Can An MBA Add $1 Million To Your Income? A New Study Says So

The peak ROI on an MBA after three years was reached in 1993 when graduates recouped their entire investment within three years Source: GMAC 2016 Alumni Perspectives Survey

The peak ROI on an MBA after three years was reached in 1993 when graduates recouped their entire investment within three years Source: GMAC 2016 Alumni Perspectives Survey

As the chart above shows, ROI is often dependent on the time period in which an individual graduates because outcomes vary by graduation year. Over a 20-year period between 1991 and 2012, the chart shows that three-year ROI peaked in 1998 and has been all over the place in the past two decades. Even so, it was only zero in the years between 1991 and 1993. In the last year charted, 2012, three-year ROI was 40%.

GMAC found predictably that the 20-year trend in return on investment for a full-time two-year MBA program is showing some decline, due in part to rising investment costs and slower growth in post-degree starting salaries. GMAC tracked the numbers based on a three-year rolling median adjusted for inflation in 2012 dollars), with data from class years 1991 to 2012 (see below). The gap between the cost of an MBA and starting salaries was largest in 2006, but is beginning to narrow somewhat, though it is far from what it was back in 1993.

Total Investment Costs Are Growing At Faster Rates Than Starting Salaries

Source: GMAC 2016 Alumni Perspectives Survey

Source: GMAC 2016 Alumni Perspectives Survey

And then, there is that bottom line outcome of what a graduate business degree is actually worth over time (see chart below). Over 20 years after graduation, business school alumni earn a median cumulative base salary of $2.5 million. This is a half million more in cumulative base salary than they would earn if they did not go to graduate business school and consistently received 5% annual salary increases, and nearly $1 million more than if they did not go to business school and had consistently received today’s more typical 3% annual salary increases over 20 years.

The solid line shows the median cumulative base salary of alumni, which is offset by the opportunity and educational costs during the enrolled period on the chart. Each of the dotted lines show the hypothetical median cumulative base salary of alumni if they did not attend business school, continued working, and received either 3% or 5% salary increases annually. As shown, during the two-year period of school enrollment, alumni cumulative base salary decreases due to lost wages and educational costs, while the hypothetical “no degree” lines show continued growth. After seven years following graduation, business school alumni earn more than both of the no-business degree candidates experiencing either 3% or 5% annual salary increases.

Business School Alumni Earn Cumulative Salaries Of $2.5 Million Over 20 Years After Graduation

Median cumulative base salary (excluding bonuses) accounting for opportunity and investment costs, and hypothetical growth rates of 3% and 5% based on pre-degree earnings, all program types, class years 1986 to 2012 Source: GMAC 2016 Alumni Perspective Survey

Median cumulative base salary (excluding bonuses) accounting for opportunity and investment costs, and hypothetical growth rates of 3% and 5% based on pre-degree earnings, all program types, class years 1986 to 2012 Source: GMAC 2016 Alumni Perspective Survey

  • ABHI CHAUHAN

    is the 1242k salary is one year salary after 10 years or sum of the salary after 10 years

  • C. Taylor

    Financial Modeler ≠ financial modeler

    Financial Modeler wrote: “promises a greater than 1,000% return
    ROI = (payback in excess of cost) / cost
    ROI ≠ compounded return

    Financial Modeler wrote: “$25K wont even get you a part-time
    investment = out of pocket cost + forgone salary
    forgone salary for part time ≈ 0
    out of pocket cost = cost – (scholarships + grants + subsidies + stipends + etc.)

    Financial Modeler wrote: “[1] Am I not understanding something? . . . [2] I’m not sure what this article actually tells us.
    1) This is accurate.
    2) True.

    Financial Modeler wrote: “If [incremental] these CAGRs become quite rich”
    CAGR = Compound Annual Growth Rate
    This is the rate at which something grows. It is defined here accurately for the GMAC’s usage as:
    CAGR = ((current salary / post-degree salary)^(1 / number of years post-degree employment)) – 1
    This is measuring the growth in cash inflows from the first year post-degree to whatever point the survey was filled out.

  • Financial Modeler

    Well hey, if you can’t seem to argue around a $25K part time program or incremental gain, might as well use a one-off anecdotal story.

  • C. Taylor

    25k ‘investment’ for a part time MBA is a tree, not the forest. These guys at GMAC are focused on incoming cash flows (thus CAGRs for post-MBA salaries). Rightfully so. GMAC clearly states in its report that the investment is out of pocket costs + forgone salary as reported by the individual alumni surveyed. I would guess many part-timers are sponsored, in part.

    Some perspective. I read this week a post by a Cambridge (Judge) full time MBA grad. His starting salary was indeed lower than those had by grads of elite programs. However, his starting bonus paid for the bulk of his degree, and his second year salary matched those starting salaries of graduates from the elite programs (Wharton, HBS, LBS, etc.).

    And yes, the same companies recruited at Judge. Cambridge’s FT program cost around him somewhere around 40k+ pounds (post scholarship, I’d hazard). Yes, his starting bonus was the typical one for the company which hired him.

  • Financial Modeler

    @C. Taylor You are missing the forest through the trees. Initial investment is totally wrong. $25K wont even get you a part-time MBA at Phoenix Online. (Am I not understanding something?)

    Additionally, the article would lead one to believe that these results are incremental (greater than what would be experienced without an MBA). If that is the case, these CAGRs become quite rich.

    Between the bunk initial investments and lack of ROI analysis based off of incremental return, I’m not sure what this article actually tells us.

  • Confused

    One thing I don’t understand is, how can the top schools have so low median 20-year cumulative cash compensation. I am 7 years out of a top 3 MBA school and literally all my friends are making easily over 200k a year. Even my world saving ex-girlfriend is banging a 160k salary for cleaning up the seas from micro-plastics.

    I always thought it would be more like 4,5 million by the time we are 20 years out. I mean is there really hundreds of Harvard graduates out there per class making only 70k per year even when they are 40 years old. I doubt it very much.

  • C. Taylor

    Check your assumptions. The ROI is payback. Should be clear (cumulative salary). This absolutely has a base in reality. (590-348)/2 = median base of 121k, four to five years out. Seems a little high for the median, but the data source is expansive.

    I believe you were looking for the CAGR. The CAGR is only 7.1% for two year programs. This does not justify ‘drastically increased’ costs even in a constrained market.

    Ignoring the CAGR, there is ample supply competing for candidates. If HBS increased cost from 200k to 400k, there would be few takers. There are tons more qualified PhDs than spots at HBS. Now look at the MBA program for the median GMAT taker, as GMAC does. Do you see that program having more pricing power than HBS? Hardly. There is little benefit available for grads in doubling the cost.

  • It’s largely because our own analysis, which we commissioned from PayScale two years ago, pretty much proves the same thing. Otherwise, I would be as skeptical as you are.

  • Financial Modeler

    Most importantly, if you cannot understand the very basic assumptions used in this analysis, that are wildly flawed and have no basis in reality, you probably do need more schooling.

    If any of these numbers actually made sense, this would be the best case for MBA programs to drastically increase their cost. Typically any entity that promises a greater than 1,000% return on any investment ends up in jail.

    C’mon, John! Why are you endorsing this crap?

  • Foxtrot

    fantastic article