October 29, 2010

Cost Benefit Analysis of M.B.A. Degrees

A little while ago a reader asked if I could look at the value of an MBA or Masters of Business Administration degree.    They suggested a cost benefit analysis for getting an MBA considering the cost of the degree & lost wages versus expected salary.

Luckily Forbes has done the work already.    They have a list of the best business schools for 2009.   You an also find all the schools listed in table format ranked by 5 year gain.
If you go to that table you can see the list of business schools and how they stack up in terms of financial benefit to the students.   They look at the average post graduation salary, 5 year return on the degree and the break even point.

Lets look at the #1 school on their list which is Stanford as an example.   The details for their analysis of Stanford are here.

5 year gain

The basic idea of 5 year gain is how much you will be ahead overall financially with an MBA after 5 years.   They say that the 5 year gain at Stanford is $85,000.   This figure is " 5-Yr total compensation after graduation, minus the sum of tuition, fees and forgone compensation" and its " before taxes and adjusted for time value of money."   So they're comparing how much more money you'd be taking home if you do get an MBA minus the tuition and the lost wages versus what you'd take home if you didn't do the MBA and worked for 5 years.   For Stanford overall you'd be ahead $85,000 in the 5 year period.  The 5 year gain ranges from the $85,000 figure at the top for Stanford all the way down to a marginal $1,000 increase at the bottom  of the Forbes list.

Break even point

They also look at the break even point.   For Stanford this is 4.2 years.   The break even point is when the money in your pocket is more for the MBA path compared to not doing an MBA.   So if you start today in 2010 and then spend 2 years to get an MBA and then 2.2 more years you'd have as much money considering wages less tuition compared to if you just kept working for the same 4.2 year period.

The break even for MBA programs ranges from 3.9 to 5.0 years.   So theres only about 1 year variation there and the better MBA programs "pay off" within 4-5 years.    If you have much more than 5 years left in your working career then an MBA can pay off.

I think a better measure of the worth of an MBA is the net gain in salary or the average post graduation salaries.   Stanford is #1 in the list either way with the highest net 5 year gain of $85,000 and also the highest average post graduation salary of $225,000.

Average graduate salary

Higher ROI is good but I think that the better bottom line consideration should be the average salary post MBA.   I'd much rather have a $100,000 increase in my salary and a $100,000 tuition bill that takes 5 years to break even than a $50,000 increase in salary on a $40,000 tuition bill that only takes 4 years to break even.   The Forbes list gives the average post graduation salary for each program.

While the 5 year gain and break even points are useful metrics, the larger impact will be from higher post graduation salaries.   I would compare schools based on average post graduation salary first and then look at the 5 year gain and break even point as secondary measure.


Also look at Businessweek's ROI measure

Forbes isn't the only magazine to look at the value of an MBA.   Businessweek has done so as well with their ROI rankings for MBA's.   Businessweek uses different methodology and comes to different results.   They have Michigan State as the top US program for ROI and increase in salary.   However they don't use bonuses or stock compensation which I think is likely to be a big factor in pay for many MBA's.   Forbes also considers pay over a 5 year period rather than just the pay immediately after graduating with the MBA.  Also see their list of best US B-School for 2008.



Hot To Put it All Together

These are the basic steps I'd take if I were to compare MBA programs for financial return and cost benefit:

Narrow the list to schools you can get into.  
Look at salary gain post graduation and average graduate salaries first.
As a secondary metric compare the 5 year gain figures.


Benefits of MBA will vary

Of course all of this is looking at average figures for MBA graduates.   Everyone situation will be unique.   What kind of benefit you get out of an MBA will depend on your situation and your career goals.   I'm an engineer and a coworker of mine several years ago got an MBA with the assumption it would get him a raise and on the fast track to management.    He got neither.   Others I know have benefited in their jobs from their MBA training.   Before you jump into an MBA or start measuring your future salary, you should consider what your career plan is and if an MBA is beneficial for your situation.

Bottom Line:   Forbes site has a lot of useful data for comparing the cost benefit analysis of different MBA programs.  Personally I think that average salary and increase in salary among MBA graduates should be the primary measure of the return for an MBA program.   


More sources

Payscale.com has detail on salaries for MBA grads at various schools and different job titles
 Online MBA facts from Yahoo.

2 comments:

  1. Thank you for writing this article (yes, I am the individual that requested it!)! :)
    Some additional thoughts:
    1) The break even point for a certain school also depends on your current salary. Mine is above average, so it will take me a little longer to break even.
    2) I am interested in changing industries. Doing so means I will have zero work experience on my resume and just an MBA. I think that will put me at a huge disadvantage to get a good, high paying job in that field.
    3) I have to think about what I want out of life. I would really like to be my own boss and/or become financially independent. Will the MBA's debt be detrimental? Would I truly enjoy working for The Man after school, even if my salary is higher?

    Once again, thanks for the informative post!

    PS One thing I noticed in Stanford's analysis: it says the avg. salary was $225k in 2004. Yet in their base salary stats by career for 2008, the salaries are $125k and lower. Either this is a mistake, salaries dropped off a TON since 2004, or the signing bonuses were huge in 2004 and skewed the numbers...

    ReplyDelete
  2. Ah... nevermind, I understand now. It means Class of 2004's salary IN 2008...

    ReplyDelete

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