Are You Asking The 'MBA Question'? Here’s The Answer From A Former B-School Dean

As the former dean of a top-10 business school, I’m often asked by friends to “chat” with their children, nephews, or nieces. It follows the same script: “Person X wants to get an MBA. What do you think?”

This time of year, the MBA question is particularly pertinent, given that college graduations are looming and a new generation is entering the workforce. As layoffs hit even the highest-paying sectors, business school has become even more appealing to employees up and down the corporate ladder, as they look to regain their career footing.

Before answering the MBA question, there are two important considerations. First, will there be a positive return on investment — the actual cost of the MBA plus the income lost to pursue one? Second, can you get into a top-tier business school, or is that even necessary to see a positive ROI?

Like most big decisions in life, the answer begins with “it depends.” But it is helpful to have the right historical perspective beforehand.

Business school is a relatively new phenomenon. Prior to the early 1960s, liberal arts colleges viewed business as professional or trade education. What little they had in the way of business courses were part of broader economics departments. It is telling that Harvard University, which was founded in 1636, didn’t open Harvard Business School — home of the first MBA program — until 272 years later.

Back in 1970, MBAs accounted for barely 11 percent of all graduate degrees. By 2012, the number had more than doubled to over 25 percent. Today, the MBA is the most popular type of graduate degree.

Many colleges and universities, which could never afford to establish a law school or a medical school, launched MBA programs — hundreds of them. And, unlike other new academic programs, they were cash cows. Business schools never required large, expensive laboratories. Courses could be taught in sections with 50 to 200 students at a time. Even today, the cost to supply MBA coursework is relatively low.

But, eventually, supply began to exceed demand. The best-paying employers — consulting firms, investment banks, and the like — realized that they only needed to hire from the top-20 (or better) business schools, filling their annual quotas with the brightest minds and hardest workers. At the same time, other companies gained a larger sample size of empirical evidence after hiring MBAs for decades. Many calculated that they could always send “keepers” back to school for an MBA, and it was often the right calculation.

Given the glut of MBA programs, the vast majority became “open admission,” meaning that applicants who met bare-minimum standards were accepted. In the process, the top-20 business schools became even more alluring and far more selective, admitting only 10 to 20 percent of applicants.

Getting into a “top” school seemed like the silver bullet for success. But that only applied to people attracting offers from the best-paying employers. Only then did the business school “math” really add up. Top-tier employment was paramount, as it is in 2023.

Which brings us back to the MBA question: To answer it, you need to crunch the numbers. Full-time MBA students receive a 50 percent median compensation increase from pre-MBA to post-graduation—from $80,000 to $120,000 on average. A top-20 choice like the Stanford Graduate School of Business, for example, can yield a 10-year ROI of 325 percent or more.

But the math only applies to a select group. The two-year cost of an MBA program like Stanford’s (i.e. tuition and fees, room and board, and books) typically exceeds $225,000 in total. Then there’s the lost income: The starting salary for an undergraduate with a business degree typically ranges between $50,000 at first and $70,000 within three to four years. Over two years, an MBA student’s foregone income can hit the six-figures, so a top-20 MBA program can easily cost upwards of $350,000 all-in.

That’s a lot of money, so the “high earning potential” of an MBA needs to be met for business school to be worth it, at least from a monetary perspective. MBAs who end up with comparable annual salaries to undergraduates cannot justify the expenditure. If you earn $80,000 per year upon graduating from business school, it is highly unlikely that you see 325 percent ROI over 10 years.

And that’s for a top-20 program. Graduates from smaller, lower-ranked MBA programs don’t necessarily attract recruiters from the highest-paying firms. In such cases, MBAs typically won’t see the immediate jump in compensation that is large enough to offset two years of lost earnings plus a six-figure investment in tuition and fees. The math doesn’t add up.

Of course, business education has evolved in recent years. Part-time and virtual programs are more common. Executive programs are often sponsored by employers, reducing or eliminating the overall investment and maximizing ROI. Now more than ever, there is something for everyone.

Finding the right fit is the real task at hand. But, whichever program you choose, the math needs to add up. You need to crunch the numbers for yourself.

The answer to the MBA question is still “it depends.” If you get into one of the world’s top business schools, then it probably makes sense to go. But don’t just go to business school for the sake of it.

You should only pursue an MBA if it makes sense for you. Otherwise, get back to work.

John Rau is a four-time CEO of multi-billion dollar companies, and an 11-time corporate director (six times as lead or chair). He was dean of the Indiana University School of Business (now the Kelley School) from 1993 to 1996.