The MBA as a Finance Case:

by on February 28th, 2018

Today’s article was submitted by Sumit Malik, Editor-in-Chief.

With Round 1 MBA admissions in the books and Round 2 underway, we are now seeing the mix of HBS campus visitors shift from Class of 2020 hopefuls toward Class of 2021 prospects. For many, the decision to apply entails weighing benefits of the MBA—facilitating personal and professional growth, gaining access to a strong brand and network, taking the opportunity for introspection and self-reflection, honing managerial skills—against the significant financial investment, both in terms of tuition costs and forgone salary. In practice, however, if you come to HBS, you can expect the degree to pay for itself within a handful of years through increased earnings, even if you shell out sticker price.

Critically, notwithstanding the expected financial return on investment of the MBA, reducing the benefits to economic terms alone would miss the point of the program. The HBS experience, designed around a mission to “educate leaders who make a difference in the world,” teaches students to embrace and harness diversity of thought, create value for society before claiming value from society, and show leadership both inside and outside the workplace. Students and alumni characterize the strength of the community and enduring relationships that it fosters as invaluable. The earnings premium afforded by the MBA is a single consideration out of a much broader set.

 

Exhibit: Illustrative Earnings Increase with MBA

Turning to the numbers, in naming HBS its top business school for 2017, Bloomberg compiled data on median compensation for a student entering the HBS MBA program ($85K), salary at the first job after graduating ($150K), and compensation 6-8 years later ($280K). The Exhibit illustrates this earnings trajectory in crimson, assuming the roughly 9% implied annual growth in post-MBA compensation from $150K to $280K subsequently ramps down to a long-term growth rate of 2%, close to inflation. For comparison, income before obtaining an MBA of $85K is plotted in black with the same growth trajectory.

The result is that the costs of the MBA—both the tuition and fees of about $80K per year and two years of forgone salary—are recouped through higher earnings within 5-6 years of graduation. Here, as a purely financial investment, the annual internal rate of return is upwards of 20% over 40 years of employment. Importantly, this analysis is illustrative and simplified: I assume a student with no partner or children, wage growth follows the same trajectory with or without an MBA, and the MBA is financed with savings. Furthermore, post-MBA salary is not perfectly comparable with pre-MBA salary given much of the median compensation boost is likely driven by rotation into higher-paying and potentially more demanding industries.

While individual circumstances vary, the takeaway is that for most there is a strong financial case for the MBA. The Graduate Management Admission Council (GMAC), which manages the Graduate Management Admission Test (GMAT) exam required to apply to most business schools, estimates that MBAs across all business schools may see a cumulative earnings bump reaching seven figures over the course of 20 years, relative to peers who skipped the degree, depending on wage growth. The return on investment in monetary terms at HBS is amplified by the generous financial aid offered by the university: roughly half of HBS students are eligible for need-based fellowships, which average $37K per year.

HBS has a deeply rooted interest in ensuring that its classrooms and campus are replete with diverse, impactful voices, which contribute to the academic experience in unquantifiable ways. There’s an ardent belief that financial constraints should not preclude becoming part of this community, a cause that HBS backs up with an annual financial aid budget of over $30 million. Even for the most challenging, idiosyncratic cases, the university is committed to ensuring that, from a financial perspective, the numbers add up.

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Sumit Malik (HBS ’19) is an investor, writer, and entrepreneur. Professionally, his background is in venture capital and private equity at Warburg Pincus, strategy as a board member of Santander Asset Management Chile, and investment banking at Goldman Sachs. Personally, he writes for academic and popular publications and performs music and poi (light- or fire-spinning). He previously received an A.B., summa cum laude, from Harvard College and an S.M. from the Harvard Graduate School of Arts and Sciences.

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