When The Financial Times published its new 2013 global MBA ranking yesterday, the newspaper also unwittingly tossed a grenade into the one of the most controversial discussions about the MBA degree: Is it still valuable?
“The MBA degree, often seen as the quickest route to a fat salary, no longer delivers the purchasing power it once did,” concluded The Financial Times. “Students on the top U.S. MBA programs in the mid-1990s saw their salaries triple in five years, but those who graduated from the same schools in 2008 and 2009 saw that increase halved, according to data collected for the FT’s annual global MBA rankings.”
What’s more, the newspaper’s writers pointed out that while the return has declined, the cost of the degree has skyrocketed. MBA tuition fees at top schools have steadily risen by an average 7% a year through the past 15 years.
“MBA students who enrolled in 2012 paid 62% more in fees – up 44% in real terms – than those who began their programs in 2005, even though the increases in post-MBA salaries remained in line with inflation,” according to The Financial Times.
There is, however, a lot of noise in this data. Most important, the comparisons are being made at extreme periods in the economic cycle. Salaries in the late 1990s for MBAs were wildly impacted by the dot-com bubble. Companies were extremely generous with their newly hired MBAs for fear of losing them to a dot-com and then you have the MBAs who ventured into the Internet space where money was flowing freely. No wonder many MBAs did so incredibly well.
FOR HARVARD MBAS, A 209% GAIN OVER PRE-MBA PAY IN THE LATE 1990S — A 121% GAIN TODAY
The average salary for a Harvard Business School alum three years after graduation was $170,346 in 1999, according to The Financial Times. That was up a heady 209% from the MBA’s pre-school salary.
Fast forward to last year and the MBA graduates who left school in the midst of the Great Recession in 2009. The average salary for the HBS alum three years after graduating into that economic tsunami was $187,432–only $17,086 more than a Harvard MBA made 13 years ago. And that sum was up 121% from the MBA’s pre-school paycheck. Or at least that’s what the Financial Times calculates.
Does all this make an MBA less valuable today than it was? Hardly. Pay in the bubble years was artificially inflated just as compensation naturally flat lines or declines in the trough of a painful recession. If anything, the numbers published by The Financial Times aren’t nearly as bad as you would expect, especially when factoring in the times in which they occur.
SALARY BOOSTING POWER AT INSEAD FELL ONLY 34 PERCENTAGE POINTS
At INSEAD, the salary boosting power of the degree fell only 34 percentage points to 96% now from 130%. Not much of a dip at all considering the periods in which the measurements were taken. At Northwestern University’s Kellogg School of Management, the difference is 56 percentage points to 99% from 155%, more considerable but understandable given the times.
Truth is, an MBA can’t isolate a professional from the stronger currents of the global economy. Salaries and job prospects for everyone–MBAs and non-MBAs–were affected by both the dot-com bubble of the late 1990s, just as they were impacted by the Great Recession in 2008-2009 and its lingering effects.
While it’s undoubtedly true that the return on the investment of the MBA has declined, that decline has less to do with the market value of the degree and more to do with the general economic climate. Just look at the comparisons below. Among selected elite schools, the biggest difference is for graduates of Columbia Business School who saw a difference of 113 percentage points in the salary-boosting capability of their degrees. In 1999, Columbia MBAs saw their average pre-MBA salaries jump by 236% within three years of graduation. Today, the increase is just 123%.
BLAME WALL STREET’S TROUBLES FOR COLUMBIA’S OUTSIZED DECLINE
The reason why Columbia has taken it on the chin has to do with the cool off on Wall Street and in finance where the economic recession has hit especially hard. Yet, can anyone name another degree that would increase your average salary by 123%?
As Robert Dammon, dean of Carnegie Mellon’s Tepper School, told us recently: “The solution isn’t to hire people who are less trained. MBA training is really important to be successful in today’s complex world. If you look at the top schools, the value of the degree has been maintained. If you are looking at second or third-tier schools, you may see more of a difference.”
It may well be true that the degree doesn’t provide the boost to salaries it did in the late 1990s, but it also doesn’t really matter. What does matter is that the MBA still provides a significant boost to a person’s earnings potential and is widely recognized by some of the world’s most admired companies as a valuable degree.
(See following page for our table on how salary increases differ at top business schools)