Return on Investment of an MBA education

Unquestionably the biggest reason why anyone pursues an MBA is to give their careers a big boost. But do the rapid cost increases still justify the value of an MBA education? What is the Return on Investment RoI of an MBA education? Let us find out.

The reasons why people pursue an MBA education are aplenty; however, one reason that is common across all aspirants, and is probably the most dominant, is because an MBA education promises very healthy financial returns – at least anecdotally, which not many professional degrees can. Yet the massive and ever-increasing cost to pursuing an MBA, and abundant supply of graduates have caused many in the industry to question the value of an MBA education like never before.

 

The reasons why people pursue an MBA education are aplenty; however, one reason that is common across all aspirants, and is probably the most dominant, is because an MBA education promises very healthy financial returns – at least anecdotally, which not many professional degrees can.  Yet the massive and ever-increasing cost (read: Top B-Schools have increased their tuition fees. What should you do to counter that?) to pursuing an MBA, and abundant supply of graduates have caused many in the industry to question the value of an MBA education like never before.

 

Only 10% MBA graduates are employable” – this headline made quite a stir earlier in 2015. It is true that management education system in India produces over 3.5 lakh MBA graduates each year and all of them can not be employed – at least in the mainstream industries. Readers must understand that the above statement holds true and only highlights the problem of oversupply, and thus the quality dilution of MBA graduates.

 

According to CRISIL, Tier III and Tier IV b-schools (that form close to 90% of the b-schools ecosystem in India) are not able to place all their students, and if they are able to do it, the average annual salaries fall in range of Rs. 3-5 lakh.  So, while selecting an MBA destination, the prospective MBAs must ask themselves before committing to a considerable financial and time investment, “What does the return on investment look like?”  This article attempts to help MBA applicants in understanding the value of a good, full-time MBA degree, as well as difference between RoI and Value of a full-time MBA education.

 

However, one can not undermine the quality of the top MBA programs.  We must always keep in mind that not all MBA programs are created equal – top MBA schools have delivered on that quality promise by admitting students of great calibre, hiring quality teachers, and maintaining excellent relationships with industries to create relevant academics for a long time, thereby elevating to the apex positions.

 

It is true that most of the lure of pursuing an MBA comes from the promise of better employment opportunities – be it in the form of career change or career growth. The underlying expectation is to achieve significant increase in salaries.  So, the focus of this article is going to be about the earning potential post an MBA education.

 

Before we talk about the upside of pursing an MBA education, let us be very clear in mind that MBA results in significant expense both in terms of money and time.  A typical MBA education cost will include, Tuition Fees, other Co-curricular expenses, Books & Supplies, Laptop, Hostel and Food, Clothing, Travel and Other miscellaneous expenses.  While planning, a prospective student must go beyond just the tuition fees, and understand these expenses, and plan accordingly.

 

Most of the students finance their education by taking education loans, which also form a major part of expense upon graduation.  Many national banks are supporting prospective students’ aspirations by providing education loans and even offering moratorium period of up to one year after graduation.  If the student is presently employed, however, a commitment to pursue an MBA education also means letting go of two years’ salary as opportunity cost.  A prospective MBA must have emotional and professional maturity to make the transition from an earning professional to being a student, and letting go of the financial independence for two years!

 

 

Let us take the hypothetical case of Ramesh, a 24 years old male, with two years of experience in IT industry.  He decided to pursue an MBA from one of the top-20 MBA programs in India, and with hard work, he is able to get into such a program.  He had heard about the concept of return on investment (RoI), and tried to evaluate the RoI of his B-schools full-time MBA program.

 

The website mentioned the Tuition and Other Fees as 7.5 Lakh per year, and the average salary upon graduation was reported as Rs 10 lakh!  Ramesh, being a number-savvy IT professional, immediately understood that the RoI upon graduation from this program was 66% [Salary upon graduation / Tuition Expense]. 

 

100% RoI did not look bad, until the time he met another of his colleagues, who got in to a top-40 program, where the average graduate salary was reported as 7.5 Lakh and the tuition fees for two years was Rs 6 Lakh – yielding an RoI of 125%!!

 

He immediately got in two minds!  Was pursuing an MBA from this B-school, really a good idea?  To answer this question, Ramesh got in touch with an expert at FYI (www.gofyi.in), who helped him in understanding the overall economics of pursuing an MBA.

 

The FYI Expert started with preparing a table to list all the cost estimates required for pursuing a full-time MBA education, under various heads –

 

Table 1:

MBA Expenses

Year 1

Year 2

Tuition & Other Fees

7,00,000

7,00,000

Books & Supplies

50,000

50,000

Laptop

25,000

-

Hostel & Mess

60,000

60,000

Personal

(Clothing, Travel, Misc.)

75,000

75,000

Total Expenses

9,10,000

8,85,000

 

That is a total of Rs. 17.95 lakh for the two years!  That is whole lot more than the Rs. 10 lakh as he previously imagined. Ramesh is even more depressed!  His RoI calculation now plummets to lower than 60%!

 

Ramesh is even more worried thinking whether he was making the right decision by getting into this MBA School.  He is presently making Rs. 4 lakh per year – a lost income in case he pursues an MBA.  Also, since he does not have enough saving to fund MBA education, he is relying on an education loan – an added burden on his finances.  In the new light of RoI calculation, which was now much lower than what he initially thought, will this decision really benefit him – both financially and professionally?

 

To answer this question the FYI Expert created a simple table to estimate his earning potential in two events –

 

  • Ramesh does not pursue an MBA
  • Ramesh decides to pursue an MBA

 

It made sense to create this table for the first 10 years starting now, to understand the near-term picture.

 

He also clarified to Ramesh that calculating value for a full-time MBA education was very complex process, which required making many assumptions about his future that may or may not turn out to be true. As is with any business model, the results are only as good as the assumptions made and the data used.

 

From the Table-1 above, Ramesh understands that he will take Rs. 7.5 lakh in education loan each year to cover for tuition and books, and pay the rest from his savings.  The education loan is to be repaid in 5 years upon graduation, and the interest rate of the education loan is 12%, and offers a six months grace period after graduation for repayment. Ramesh decides that when he takes the loan, he will make sure that it is paid in 5 years. It is a tough financial commitment, but not without merits. He can avail tax exemption on the repayment of Education loan, which would lessen a burden somewhat. However, that aspect was not included in the calculation.

 

The FYI Expert proposed that for simplicity, Ramesh assumed an average salary increase of 8% each year both in the event of pursuing MBA and not pursuing MBA education.  When he gets promotion, he proposed, Ramesh could expect a salary increase of 20%.

 

He estimated that Ramesh would secure 3 promotions over the course of 10 years if he does not pursue an MBA, and 2 promotions (just because of time opportunity) if he pursues an MBA. The table below details all salaries and expenses for both the cases –

 

 

Salary without MBA

Salary with MBA

Education Loan Exp. (5 Years)

Expenses from Savings

Net Salary with MBA

Year 1

4,00,000

-  

-  

-1,60,000

-1,60,000

Year 2

4,32,000

-  

-  

-1,35,000

-1,35,000

Year 3

5,40,000

10,00,000

-4,94,011

-  

5,05,989

Year 4

5,83,200

11,80,000

-4,94,011

-  

5,85,989

Year 5

6,29,856

 13,50,000

-4,94,011

-  

8,55,989

Year 6

7,87,320

 14,58,000

-4,94,011

-  

9,63,989

Year 7

8,50,306

 15,74,640

-4,94,011

-  

10,80,629

Year 8

9,18,330

 19,68,300

-  

-  

19,68,300

Year 9

9,91,796

 21,25,764

-  

-  

21,25,764

Year 10

12,39,746

 22,95,825

-  

-  

22,95,825

 (Highlighted cells in the above table are ‘promotions received’ events)

 

The total earnings over the course of 10 years come out to be Rs. 73.7 lakh if he does not pursue an MBA and Rs. 100.9 lakh net of loan, if he pursues an MBA!  That is about 37% more total earning, when he did not have an MBA (and this calculation does not even show the tax-savings on education loan)!  So, definitely, MBA degree’s promise of handsome rewards seems to hold its ground!  How about some more insight?

 

The Expert explained that many people even look at the cumulative salaries to understand how they were doing in both the cases.  The following graph shows the cumulative yearly earning to understand when he beats his “without MBA” salary.

 

MBA Salary Comparison 

 

With an MBA degree, Ramesh seems to be turning positive over his non-MBA salary in 5 years after his MBA graduation!  After that his monetary reward seems to leap ahead!  And all this with the added burden of education loan! It sounds good! 

 

The FYI Expert then tried to project his salary till the time when Ramesh becomes 50 years old, seasoned leader.  He explained that this exercise was close to a joke, because no one can predict that far in the future; still, it could give a good perspective of life-time value of a full-time MBA in a young professional’s career.

 

According to this exercise, Ramesh, at the age of 50, was expected to earn Rs. 1.2 crore per year as an MBA professional, and Rs. 62 lakh without an MBA education – difference of more than 98%!  Also, taking the salary base of Rs. 4 lakh, Ramesh’s salary was expected to grow at 14% annually, with an MBA education, and 11% without it.  That means his MBA education commanded a premium of 3% per year in salary growth, over when he did not have an MBA education!

 

 

It is clear from the above analysis that pursuing an MBA degree from a good institute is a great value addition to a professional’s profile.  Please understand that this analysis is based on certain assumptions about pre and post MBA salary, and career growth.  However, as we mentioned earlier too, MBA programs are not equal.  As an active MBA aspirant, one needs consider factors such as MBA School & program’s reputation, student & alumni profile, placement record, faculty quality & teaching methodology, geographic location, etc.  

 

A good MBA education not only rewards you financially, but also gives several intangible benefits.  During MBA, students form strong network with peers, alumni and the faculty, something that goes a very long way in shaping up their career.  An MBA graduate receives higher positions that have higher responsibilities, and grow fast.  A person doing an MBA from a good school gets a lot of respect, which builds his self-esteem.  And, by the time you graduate from your MBA program, you will gain skills, knowledge and temperament to lead an organisation!