Are U.S. Business Schools Headed For A GM-Like Fall?

Financial Times data shows that the three-year salary increase after an MBA from a U.S. school has declined to 96% from 170% in 2002

‘A SPECTACULAR FALL IN THE VALUE PROPOSITION OF A U.S. MBA DEGREE’

A Harvard MBA and former consultant, Martin served a highly successful run as dean of the Rotman School from 1998 to 2013. Since then he has been the academic director of the Martin Prosperity Institute at the leading Canadian business school. He presented his observations on the future of the MBA last week at the Academy of Management’s annual conference in Vancouver. Martin focused his research on U.S. business schools because, he says, the U.S. is the “bellwether market” for the MBA degree. In interview with Poets&Quants, Martin shared his provocative observations.

Using data from The Financial Times to track three-year salary increases for MBAs of the 50 to 60 U.S. schools in the FT ranking, Martin found that as recently as 2001, the return on the degree was in the 170% range (see above chart). “It dipped below 100% for the first time last year,” he notes. “That is a spectacular fall because we have saturated the world with plenty of MBAs who mostly are narrow specialists. So the payoff for doing an MBA at a U.S. university is dramatically lower than it was. From the perspective of students, it’s not quite the deal it used to be. That’s why fewer North Americans are taking the GMAT to go to business school (see below).”

As the pipeline of American students has fallen, schools have largely made up the gap by increasingly filling class seats with international candidates. In 2009, roughly 31% of the incoming MBA students at the top 50 U.S. schools were international. Today, that total has risen to 40%, according to Martin’s analysis. “That means the schools took in about 1,000 more foreign students compared to what they did in 2009. To save their bacon from being less attractive to U.S. students, they filled in with foreign students. That is not a bad strategy, but it is a short-term strategy.” Over a two-year MBA program, those additional international students alone are providing about $100 million in revenue to the top 50 schools, estimates Martin.

For prospective international students, the value equation still works because of what Martin describes as a hoped for shift in job markets. “They will come from a job market where the entire structure of it is lower and they are hoping that by going to a top 50 U.S. school they will get access to the U.S. labor market and have a better chance of being sponsored by a company for immigration. That is an enticing lottery ticket to buy, but a bunch of these students are going to end up very sad when they get punched out by immigration.”

International students have offset and somewhat disguised the decline in American MBA students at top U.S. schools

UNIVERSITY PRESIDENTS ARE TELLING BUSINESS SCHOOL DEANS ‘JUST KEEP IT GOING’

For U.S. business schools, ‘buying’ international students may well be the equivalent of selling cars at rock bottom prices to rental car agencies to offset declining market share. In the short-term, the practices props up revenue and share but may not be sustainable in the long-term.

“The problem with GM was that the stock market was saying to them, ‘Don’t take strikes. You’ve got to make money. Just keep it going.’ So they agreed to pay more and more to union members—even when it made little economic sense to do so–to avoid any strikes. And for business schools, it’s now the university presidents who are saying, ‘Just keep it going. Don’t tell me you have problems. Don’t tell me I have to bail you out.’

“GM kept pushing up prices ahead of inflation and there was declining customer satisfaction. GM paid for labor peace with rising salaries and benefits. They wouldn’t take long, brutal strikes. In business schools, professor salaries have risen dramatically. If you are a sociologist working in the business school, you get 2X what you would make in the sociology department. It’s the same for economists. The number one thing that business school professors do is negotiate for teaching relief. Anything they can do to get teaching relief they will.”