pennsylvania (Wharton) $3,491,372
3. Columbia Business School $3,349,669
4. Stanford Graduate School of Business $3,327,145
5. Dartmouth College (Tuck) $3,146,031
6. Northwestern (Kellogg) $3,085,680
7. MIT (Sloan) $3,031,132
8. Chicago (Booth) $2,970,437
9. Berkeley (Haas) $2,960,527
10. New York (Stern) $2,918,748
11. Virginia (Darden) $2,908,136
12. Duke (Fuqua) $2,858,021
13. Cornell (Johnson) $2,844,421
14. UCLA (Anderson) $2,807,378
15. Yale School of Management $2,750,657

SOURCE: BLOOMBERG BUSINESSWEEK

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  • Bruce Vann

    Dang you ripped their research a new one, huh?

  • http://poetsandquants.com/members/jbyrne/ John A. Byrne

    Nah. Just pointing out the facts. This is all a very useful exercise for everyone and the data that BusinessWeek is throwing into the marketplace is important and valuable. Besides, I’m completely biased and admit it–in favor of BusinessWeek. I spent the better part of my professional life there, leaving as executive editor of the magazine and editor-in-chief of BusinessWeek.com.

  • http://poetsandquants.com/members/money9111/ Richard Battle-Baxter

    I’d like to see a study like this for non consulting/i-banking. brand management comes to mind. That’s another big MBA career choice.

  • Bruce Vann

    I really was just being dramatic. :)

  • http://poetsandquants.com/members/jbyrne/ John A. Byrne

    I’m posting this response from my former colleague and friend Lou Lavelle who is BusinessWeek’s business school editor:

    John raises some good points about the methodology, but we noted the weaknesses ourselves in the story. The fact is factoring in things like bonuses and equity awards has a lot of problems of its own; unlike base salary they vary wildly from year to year, and predicting what the average bonus or equity award is impossible.

  • Lim,

    Ah..I couldn’t figure out what do this findings have to do with ‘the world is not flat’. Anyone can help?

  • Frazier Bardolph

    Industry before – industry after is super-critical in all of this.
    Those of us in the construction industry can tell you that an MBA is a double no-brainer. When you can triple your salary in exchange for 2 years of school, all this chatter is nonsense. Especially considering there’s no work to be done in the sector for the next 3 years (and hasn’t been for some time).
    Think of all the millennials whose first recession experience is the one we just had. Now think about how many of them are ready to trade some of their idealism for a little pragmatism. For all those newly nervous 20-something career changers, B-school is looking pretty good.

  • http://poetsandquants.com/members/llavelle/ Louis Lavelle

    John raises some good points about the methodology we used, but we noted the weaknesses ourselves in the story. The fact is factoring in things like bonuses and equity awards has a lot of problems of its own; unlike base salary they vary wildly from year to year, and predicting what the average bonus or equity award will be 3, 8 or 14 years down the road is the worst kind of guesswork.

    I’ll point out, too, that many people with MBAs got bonuses and equity awards BEFORE they got their degrees AND after–not just after–so you would need to somehow factor in the difference only. (That’s virtually impossible since there is NO reliable data on pre-MBA bonuses and equity awards.) Also the BW methodology uses only base pay for the “forgone salary” portion of the b-school costs; if we’re counting bonuses and equity awards we should also count the ones students would have received if they stayed employed. Again, this is virtually impossible to do.

    Would anyone in their right mind choose Texas A&M over Harvard? Probably not. And for the record: Bloomberg Businessweek is not saying that they should. At the same time, though, we think it’s worth noting that if your goal is to get an MBA and get out of debt quickly schools like Texas A&M offer a way to do that. The elite programs John advocates here undeniably offer huge advantages over less expensive schools (including a superior educational experience, brand recognition, job opportunities, and alumni networks). But believe it or not, not everybody wants or needs an elite MBA to accomplish their life goals.

    Louis Lavelle
    Associate Editor
    Bloomberg Businessweek

  • Vince V

    I’m sure many readers caught the NYT piece last weekend on the questionable return on value of law schools. Quite a bit of criticism about the schools’ placement stats methodology as well. I thought it was notable that there was no mention at all of b-school. Link below:

    http://www.nytimes.com/2011/01/09/business/09law.html?_r=1&pagewanted=all

  • http://poetsandquants.com/members/jbyrne/ John A. Byrne

    Vince,
    I think the situation for business schools right now is exactly the opposite. Obviously, that wasn’t true two years ago when the economy was in a free fall. But the job market for MBAs has improved substantially. Besides, the already reported fact at P&Q that Boston Consulting Group will increase its MBA hires by 18% this year (off a big year in 2010), I spoke today with the head of career services at Stanford. He says there is an 85% year-over-year increase in job postings for Stanford MBAs.

  • Adam

    As a Ross grad, I remember scoffing at this data during the previous release 2 years ago, when it showed that Ross alumni actually made LESS 5 years out than they did in their first year.

    That said, the most shocking thing about this to me is that over the course of a 20 year career, the “average” elite MBA grad’s pay only goes from ~$100k to ~$150k. I’m hoping that stock, options, other compensation not included in the survey makes up for the 2% raises I can expect for the next 20 years.

    This data mostly jives with the salary reports i’ve seen on glassdoor.com.

    But I wonder if there’s any information on what it takes for an MBA to break through that ceiling and into the salary stratosphere. We’re all wowed by the reports that management consultants get paid closer to the ~$1M if they are still in the business after 10 years or so (and don’t get forced out).

    What are your thoughts? What is a corporate MBA’s hopes of beating inflation over two decades?

  • Adam

    Oh dear –
    I suppose the hopes of beating inflation begin with proper use of the English language.

    “What is an MBA’s hopes…” Sheesh.

  • http://poetsandquants.com/members/jbyrne/ John A. Byrne

    Adam,

    I think an MBA grad who so quickly corrects his grammar on a comment board should have very high hopes of beating the hell out of inflation. If you accept the estimate of the consulting firm PayScale, a Ross MBA should make more than $2.5 million in salary and bonus over a 20-year career. That number excludes equity awards of any kind which would add considerable to the total. Remember this is the median so half of the people in this sample have earned more (and half have earned less).

  • Adam

    Thanks John, I appreciate the encouragement. I guess my overall point is, though, that nearly all MBAs at top schools would expect to do significantly better than 2% pay raises over the course of a career. Believe me – the pervasive mindset among students at these schools is that they will all be making several hundred thousand dollars within a few years of graduation, if that’s the path they choose.

    I don’t think there’s anything wrong with the data. I just think the “average” career trajectory after earning an elite MBA may not be as financially rewarding as students expect it to be at the outset. The top MBA degree isn’t an automatic Groupon for a home in the Hamptons.

    I’m sure you get content suggestions for your website all the time. I would be interested in knowing what a group of “average” MBAs are doing 5, 10, 15 years out. What have their career paths looked like? What do they make? What major decisions have they faced post-MBA? To what extent has the MBA fulfilled their expectations.

  • http://poetsandquants.com/members/jbyrne/ John A. Byrne

    “The top MBA degree isn’t an automatic Groupon for a home in the Hamptons.”

    Love that. And I like your suggestion for a well-researched story on what MBAs are doing 5, 10 and 15 years out. Sounds like a great project story that could lead to a fascinating series. Thanks!

  • rank_theranker

    Hii John,
    Good job John lots of information.
    But What about Tuck, where does it stand here?
    I too have a feeling that you are overrating Tuck or influenced by Tuck totally, including some previous comments..
    I accept Tuck is great program, but i think
    1) smackdown it with Stanford and Harvard (total elites)
    2) not showing their downsides in articles like this
    3) showing up their programs in almost all positive articles
    is a bit glaring. Just bcoz Tuck made it into Top5 bcoz of your ‘weighted’ rank of rankings wouldnt mean anything..
    I consider you one of the best .. and expect you to consider other programs deeper like Booth or Northwestern.. and give us like good smackdowns like Wharton Vs Harvard, or Wharton Vs Kellogg or Booth Vs Wharton..
    Thanks John, overall good work

  • http://poetsandquants.com/members/jbyrne/ John A. Byrne

    There is no bias toward Tuck or any school. If Tuck was being favored, we would put more weight on the BW rankings than any other because BW ranks Tuck lower than any other ranking. Tuck currently ranks sixth on our list. It is an elite, premium MBA program with exceptional teaching and an alumni network that is second to none. The quality of the students at Tuck is off the charts. We’ll get to all these other smack downs. It just takes time. We’re still not quite five months old.

  • http://poetsandquants.com/members/llavelle/ Louis Lavelle

    Adam, I think you’re confusing two different stories. The one John wrote about was based on an analysis of how long it takes to repay the “investment” in an MBA at various schools. It was based on the total cost of attendance (including forgone salary) as well as the salary increase grads can expect at graduation.

    The story you’re referring to was a look at the pay of MBA alumni from various schools over the course of a long (20-year) career. It was based on data from PayScale, which collects it directly from alumni. In 2009, you’re right, PayScale found that the pay of Michigan alumni fell 5 years after graduation. That story can be found here: http://www.businessweek.com/bschools/content/feb2009/bs2009029_859361.htm

    We updated the story in 2010. That story, as well as a detailed interactive table, can be found here: http://www.businessweek.com/bschools/content/may2010/bs20100521_243715.htm

    BW’s former B-Schools editor Jennifer Merritt actually surveyed grads of top 30 programs 10 years after graduation to find out what they’ve been up to. The story is kind of old at this point, but still interesting: http://www.businessweek.com/magazine/toc/03_38/B38500338alumni.htm

    What does it take to break into the pay stratosphere? I posed this very question in 2006. You can find the story here: http://www.businessweek.com/magazine/content/06_12/b3976089.htm To find the answer I analyzed the academic credentials of the five highest paid executives at each of the S&P 100 companies. What I found was that 146 had MBAs, half of those had MBAs from top 10 programs, and two thirds of those had degrees from just three institutions. So to answer your question…what does it take? An MBA from Harvard, Stanford, or Wharton, and a lot of luck.

    Hope that answers some of your questions. And good luck hitting the jackpot.

    Louis Lavelle
    Associate Editor
    Bloomberg Businessweek

  • http://poetsandquants.com/members/jbyrne/ John A. Byrne

    Thanks Lou. I should have mentioned Jennifer Merritt’s story because I still believe it is the most complete and detailed look at MBAs ten years out of school. BW then surveyed nearly 1,500 alums of the top 30 schools. Jennifer’s conclusions are extremely favorable. She found that their “salaries and bonuses are hefty, and they occupy, after only a decade, top posts in their companies. They are an enterprising lot, an entire cohort of ambitious men and women who have started hundreds of companies and created nearly 100,000 jobs — a surprising record from a group often derided as better at bean-counting and consulting than actually doing anything. Today among the class are chief executive officers, vice-presidents, regional managers, and directors in nearly every corner of Corporate America. They’re loaded with management responsibilities, overseeing an average of 93 people. And many have the wealth and desire to give generously of their riches and time.

    “Overwhelmingly, they say earning the degree was worth it. Some 89% say they would go for the MBA again if they had it to do over. And nearly 80% said they would attend the same school. Those who said they wish they had gone elsewhere often cited schools like Stanford, Harvard, Kellogg, and Wharton as their dream choices — pointing to the enduring strength of those well-known brands. Alums largely gave the level of instruction and knowledge they gained from their own school high marks.”

  • http://poetsandquants.com/members/llavelle/ Louis Lavelle

    Your memory isn’t failing you John. As I recall they were making scads of money and more importantly the vast majority seemed to be pretty happy. They also had some interesting things to say about how their MBA programs could be improved. An interesting read.

  • Chris – Kellogg

    In FIN1, didn’t we all learn that ROI and payback period were inferior metrics to NPV? Why are we even debating this?

    An MBA that continues to pay more, but has a longer breakeven time, may still be worth more when greater future cash flows are considered. Yes, it take students from some schools longer to break even, but they’re doing so at statistically-significant higher salaries…

  • Adam

    Hey, just wanted to thank everyone for chiming in. Great info.

  • http://poetsandquants.com/members/llavelle/ Louis Lavelle

    Chris, I think your idea for an NPV calculation on an MBA degree is a great one…you’d be able to compare the NPV with current costs and find the bargains. (I think the top programs would fare exceedingly well in that kind of comparison.) The trick is doing it in a way that doesn’t require the making of assumptions about future salaries/bonuses that could turn out to be wrong. If you’ve got a magic formula, I for one would love to hear it.

    BW’s solution to this conundrum was to use self-reported pay data from grads at various points in their careers, from graduation to 20 years out. But this is far from perfect–it measures the return on an MBA that was awarded 20 years ago, not a degree awarded today. And it doesn’t count stock, options, bonuses, and all the intangible benefits. Thanks Chris.

  • Rich

    Great article and good job picking apart BW’s ROI calculations. As a PhD engineer going to B-School next year, I’m really surprised that BW published such flawed ROI analysis. If I publish such article in a science journal, it’ll severely damage my reputation as a researcher and the people who peer reviewed my article will be frowned upon as well. Publishing such flawed analysis and acknowledging there are too many unpredictable variables are not acceptable especially in a highly repectable journal like BW. Better off not publish it or find other ways to present the data. Don’t call it ROI analysis since it’s just a pre and post base pay differential survey.

  • NT

    Post Hoc Ergo Propter Hoc, a Type I Error –
    These analyses always seem to gloss over one seemingly vital tidbit of information. Those who go to an elite MBA program are going through a rather rigorous screening process and simply by attending have demonstrated a capitalistic ambition. In other words, these studies compare the students who have scored the requisite 650+ score (a supposed indication of academic potential or management capability) and have indicated that they are going to work very hard to achieve success in business. We are comparing that sample set of professionals with those who by and large have not demonstrated those skills. An interesting study would be to compare those who were accepted to these elite schools and then chose not to attend with those who did. I have a feeling the results would be a bit less skewed. So, is it really the MBA that makes the difference, or is the fact that smart driven people tend be more successful in business, plainly for the fact that they’re smart and driven. Personally, as one who will attend one of these schools, coming from a management consultancy, it’s a bit of a stamp on the resume, an insurance policy should I leave my firm following my return, a way to instantly demonstrate to an employer that you’re one of that first group – a palpable ROI if you are not the one who has to pony up the $100 K.

  • Obi

    In my own opinion, and I stand to be corrected just incase I am wrong. These analysis are superficially interesting but seem fundamentally irrelevant. Why – Because it not only assumes but presupposes that everyone going for an MBA wants to work for someone. Personally I think this discourse or debate on cost justification should be viewed from the perspective of creating new market space or making new opportunities available.

    MBA curriculum needs to be revised to focus on value creation in the real economy. And in conclusion, ranking and Cost/ Benefit should not be based on value appropriation when individuals work for big organization.

  • RM

    I agree about the NPV/DCF analysis.

    Consider that an MBA student is not only paying $150,000+, but is also foregoing $80,000 in pre-MBA salary. Add to this the effects of a loan over the course of thirty years, and you have a huge some of money (close to, or even more than, $500,000 in negative cash flow). So post-MBA salary must beat that money invested at a reasonable rate (if we use a conservative, slightly higher than risk-free rate of 3%, we’re talking about a ton of money). Obviously, some of this is mitigated by amortizing debt, but not much.

    This is akin to valuing a growth stock. Given early negative cash flows, you need to be compensated with disproportionately large cash flows to make it a worthwhile investment. I would argue (without having done the calculations :-) that there is no way salary itself could beat out the costs without some extremely large option grants (or people giving you huge jobs in the future because of the brand of your MBA).

    A truly good study would look at NPV/DCF and use two competing/controlled groups of similar students: one a path of MBA students, and one without, adjusting/controlling for GPA and industry.

  • Pebbles

    The value of a good business school, like any good graduate degree goes far beyond dollars.

  • http://poetsandquants.com/members/llavelle/ Louis Lavelle

    Let me try to clear a few things up. First, BW is not a peer reviewed science journal. It’s journalism, not science, and the standards for the two are different.

    Second, the BW analysis, such as it is, isn’t flawed at all. We opted to analyze the two things we know with certainty: base salaries and the cost of attendance. If we threw in bonuses and stock grants and options and what have you–making wild guesses about they were pre-mba and what they were likely to be post-mba, including assumptions about stock prices and strike prices and exercise dates for those stock and option grants–you would have criticized us for that, and rightly so.

    What we did is, in fact, rightly described as an ROI analysis–it relates investment to return. It may not be one that wildly inflates the value of an MBA, which is what everybody here seems to want, but it does measure at least one aspect of ROI.

    Here’s an idea. Next time you sit down and decide to describe something as “flawed,” try to come up with a way to do it that’s better. In this case, try to come up with a methodology for determining MBA ROI that accurately takes into account every penny ever earned or likely to be earned in perpetuity; accurately teases out the portion of “R” that’s directly attributable to the “I”; corrects for the possibility that much of the “R” is the result of innate talent and not the MBA; somehow monetizes all the the nonmonetary benefits of an MBA; and does all this in a way that passes 4 million individual “smell” tests and is publishable by a peer reviewed journal.

    If you can’t do that, maybe flawed isn’t the word you should be using. Go ahead, give it a try. I won’t hold my breath.

    Louis Lavelle
    Associate Editor
    Bloomberg Businessweek

  • Chris – Kellogg

    Calm down, Louis. You’re trying to make an investment recommendation to people who are trained to make sure logical decisions are made with relevant information. You’re going to get some push-back if there are gaping holes in your argument.

    For your information, your analysis isn’t an ROI… it’s payback time. ROI would include future cash flows, which you elected to ignore. It would basically tell you the same thing as NPV, except it would be represented as a percentage.

    My recommendation would be to look at salary AND bonus data 1yr, 5yrs, & 10yrs after graduation, extrapolate the in-between data, and do an NPV calculation. You’re correct in including the opportunity cost of not working (for full-time students), but living expenses would have to be incurred in either the case of going to graduate school or not, so you should include only the expected difference in living standard. If you want to get a more accurate picture, you might also want to run a regression, including variables for different fields, such as consulting, investment banking, general management, and non-profit.

    But payback period is not an effective way to convince anyone of the value of an investment. If I gave you the choice of 2 assets to invest in, where one cost $100 and paid back $50/yr (payback period 2yrs), and the other cost $200, but paid back $75/yr (payback period 2.7yrs), would you seriously tell me that the first one is the best pick? After 4yrs, they’re dead-even, and option 2 only gets better from there.

    I’m reminded of a speech given by John C. Bogle, the founder and former CEO of Vanguard Group, to the Center for Economic Policy Studies at Princeton University:

    “30 years ago, here is how I closed in my annual message to the employees of Wellington Management Company (which I then headed) about giving too much credence to the counting of numbers:

    “The first step is to measure what can be easily measured. This is okay as far as it goes. The second step is to disregard that which cannot be measured, or give it an arbitrary quantitative value. This is artificial and misleading. The third step is to presume that what cannot be measured really is not very important. This is blindness. The fourth step is to say that what cannot be measured does not really exist. This is suicide.”

  • dave

    I believe the reason for this- is not that HBS etc are bad business schools but the majority of people going into them are already coming from elite corporate backgrounds where they were probably making close to 100k if not more- therefore the rise in income when they come out is not so much- maybe 25-30k more. however if someone went into an elite bschool from a less prestigious background making say 40-50k and comes out earning 150+ that is a huge reason to go- you have to consider where you are coming from when you enter the school- allot of time if you are coming from an elite corporate background- the ROI might not be so good- however the value of the prestige and connections well into the future may be worth more…..think about it

  • Chris – Kellogg

    So, I’m putting my money where my mouth is, and I did a discounted cash flow analysis during lunch today. My assumptions are:
    – Salary data from here (0, 5, 10, 20yrs): http://www.businessweek.com/interactive_reports/mba_pay_2009.html
    – The future will reflect the past.
    – Adjusted salary data for future graduates at an annual inflation rate of 3%.
    – Tuition costs from schools’ websites (considered out-of-state tuition, where applicable).
    – All of the tuition would be borrowed, and paid back at 5% over 10yrs.
    – Discount rate of 15%. A little higher than you might expect, but there is a significant risk to cash flow based on individual aptitude and economic conditions.
    – Did not include opportunity cost of not going to b-school, because that cost will be incurred, regardless of which school a student attends. However, it should be considered in deciding about whether to go to B-school or not.

    And the Top 10 results for the Net Present Value of an MBA program’s education over 20 years are:
    1) Harvard
    2) Wharton
    3) Stanford
    4) Columbia
    5) Dartmouth
    6) MIT
    7) Kellogg
    8) UC Berkeley
    9) Booth
    10) Virginia

    Some notes:
    – The Top 5 are within 18% of each other.
    – The Top 10 are within 33% of each other.
    – The average NPV of the schools ranked 31-40 are two-thirds of the average NPV of the schools ranked 1-10.
    – Most schools’ NPV ranking was within a few slots of their academic rankings. Notable exceptions were significantly better placement for Yale and Georgetown, and significantly worse placement for Michigan, Indiana, and Southern Methodist.

  • http://poetsandquants.com/members/jbyrne/ John A. Byrne

    Chris,

    That’s impressive number crunching! Thanks. I’m sure everyone here will benefit from it.

  • Chris – Kellogg

    Thanks… it’s what I go to school for.

  • Arthur Dullsworthy

    @Chris: What are the NPVs? Did you use incremental cash flows, i.e., difference between salaries with and without MBA?

  • Chris – Kellogg

    No, I did not use incremental cash flows, since we are only analyzing the decision point of which program to attend. These numbers are essentially the expected values of the decision tree after it has been decided to go to b-school.

    A prospective student would want to take the best one of these they could get into and realistically attend, and then compare that to his/her own projected 20-yr NPV without an MBA. A good decision would be to go with which ever is greater.

    Given my current salary and potential career paths, I just did a back of the envelop calculation for my 20yr-NPV without an MBA. Using this method, for me, it would not have been a good decision for me to attend a school ranked lower than UNC.

    The fault in that analyis is that it takes into account personal data for the non-MBA path, and general data for the MBA path. For greater fidelity, you would want to include variables for where you want your career path to go with an MBA (i.e. consulting, investment banking, general management, etc.), and your own personal aptitude. Then you would be comparing apples to apples.

    Draw out the decision tree… it will make sense.

    Here are the values I calculated for the Top 10, though I suggest you take them as comparision indicators rather than precise figures. Numbers are in $x1,000:
    1. Harvard 1,084
    2. Wharton 1,018
    3. Stanford 944
    4. Columbia 943
    5. Dartmouth 914
    6. MIT 876
    7. Kellogg 856
    8. UC Berkeley 831
    9. Booth 820
    10. Virginia 816

  • Arthur Dullsworthy

    @Chris, if you don’t use incremental cash flows your calculated NPVs are too high and you miss out on effects relating to what I call MBA leverage, the percent post MBA salary exceeds pre MBA salary. Where post MBA salaries are equally high, MBA leverage will result in a higher NPV for programs with a lower median pre MBA salary. My recollection is that the pre MBA/post MBA spread at Harvard, Stanford and Wharton is roughly $35K (not much). A program that admits a class who earn $40K on average pre MBA and graduate to jobs earning $80K will have a higher NPV than Harvard, Wharton and Stanford. Try it as an exercise.

  • Chris – Kellogg

    I hear what you’re saying, and I think we’re talking about different types of analyses here, which would be used by different audiences. You’re talking about comparing average incoming salary, tuition, and average outgoing salary, and asking if the program is worth it for the candidates it admits. It would be a great metric for schools to track, to make sure they are providing suitable value to the caliber students who enroll. If that’s the case, then yes, you would want to use incremental cash flows and include the opportunity cost of not working.

    My analysis is more to help individuals decide which school to go to, and he/she will have different information. The first question they’re going to ask is: Should I go to B-School? Second: If yes, which one? This is a classic decision tree, so, as always, we roll back the tree by starting with the 2nd question: the potential student picks the one they can get into that offers the best return. No need to include opportunity cost or incrementals… those are sunk costs at this point. And we all know about the sunk cost fallacy. Looking forward, which school is the best choice? For that, you’d include the entirety of future cash flows.

    Now the potential student can answer the first question of deciding between the best school they can attend, and their career without an MBA. They will KNOW what their incoming salary is (don’t need to use published averages), and be able to estimate their future NPV without an MBA, given their next-best career plans. Obviously, they should pick the greater one.

    To reconcile it with the analysis you’re referring to: the potential student earning $90k would immediately cross-out every program where the average graduating salary is under $90k. It wouldn’t matter if their “leverage” was 200%… it would not be a good decision for that person to attend.

  • AMG MBA

    Though I understand the need to look at the ROI for this investment, we seem to leave out the fact that the MBA tends to allow you to do different work. A high-school student with no diploma who washes dishes for minimum wage has an infinite ROI on their education. By finishing high school, they are deemed more mature and can start to work higher up the value chain.

    I argue the same for the MBA. Though it may take a while to pay back the loans for the degree, on average, the MBA allows you to do work that you would not have otherwise been deemed mature enough to do, given your qualifications.

    I suppose this doesn’t hold true if you go back to the exact same job after you finish your degree.

  • John

    Not sure how they calculate tuition costs, but I think its worth nothing that people who go to the lower cost schools usually pay that price. The kids who go to the elite schools rarely pay the full price – most of them get assissance from the endowments at the schools (unless they earned 200k salaries from PE for the three to five years before school).

    Get the real cost of tuition, not the sticker prices and you will see that the elite schools are much better value.

  • Matt

    What is to be said though for the students that are looking at lower cost schools that can not break into higher paying salaries? Which MBA has more benefit / worth? Currently I am making ~$38000 per year, but I would love pursue an MBA strictly for the purpose of boosting my resume to get a new position as I hate my current job. Certain things I’m reading say don’t pursue an MBA until your in your career that you would like to stay and work up within, but in the current job market it is impossible to get into the career field I would like to go. So is it worth it to go to say a University of Chicago Booth Business School when it would require a lot of student loans and still a possible unsure job market, or would it be better to go to a more affordable DePaul University or a Northern Illinois Univ. for a MBA?

  • http://poetsandquants.com/members/jbyrne/ John A. Byrne

    Chicago Booth, for sure, if you can get in. Always go with the best brand name, regardless of the cost. It will take longer to payback your loans, but you’ll get a much better job out of the gate and your chances for advancement will also be better.

  • Kevin

    This is coming from someone who has been in the pharmaceutical industry for four years. From what I have assessed, it’s absolutely true that a top full-time MBA will jump start your career into middle management. Brand recognition will always go farther than what you have actually learned. These employers only have a very short period of time to evaluate your abilities and having a top MBA certainly demonstrates that you are dedicated and capable of performing at a high level.

    As an individual who grew up relatively very poor with no career guidance and a very low undergraduate GPA, the option of going for a top MBA is very limited for me. I have thought about pursuing a lower tier MBA, but quickly learned that it would definitely not be worth my time.

    My current salary is very competitive for my background (bachelors in science from a mid ranked state school). I have jumped companies three times since my first job out of undergrad. If it were not for my low GPA, I would most likely have applied for several top MBA programs already. Given my current situation, I will take the much harder route and attempt to climb up to senior management or become an entrepreneur servicing the pharmaceutical industry in China.

    Overall, I do believe an MBA gives you jump start to your career. However, unless you’re in banking/trading, your opportunities of making a lot of money are much more limited than, say, a surgeon, radiologist, or anesthesiologist. Also, contrary to popular belief on P&Q, there are many senior managers and executives, and even more entrepreneurs who do not have an MBA.

    Like Lou said, you do not need an MBA to accomplish your life’s goals. However, if your goal is to have an easy road paved for you into a management position at a top prestigious firm such as BCG, Bain, Goldman, or Google, then yes, an MBA is for you.

  • de Mellow

    Is ANY MBA worth the cost? … is what landed me on this nice thread.
    My Master’s ROOC (Recovery of Opportunity Cost) time guestimate was ~10 years, prior to the decision. A similar figure came up for my spouse’s PharmD & Post-Doc work.

    These days it seems the biggest risk to getting long-term results, in any high skill/expense education, is loss of FT employment for some # of years. That will blow your plans (speaking from experience).

    For me, I left a ~$40k role for an MSEE when DotCom salaries were $100k even for those with near zero skills. 4 semesters in 1.5yrs implies a ROOC minimum of $150k. Ignoring NPV, time value of $, & more, that nets to an average of a $15k delta needed for 10 years. Would have worked great, but 9 years later senior engineers were axed in favor of cheaper options in the Great Recession.

    MBA has been on my list of options a while. But unless it’s funded by a grant or tuition waiver, I have not yet found evidence that there’s a beneficial ROOC versus what I’d earn in a “normal” employment market.

    My spouse might “break even” in 5 years. We’ll see.

  • Brazilian

    John,
    Would you say that Forbes methodology of calculating payback period is more accurate than BW’s?

  • Orthodoc

    I went into medicine. 4 years medical school, 5 years residency ($50k a year), 1 year fellowship. Now a hand surgeon making about $400k a year plus benefits and after malpractice premiums, working 55 hrs a week and 5 weeks vacation. One perk is that I can pretty much move anywhere in the country in a city larger than 100k people and expect to find a job with similar salary.

    I would say about comparable to the typical top 10 MBA grad considering the boot camp and sacrifices we in medicine go through.

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