The Strange Math In The FT Ranking

You would be right to notice another pattern. The Financial Times appears to be underestimating the salaries of MBA graduates of U.S. schools and overestimating the salaries of MBA graduates of schools in emerging economies.

THE FINANCIAL TIMES TENDS TO CONSISTENTLY UNDERESTIMATE SALARIES FOR THE ALUMS OF U.S. SCHOOLS…

Source: Forbes and Financial Times.

….AND CONSISTENTLY OVERESTIMATE SALARIES FOR THE ALUMS OF SCHOOLS IN EMERGING NATIONS

Source: Forbes and Financial Times.

Like the differences in overall rankings, it’s mostly a function of methodology. Forbes provides the absolute numbers reported by MBAs and converts differences in currency by using the average exchange rate over a five-year period, the timeframe between pre-MBA pay and post-MBA pay three years after graduation. It’s a simple, clean and understandable.

In an effort to create some sort of level playing field, The Financial Times takes the numbers provided by alumni and then “adjusts” them. How?

First off, the British newspaper excludes the highest and lowest reported salaries. Secondly, it excludes the salaries of every alum who works for either a non-profit or the public sector. Then, it adjusts the numbers on the basis of which industries employ the graduates of any given school. The explanation for this adjustment is rather vague and the adjustment is not done for all schools–just some.

Here’s how the FT explains it: “For larger schools, the average salary is weighted to reflect variations between sectors. The weights are derived by calculating the percentage of respondents in each sector. This breakdown is then used to calculate an overall average school salary, which includes average salaries for each sector.”

Huh? Sounds more like a GMAT or SAT question designed to trip up a test taker than a clear and understandable explanation of what is going on here. Yet, that’s not all. Finally, the Financial Times translates local salaries into U.S. dollars on a purchasing power parity basis. So instead of using exchange rates, the newspaper uses purchasing power parity to adjust the actual numbers provided by alums yet again.

The Economist, which publishes a Big Mac index based on purchasing power parity, is highly cautious in its use of this translation. “Keep in mind that PPP is a long-term indicator, pointing to where currencies ought to go in the future. It’s also best to use it only to measure currencies between countries that are at a similar stage of development.”

Oops. The point is it’s easier, of course, to have much more significant purchasing power in a country where most people are dirt poor–like India, China, or Mexico. It’s virtually unheard of for a local MBA in mainland China to be pulling down more than $123,000 a year just three years after graduation. Yet, that’s exactly the number reported by the FT this year for the graduates of CEIBS.