The Alarming Decline Of The MBA’s ‘Value Added Ratio’

Some 33 years ago, in 1985, writer James Fallows penned what might very well be one of the first attacks against the MBA degree. In a compelling essay entitled The Case Againt Credentialism published in The Atlantic, Fallows condemned the rising popularity of the degree. He noted that “it reflects the tremendous pull exerted by the security, dignity, and order of the professionalized world. The basic tenet of this culture of achievement is that he who goes further in school will go further in life.”

In the years since the publication of his assault on the MBA, there has been no shortage of naysayers as the degree itself has become more popular than ever, offerred by substantially more schools worldwide than it was in 1985. Buried in his criticism, however, was a calculation about the degree’s worth that has been little noticed in more recent years. It was something that Fallows called the “value-added ratio”—how much an MBA degree adds to a person’s salary, compared with how much it costs to obtain.

Fallows noted that the business school community closely follows the ratio. “At Dartmouth’s Amos Tuck School, the nation’s oldest graduate business college, tuition this year is $11,000, and the average starting salary for graduates is around $43,000,” wrote Fallows. “‘That four-to-one ratio has been constant for at least the fifteen or twenty years. I’ve been aware of it,’” he quoted then Tuck Dean Colin Blaydon. Harvard, Fallows also noted, also “reports a four-to-one ratio, down from the heady seven-to-one ratio of 1969, but not so far that Harvard has any trouble filing its admissions quotas.”

THE RATIO HAS FALLEN TO SHOCKINGLY LOW LEVELS IN THE PAST 20 YEARS

How has that “value-added ratio” changed over these past 33 years? Ever escalating tuition costs have greatly outpaced the relatively miserly rises in MBA starting salaries, causing the results of Fallows’ ratio to fall to shockingly low levels. At Dartmouth Tuck, for example, the average starting salary for last year’s MBA graduates was $127,986, a 198% increase from the $43,000 level of 33 years ago.

And tuition? Last year the annual MBA tuition at Tuck is $68,910, not including “program fees.” That level of tuition alone is 526% above the $11,000 rate in 1985. Not surprisngly then, today’s value-added ratio has plummeted to 1.86-to-1.0 from the four-to-one level of 33 years ago.

Tuck is hardly an outlier. Over at Harvard Business School, the ratio is also down to 1.8, from the four-to-one level in 1985 and far below the almost giddy seven-to-one ratio in 1969 when business schools graduated far fewer MBAs every year. Harvard annual MBA tuition last year was $72,000 (it is now $73,440), while the average base salary for its graduates last year was $137,293. The ratio? 1.90 to one.

THE MEDIAN VALUE-ADDED RATIO FOR A TOP 25 MBA IS NOW ONLY 1.93-TO-ONE

At Stanford’s Graduate School of Business, it’s a similar story. The ratio is 2.09, roughly half of what it had been when Fallows wrote his essay, even though average salaries last year reached a record high at $144,455, a $4,000 jump from the year-earlier all-time record. Annual tuition at the GSB, however, last year was $68,868.

Among the top full-time MBA programs in the U.S., the best values—by this measure at least—are at four public universities: the University of Washington’s Foster School of Business (2.52), the University of Texa’s McCombs School of Business (2.25), Indiana University’s Kelley School of Business (2.14), and UC-Berkeley’s Haas School of Business (2.10). And those numbers are based on out-of-state tuition. The median for a top 25 program is now 1.93.

The best value at an in-state tuition rate is at the Kelley School of Business where the ratio is not far from what it was many years ago for most schools: 3.84-to-one. That is because Indiana University’s discount for in-state students remains among the best at a top MBA program: $26,265 per year versus $47,128 for out-of-state students. Residents of Washington state also do well, with a value-added ratio of 3.72 to one, while UT in-state students also see a ratio of 3.30-to-one.

‘MAJOR MBA PROGRAMS FOLLOWED EACH OTHER DOWN THE PATH OF UNRELENTING TUITION INCREASES’

Yale SOM Dean Edward ‘Ted’ Snyder

MBA tuition increases, without equally offsetting salary rises, have led to a situation where the MBA degree is no longer the flagship program at many business schools. “For over three decades major MBA programs followed each other down the path of unrelenting tuition increases,” says Edward ‘Ted’ Snyder, dean of Yale University’s School of Management. “With credit to Bob Dylan, the ‘thought never hit that the one road we traveled would ever shatter or split.’ While the elite herd continues down the high-tuition path, investing more and more in scholarships along the way, others seek sane tuition levels and push alternatives to the two-year MBA, which for many schools is no longer a viable flagship program.

“In the process, some schools have managed their Masters-level degree portfolios well. I put MIT Sloan, Stanford GSB – and Yale SOM – in that category. For others, their navigation has led to confusion. If prospective students are unclear about what degree program to choose, if current students don’t know their place in the school, and if recruiters can’t distinguish among the graduating students, then school is in deep yoghurt.”

There are many reasons why the value added ratio has dramatically shrunk. Global competition has put severe pressure on employers, decompressing pay levels for everyone—not only MBAs. The Great Recession of 2008-2009 actually caused compensation to fall for MBAs and it is only recently begun to recover.

ONE ISSUE: SUPPLY AND DEMAND

There’s also a supply and demand issue. When Fallows wrote his essay, business schools produced roughly 67,000 new MBAs annually. Today, nearly 200,000 students in the U.S. alone are awarded master’s degrees in business every year since 2010. The MBA, moreover, has become the most popular postgraduate degree in the U.S., according to figures from the U.S. Department of Education. In 2011-2012, the last year for which data is available, 191,571 people graduated from U.S. schools with advanced degrees in business, some 25.4% of all the master’s degrees conferred.

No less crucial, the equation has become far more difficult to make because the pricetag on the MBA is more often than not the ‘sticker price’ and not the real price. That’s because business schools are funneling millions of dollars into scholarship awards that have discounted the tuition for as many as half or more of the students who enroll in these programs. In recent years, schools are in nothing less than an arm’s race to shower the best students with financial awards.

Harvard Business School now spends more than $36 million a year on fellowships for its MBA students and nearly 50% of the class receives a fellowship award. The average HBS Fellowship is more than $37,300 per year. Apply that to the current annual tuition tab of $73,440 and for students on the receiving end of an award, the ratio climbs to 3.7, not all that far off from the four-to-one ratio in 1985.

(See following page for the current value-added ratio for the top 25 U.S. MBA programs)

About the Author...

John A. Byrne

John A. Byrne is the founder and editor-in-chief of C-Change Media, publishers of Poets&Quants and four other higher education websites. He has authored or co-authored more than ten books, including two New York Times bestsellers. John is the former executive editor of Businessweek, editor-in-chief of Businessweek. com, editor-in-chief of Fast Company, and the creator of the first regularly published rankings of business schools. As the co-founder of CentreCourt MBA Festivals, he hopes to meet you at the next MBA event in-person or online.