What Business School Is Really Like

MBA Earnings Decrease as Two-Year Model Faces Uncertain Future

Ever hear that business school is an “investment?” Forego a return for two years and you’ll come out with a higher return once you graduate.

Here’s a reality check: If you attend an elite business school, you’ll drop $120K in tuition and fees, easy. Then, you lose another $120K-$180K in salary. Pretty scary, right? After graduation, you might just double your last salary (when you factor in signing bonus). And that doesn’t include those outliers earning $300k or more to start. Who knows, that could be you.

In other words, over time – maybe 5-10 years – you can pay off your tuition and earn back whatever you lost. Now, let’s be more specific. If you earn a bachelor’s degree, your average 20-year return is $1,301,000 according to PayScale. If you graduate from a top 50 MBA program, that jumps to $2,266,000 over 20 years, And that number rises $2,759,000 for a top 10 school – double a bachelor’s degree.

In other words, an MBA is a long-term investment play. It gives you more credibility and options – and a wider network to tap – when you would normally hit your ceiling. But it does carry some risk. Question is, as always, is the reward worth that risk?

This week, The Financial Times (FT) reported that MBA starting pay is down…which means risk just went up. Based on data collected for their new 2015 business school rankings, The Times found that, “three years after finishing their degree, those who graduated with a full-time MBA in 2011 earned an average 92 per cent more than they did before starting their course. At the MBA’s zenith in 2002 and 2003, the increase was 153 per cent, and as recently as 2012 it provided an average 110 per cent step-up to earnings. In 2003, alumni from 82 per cent of schools in the ranking saw their salaries increase by more than 120 per cent over a four to five year period. In 2015 just 7 per cent saw the same increase.”

So what’s behind this decline? FT cites two factors: an increase in women enrolled in business school and a decrease in MBAs moving into finance and banking jobs. “A decade ago,” FT notes, “23 percent of respondents to the FT survey were women, compared to 26 per cent for the 2015 ranking. In the data collected for the latest ranking, women report an average salary of $120,000, compared to $138,000 for men. Similarly, 29 per cent of the FT sample worked in finance and banking a decade ago; today the figure is 25 per cent. Finance salaries have traditionally outstripped those in other sectors, and the data collected for the 2015 shows no exception. On average respondents from the top 100 business schools earned $133,000, but those in the finance sector earned $152,000.”

The situation is best summed up by Stanford Dean Garth Saloner. “There hasn’t been much change in where [students] come from,” he tells FT, “but there have been changes in where they go.” He points to start-ups as an area that draws an increasing number of MBA grads.

Of course, FT misses a key point in its prescription. Based on FT’s Global Ranking Methodology, “the ranking is compiled using data collected from the schools and a survey of alumni who completed full-time MBAs in 2011.” While the data may be current, the sentiments are rooted in a time when the economy was still recovering from the 2008 crash. In other words, they are a lagging indicator to what’s happening now. For example, outgoing Dartmouth Tuck Dean Paul Danos shared with Poets&Quants that salaries are up 2.5% this year, with Tuck grads who received signing bonuses and other guaranteed compensation averaging $181,003 to start.

This week, FT examined another trend with even greater ramifications: The decline of the two-year full-time MBA program. In 2014, FT identified three schools – Thunderbird, Wake Forest, and Virginia Tech – that either shut down or merged their full-time programs.  And more could follow, says Michigan Ross Dean Alison Davis-Blake. She argues that, when it comes to full-time MBA programs, few are in the black. “The segment of the market that is healthy is quite small,” she tells FT.

Davis-Blake lists overseas competition as one threat to American full-time MBA programs, which are often a magnet for talented and ambitious international students in Asia. “If China continues to come up the curve and India becomes like China,” she warns, “we would be at a fundamental tipping point.”

The full-time MBA is under attack on a number of fronts domestically too. Specialized master’s programs in areas like finance, accounting, and management are growing increasingly popular according to a 2015 GMAC recruiter survey. In addition, new formats are also cutting into full-time enrollment. For example, the one-year MBA, already the standard in Europe, is being offered in American programs Northwestern Kellogg, Cornell Johnson, and Notre Dame Mendoza offering their own variation.

For Davis-Blake, that brings an uncomfortable ambiguity into the equation.”The question no one really knows the answer to is: will these cannibalise the MBA?” ponders Prof Davis-Blake. “We haven’t been in the business long enough at scale [in the US] to know.”

DON’T MISS: A REFRESHINGLY CANDID CONVERSATION ABOUT THE CURRENT MBA APPLICANT MARKET 

Sources: Financial Times, Financial Times