Calculating the Return On Your MBA Investment
- Sep. 01 2005 00:00
Evgeny Shatskih made a careful assessment of his likely return on investment (ROI), before deciding to study at Tuck School of Business in the USA. "I was already earning a good salary after working for eight years in the pharmaceutical industry in Russia. After talking to schools at the World MBA Tour I established that Tuck has a favorable loan scheme and that my expected salary would result in a very positive return after my MBA."
Twenty years ago, the conventional wisdom was; always 'study at the most prestigious business school you can gain entry to, irrespective of cost' - the logic being that over a twenty to thirty year working life post-MBA, course fees would be relatively insignificant, compared to the salary uplift from a prestigious school. Subsequently many new MBA programs have emerged around the world, which are challenging this convention. Does the tenet still hold true and can ROI, which has been largely neglected in recent studies of MBA programs, shed some light?
QS TopMBA Scorecard has recently completed a study of average ROI achieved by graduating full-time MBA students at 200 MBA programs around the world. The results below show that the typical two-year MBA model favored by US schools, remains competitive, but a couple of UK schools have edged ahead. Recognizing that 12 month MBAs offer a different learning experience, we separately show the ROI table for these shorter programs, which are dominated by European schools.
How do you calculate the ROI and pay back period of an MBA program? An MBA is a significant investment in one's personal development (more important than buying a house, because it will affect your stream of income for the rest of your life). But as with any investment, it has a measurable payback.
On the cost side, there is a correlation between school reputation and course fees, though there are significant regional adjustments to this principal. Schools in New York and Central London tend to be more expensive than other regions of the world. Tuition costs for two-year MBAs like Wharton and Harvard are approximately $76,000. In Europe, London Business School (LBS) and IESE offer two-year courses, whereas IMD, INSEAD, Cranfield, Warwick and other leading programs are one year. The annual tuition cost for a fulltime MBA can be as little as £10,000 at the University of Wales, Aberystwyth or as much as £41,500 at LBS.
The second major determinant of total fees is course length. Of the few 12 month programs in the US, like Hult or Florida International Business Schools, course fees are roughly half their better known two year alternatives.
To estimate the 'true cost' to complete an MBA, we take into consideration tuition, living, travel and book costs. In the table below, we assume annual living costs and book costs of $23,000 per annum and apply a weighting depending on whether the location is rural, suburban or metropolitan. This figure should also cover hidden costs like travel home and insurance. In addition the opportunity cost of salary foregone, must be included in the calculation.
Globally, average salaries for graduating MBAs have increased by 12 percent in the last two years. This matches the pre-downturn levels of 2001 with a USEuropean average of $84,500. Average salaries for MBAs graduating from a top US school like Tuck, Chicago and Stanford average $95,000 this year. Bonuses for 2005 have increased substantially. The average reported bonus is a sizeable $27,000.
To calculate 'true earnings' one could also take into account a 'sign-on' bonus offered by many MBA recruiters, and the potential to earn a further $15,000 during a summer internship (these are not included in the results below).
Table 1 shows some assumptions a typical MBA applicant can make to calculate a 20 year ROI, as well as how long it would take him or her to payback the MBA investment, and what would be the Net Present Value from an MBA over a 20 year period (figures are presented in U.S. dollar at an exchange rate of $1.80:£1).
The calculations reveal that for a two year MBA taken in the US, the payback period is usually just over three and a half years. This means that three years after your MBA, you will be better off, even taking into account the salary foregone. For a one-year European MBA the typical payback period is between two and three years.
In these scenarios, over a 20-year working period, the Net Present Value of incremental future cash flows is approximately $0.7 million. The ROI ranges between 800to 1200 percent. In comparing results between schools, some words of caution are required. Though the assumptions are sensitive to pre- and post-MBA salaries, an annual salary increase of just 7 percent per annum is cautious. For a strong performer entering consulting, investment banking or becoming an industry leader, the NPV would be higher. When comparing schools, it is worth exploring where graduates end up working - there are strong country variations - an MBA is likely to earn far more in New York or London, than in parts of Asia or Latin America. Comparison between US and European schools is also sensitive to the dollar exchange rate.
ROIs calculated by TopMBA Scorecard
The tables below show 20-year returns on investment, using the same assumptions, for the twenty best performing long programs (13 months or more) and the twenty best performing shorter programs (12 months or less).
Manchester Business School and London Business School can currently claim to yield amongst the highest ROIs for programs over 12 months in length, when comparing in dollar terms, which at the assumed rate of $1.80:£1, certainly favors European schools. Amongst US schools, Tuck narrowly edged out Stanford, Harvard, UCLA, Kellogg, Wharton and Columbia in terms of this ROI measure, partly because of the lower cost of living of its location.
Amongst one year programs, Vlerick Leuven Gent (VLG) in Belgium achieves a strong ROI. It charges just $14,450 for its one year program, making it one of the least costly MBAs. Dessy Arfianni joined Vlerick Leuven Gent because, "I wanted a less expensive MBA, which offered good contacts with employers and hence, pretty good salary prospects. At the back of my mind I was looking at ROI. Coming from a low pre-MBA salary, I did not feel comfortable with the cost of some of the top schools." Dessy adds "Three prominent companies in Belgium had offered me jobs within 1 month of my graduation. By working in Europe, my salary is now three times higher than I could have earned without an MBA, if I had stayed at home."
You can enter your own salary on TopMBA Scorecard and identify your own potential ROIs. Complete ROI results for 200 full-time MBA programs are available on TopMBA Scorecard - visit www.topmba.com, where you can also register for the World MBA Tour, which will visit Moscow on October 31, 2005.