New Forbes MBA Ranking Due Oct. 9

Kurt Badenhausen of Forbes

When Forbes publishes its eighth biennial MBA ranking on Oct. 9th, the return-on-investment of the degree at most business schools is expected to take a hit. The reason: Forbes’ ROI ranking will be based on the earnings of the Class of 2008 which began taking their jobs just before the Great Recession hit the economy in full force.

“They all graduated during boom times and then saw their compensation fall through the roof,” says Kurt Badenhausen, the Forbes’ editor and guru of its business school rankings.

The fact that it will take longer for these MBAs to get a return on their educational investment comes on top of earlier declines. The last time Forbes issued its ranking in 2011, the magazine estimated that a Harvard Business School MBA had a payback period of 3.6 years. A decade earlier in 2001, the payback time for an HBS degree was a full year less, 2.6 years, according to Forbes. In fact, MBA grads at 22 of the top 25 schools saw their payback periods extended over the same time.

‘THIS YEAR’S DATA WILL TELL AN INTERESTING STORY’

Nonetheless, Badenhausen, a 41-year-old journalist who does not have an MBA, strongly believes the degree remains highly valuable and worthwhile. “What we have seen, particularly at the top schools, is that an MBA pays off very quickly,” he says in an interview with Poets&Quants. “Graduates often see their salaries triple coming out of school. This year’s data will tell an interesting story because these top schools are sending so many MBAs into consulting that their ROIs are fantastic. This year, with the shift in job placement, we’ll see a slowdown in that salary growth.”

Of course, the bigger question with any ranking is which schools will gain ground and which ones will suffer a fall. In the seven editions of Forbes’ business school rankings, Harvard Business School has topped the return-on-investment list four times (1999, 2001, 2003, 2011), Dartmouth College’s Tuck School of Business did it twice (2005 and 2007), and Stanford captured the ROI crown once, in 2009.

Badenhausen is mum on whether Harvard will repeat when the 2013 list comes out later this month. HBS topped the list of U.S. MBA programs with a five-year total gain in pay of $118,000 and the 3.6 payback period. The top ten in Forbes’ 2011 return-on-investment calculation were Stanford, Chicago Booth, Wharton, Columbia, Dartmouth, Northwestern, Cornell, Virginia and MIT Sloan (see table on following page for the top 30 winners and how the returns compare with ten-year earlier results).

THE ONLY RANKING BASED SOLELY ON RETURN-ON-INVESTMENT

Of the five most influential MBA rankings in the world, Forbes is the only one to base its entire methodology on one simple measure: return on investment. The magazine surveys alumni five years out of school and asks them what they made before getting their MBA, what they made immediately after graduation, and then their compensation three and five years out. Forbes then compares alumni income at each school to MBAs’ opportunity costs–two years of foregone compensation, tuition and required fees. It calculates a payback period–which in 2011 ranged from 3.1 years at schools such as the Brigham Young and the University of Iowa to 3.8 years at Carnegie Mellon’s Tepper School of Business.

The actual ranking, however, is based on the net cumulative amount a typical alum of the school has earned after five years by getting their MBA versus staying in their pre-MBA career. The magazine adjusts the median five-year MBA gain for cost of living expenses and discounts gains using a rate tied to money market yields. It also discounts tuition to account for students who pay in-state rates and for the non-repayable financial aid that schools dole out.

THE DEANS SCREAMED: ‘NOT ANOTHER RANKING!’

Asked how confident he is that alumni are providing accurate compensation data when they know that data will be used to rank their alma maters, Badenhausen concedes, “We don’t. We survey the schools and ask them for pre-MBA and post-MBA salaries so we can match up what the alumni say with what the schools say. When there are extreme differences, we’ve knocked out a school. I find the data quite resembles what the alumni report. Could a class get together and game the ranking? Yes. But any sort of ranking is hardly foolproof.”