Besides investing their time and money, candidates stake a great deal of hope and emotions in this education. As a whole, the return on the investment (ROI) is a very useful tool but care should be taken not to set too much store by the figures as they do not reflect all aspects of the quality of a school.

Figures cannot convey the whole picture

The importance of the ROI in an MBA cannot be over-emphasised. A business degree is a major investment and many students incur debts to pay for their one or twoyear course. The questions of when the debt can be paid back and when the investment will begin to yield a profit are crucial to the choice of your business school.

How is the ROI calculated? Say you have paid 38 000 Euros for the entire Master of Business Administration degree course and your salary before starting the course was 40 000 Euros. By going back to education, you will miss two years’ salary, i.e. 80 000 Euros (this is a conservative estimate as no change in remuneration is taken into account). This is the so-called opportunity cost. Even if you did not have a job before starting your business degree, you would still incur expenses during your studies, such as rent, food, books, etc., which also have to be put into the equation. After 2 years of study you receive an offer from a company. You decide to take the job for a salary of 70 000 Euros. How do you determine the return on your investment in the MBA degree?

Firstly, add the opportunity cost and the course tuition fees: 38 000 + 80 000 = 118 000 Then subtract your previous salary from your post-MBA salary: 70 000 - 40 000 = 30 000 Now divide 118 000 by 30 000: 118 000 ÷ 30 000 = 3.93

This calculation suggests that it would take you 3.93 years to earn back what you paid for your degree. The amount you earn after this period is the return on your investment. Of course this is an idealised picture and the ROI can never be estimated with absolute accuracy. Moreover, the model shown above does not include periods of increased or reduced salary or periods of unemployment.

The structure of the ROI model emphasises the salary of MBA graduates. Their remuneration has remained relatively stable during the crisis, but competition for jobs has been much more intense. According a research report by the European Foundation for Management Development (EFMD), 75% of MBA graduates received an increase in remuneration in 2008. Companies felt the instability most acutely during 2009, when less than 60% earned more money and more than 15% saw a decrease in their remuneration. As a whole, 2010 was a more favourable year, with 60% of MBA graduates earning more on a yearly basis, 35% taking home the same amount of money and 5% earning less. The table below shows the difference between the income of MBA graduates and graduates in other disciplines in Europe and in the United States.

The difficulty in estimating the ROI is that the skills and experience of an MBA graduate cannot be reduced to mere figures. Intellectual capacity, business skills and leadership qualities cannot be measured mathematically. The assumption that a more efficient global job market and salaries could adequately reflect all these factors is controversial. The ROI should be taken into account, but not perceived as a static or absolute value, as there are many unknown variables that cannot be put into the equation.

“…If you take a brilliant young person or notso- young person that goes to a school that’s not in the top 50, they can often rise to the top just on the basis of their gifts. I’ve seen that over the last 15 or 20 years. It’s hard to keep really, really bright people down—thankfully. And, finally, good fortune can affect these earnings—being at the right place at the right time, both in terms of landing a job and launching new products…”, according to Thomas Cline, co-author of “The ROI of the MBA”.

ROI Rankings

Forbes Magazine ranks MBA schools on the basis of the ROI achieved by graduates over a five-year period. This survey is conducted every five years and is probably the most relevant to the return on the investment. The 2010 ranking for US schools puts Stanford at the top of the list. In 2008, the average salary of MBA graduates who studied in 2004 was 225 000 USD. Their pre-MBA annual salary averaged 82 000 USD, and their five-year MBA gain (remuneration minus foregone salaries, tuition and fees) stands at 85 000 USD. The time needed to reach the break even point was 4.2 years. It should be noted that the five-year gain and the break-even point results could theoretically be beaten by less expensive schools. However, they would probably not be able to improve the graduate's MBA gain over a longer period after the break-even point. Do not be mesmerized by small figures when it comes to your expenses. Although cheaper schools may give a high ROI, in the long term they are probably not a better option. Tuition fees at Stanford for students in 2010 amounted to $102 000, while the average firstyear remuneration for graduates who studied in 2008 was $120 000. The highest percentage of alumni (42%) started working in finance and accounting; 29% went into consulting and 16% obtained employment in marketing and sales.

According to Forbes, the first one-year school outside the USA is INSEAD. This business school also shows very strong results. The five-year MBA gain for graduates who studied in 2004 is $192 000. Their annual pay in 2008 was $218 000, as opposed to $64 000 before obtaining their MBA. The basic starting salary for graduates who studied in 2008 was $112 300. Forbes ranks the London Business School as the best two-year business school outside the USA. Prior to the start of their business degree courses, the average remuneration of its graduates who studied in 2004 was $64 000. Their average salary in 2008 was $209 000. The five-year gain is estimated at $121 000 and the basic starting salary for graduates who studied in 2008 was $120 408, more than the amount received by INSEAD alumni from the same year.

The Financial Times rankings also pay attention to the importance of MBA graduate salaries. The remuneration in the 3 years following graduation constitutes 40% of the weight of the FT methodology. In the rankings of The Economist, 20% of the results take account of the salary increase of MBA students after graduation compared to their pre-MBA remuneration.

Be modest

Looking at the ROI is essential in your efforts to find the right school(s). The ROI figures shown above for the best schools were calculated during times of unparalleled economic prosperity. However, it would be wise to be more modest and conservative in your expectations and estimations. Remember that the return on your investment in a business degree, just like on any other investment, may prove volatile over the years. It could increase during economically good times and go down in turbulent periods.