Return on Investment of MBA Programs

TopMBA.com looks at whether the high cost of an MBA is a good return on investment for students. 

When those involved in the business school world – from deans, academics, and school faculty; to applicants, their family, and their friends – ask how much it costs to get on an MBA program, the result often leaves them spluttering into their coffee with shock.

After all, business school requires what can seem, especially to those who have no interest in furthering their business education, an enormous upfront outlay of fees and annually accrued expenses. This is especially true when the MBA candidate, as is very often the case, chooses to study overseas.

Harvard Business School for instance, estimates an annual US$84,000 expenditure for a single MBA student. This includes fees, estimated accommodation and personal costs. However, the figure could tip into the six-figure sum when travel, books, study trips and other outgoings are factored in.

Most schools will have lower fees than Harvard. But for the international student in particular, considering an investment like this naturally requires a great deal of consideration and soul-searching.

Cost versus investment

While many will ask 'how much does an MBA program cost?' you’ll note that schools in particular try to avoid the word ‘cost’ wherever possible. The best advice is that business school ought not to be measured as a ‘cost’ but as an ‘investment.’

“An MBA is not like a motor car,” says one Melbourne Business School MBA alumni. “When you buy a car you use it until, if you’re lucky, you can sell it in a few years’ time at a depreciated fraction of the amount you paid for it. An MBA is the opposite. It appreciates in value over time.”

Even in these stringent times, the MBA is time and again proving its worth as a qualification.

The management degree not only opens up international barriers, but allows for career progression or career change. However as average salary figures included in the recent QS Global 200 Business Schools Report show, it retains a very high level of return on investment.

Mary Granger, associate director of admissions and career services at ESADE Business School in Spain, agrees: “Despite the tough economic climate in many mature markets, today’s MBA graduates are global players with language skills and geographic flexibility who are able to use the knowledge acquired in their MBA wherever companies need them.

“We see recent growth in fast-growing countries such as Brazil, India, United Arab Emirates and South Africa, as well as other emerging markets which have been relatively isolated from the global crisis, and where the MBA skills can be put to good use. So return on investment has remained high on a global scale.”

Calculating the return on investment

In general terms, return on investment is best thought of as the amount of time it will take you to repay your MBA program expenditure; given that almost all MBA alumni experience uplift in their salary within a year of completing their program.

Let’s use Oxford University’s Saïd Business School as an example.

Referring to TopMBA.com’s business school profiles, it’s easy to find that the mean-base salary for MBA alumni taking job offers within three months of completing the Saïd MBA is equivalent to US$98,000. Furthermore, it shows that 60% of alumni go into finance, accounting or consulting. To live comfortably and pay all their fees, the student will need US$84,000 for the year, according to the school.

The latest TopMBA.com Applicant Survey found that the current average salary among MBA applicants in the UK is just under US$61,000. This shows a salary uplift of US$37,000 per year, therefore the time required to repay that initial investment is less than two-and-a-half years.

Given an average work expectancy of around 35 years at a high rate of earning, this seems like a no-brainer, especially considering factors such as performance-related bonuses and MBA scholarships, which may shorten this time period even more.

For Nick Barniville, MBA director at the European School of Management and Technology (ESMT) in Germany, this mathematical approach has some value. He suggests that looking at business school and applying the kind of financial models that MBA programs encourage, is an advantageous way of working out whether an MBA degree at a certain school makes a reasonable investment.

“Potential MBA students make their decision based on their calculation of the net present value (NPV) of the investment,” he says.  “[MBA candidates] take the opportunity cost of foregoing their current salary for either one or two years, add this to the price of tuition, minus any financial aid available and living expenses in their target cities, and compare this to the expected increase in income that they are likely to earn over their career post-MBA. All else being equal, the school which has the highest NPV will be chosen.”

Working out the average MBA salary

It is always a good idea to look closely at the salary figures provided by business schools.

This is an ‘average salary’ that alumni have told their schools, but beware – these are two parties for whom a higher figure looks better than a lower one. However, identifying return on investment is not an exact science and it’s often one that is hard to pin down, as most of the figures are inexact or based on averages.

Most people will use the ‘average salary upon completion’ of the MBA program, which can be found on TopMBA.com's business schools profiles, or via TopMBA Scorecard.

Additionally, this average is going to be far higher for a school such as London Business School, which produces a disproportionately high number of financiers and investment bankers.

Another factor to consider is: at which stage in an alumni’s career does a school take the average salary figure? At their first post-MBA position, or at one, five, or even ten years after graduation, when a salary is likely to be far higher?

Candidates need to look carefully at what a realistic return on investment is for them as an individual. What is the likely salary window they are going to be operating in when they complete their studies?