With the high cost of admission to a top-tier business school, prospective students should determine whether pursuing the MBA degree makes financial sense as a long-term investment. I advise applicants to ask themselves three questions: Will the degree help me switch careers? Can I expect a significant salary increase? Will an MBA help me reach a leadership position sooner?
While it can be daunting to pay hundreds of thousands of dollars to earn an MBA, most business school graduates experience a substantial salary increase. The degree is also a powerful differentiator in a crowded marketplace. The vast majority of graduates report having greater job satisfaction and the ability to advance quickly and, therefore, earn more in shorter time.
In fact, Graduate Management Admission Council’s 2016 Alumni Perspectives survey gets very specific about the dollar value such a degree can bring. Business school alumni earn a median of US$2.5 million in cumulative base salary over 20 years following graduation. Alumni — on average — recoup their b-school investment within four years after graduation, depending on the type of program attended.
Last fall, when Forbes released its 2015 ranking of the best b-schools based on the ROI of the MBA Class of 2010, Stanford Graduate School of Business nudged out Harvard Business School for the top spot for the second straight time, with a five-year gain of $89,100 for graduates. In fact, according to the report, the class of 2010 tripled their pre-MBA total compensation to $255,000 five years out of school.
Calculating the return on investment requires a simple formula. It’s the return acquired from an investment minus the cost of the investment, divided by the cost of the investment. Students of two-year MBA programs typically have the largest investment expense because they miss two years of employment. They need to recoup the cost of the MBA degree plus the opportunity cost in order to get a positive return on their investment.
To dive deeper into the numbers, TransparentMBA, a company started in 2015 by University of Chicago Booth School of Business students who were frustrated by the lack of relevant compensation and satisfaction data available to MBA students, provides both industry and company-specific on effective hourly wage across a multitude of post-MBA roles.
This can greatly help those considering business school figure out just what type of salary bump they can look forward to based on the industry or company they plan to target upon graduating.
Prospective students should consider payback time with projected cumulative growth, and average growth rate, when looking at return on investment as a motivating factor for pursuing an MBA. But keep in mind, the value of the MBA degree varies depending on your post-graduation plans, as well as the brand of the business school where you earn the degree.
In an earlier post on ROI, Paul Danos, former dean of Dartmouth College’s Tuck School of Business, noted that while the elite programs require a significant investment in time and money, it pays off in both career options and compensation. “The top programs are able to recruit the best qualified students, provide a truly excellent educational experience, and therefore attract top recruiters who recognize the value of that experience.”
Remember, every choice that you make when deciding whether an MBA makes sense for you– ranging from the cost of the city you decide to live in, the field you move into, to the school you choose – will impact your financial return on investment. Nevertheless, I believe that no other degree can open doors as the MBA does.