By Jenny George*
It pays to be careful when interpreting the vast increases in salaries that MBA graduates are said to enjoy once they have obtained their degree.
The reported rises, published by the UK-based Financial Times each year as part of its business school ranking data, are driven by purchasing power parity, industry choice and personal work experience. But there are issues you need to be aware of regarding the way the surveys are actually put together.
The first of these is the use of purchasing power parity (PPP) to convert different currency rates and compare salaries between countries. PPP is the exchange rate that equates the price of a basket of identical traded goods and services in two countries.
This is one of the reasons Chinese schools appear to show enormous pre-and post-MBA salary increases among their graduates of 100-200%.
Although that is interesting, it does not necessarily indicate what is happening with those students because often their pre-MBA salary was earned in an area where the cost of living was quite low, for example in a rural area, while their post-MBA salary has been earned in an expatriate company, still in China but in a city such as Shanghai or Beijing where the cost of living is much higher.
In the past, the way PPPs were calculated tended to advantage schools in China, with some jumping to very high rankings. But newer PPP calculations are likely to see that trend reverse. This means Chinese business schools should reflect a different salary increase ranking next time.
Another reason for massive salary rises has to do with people who have raw talent and skills but who go straight into the financial industry after graduation.
Business schools such as Pennsylvania’s Wharton School and New York University are traditional feeder schools that used to send their new MBA graduates to Wall Street. But the finance industry is no longer hiring as many graduates, nor are salaries at the same kinds of levels as they were previously, given the present economic climate, so some of those increases will be much less visible in the next rankings as well.
The third factor that affects salary increases concerns the amount of work experience people have when they start their MBA.
There is an optimal window of time to get the absolute maximum salary increase out of an MBA and it tends to be relatively early in a graduate’s career. It is not necessarily when an MBA graduate earns the most but it is the time when an MBA graduate enjoys the biggest salary bump.
Current statistics reveal that executive MBA programs, which traditionally admit people at considerably more senior levels, have much lower salary increases, even when compared against other MBA programs at the same university.
This is because someone who has been working for eight to 10 years, and has been identified as a future leader, will probably already be on a high salary. The Executive MBA will help their career, it may even deliver the same dollar increase in salary enjoyed by a new graduate with an MBA, but it will not show the huge percentage boost that the new MBA graduate receives earlier in his or her working life.
This does not mean that it is a not a good idea to undertake an MBA; it just means that at different levels, people have different outcomes and expectations about their post-MBA salaries. In fact, the return on investment of an MBA is about the difference in salary (in dollars) that an MBA graduate can expect to get for what it cost to get the degree.
This also partly explains why salary increases in different countries look different. Each country tends to have different expectations about when people should do an MBA and so percentage salary increases are correspondingly different.
In Australia and Europe, the average work experience before starting an MBA is eight to 10 years. In the US, it is more common for people to undertake an MBA with only about five years experience while in India it is only one or two years.
These vast differences typically mean that business schools in those countries that admit students with high levels of work experience will have lower post-MBA salary increases among their graduates.
One final point: be careful not to view salary increases reported by a school you are thinking of enrolling in as applicable to everyone. Some people who bump up those averages are on a specific career route that is not necessarily for everyone.
For example, some students plan to go straight from their MBA into a high-paid, high-stress consulting or finance job, where they expect to stay for maybe two to four years, before moving on to something else.
Such people give the business school an immediate extremely high salary hit. But this is a young person’s game and not a career path that every student wants.
Sensible schools and wise students value the diversity of career options available in the world and make sure the fit between an organisation and a student is the right one.
This is the best way to produce leaders of business, governments and other organisations who are passionate and committed.
How should you use salary increase data when thinking about the return on investment in an MBA?
The value of an MBA degree will depend on many things, including the amount of work experience you have and the salary you are already earning.
Suppose an MBA graduate paid $75,000 to do the course and their salary then rises from $150,000 to $225,000.
This is only a 50% increase in salary yet they will have paid back the cost of the investment in the course in the first year. Contrast that with a less experienced MBA graduate who paid $75,000 to do the course and whose salary rose from $50,000 to $100,000.
They have recorded a 100% increase in their salary but it will actually take them longer than a year to pay back the cost of the investment.
The calculations are more complicated when you factor in the loss of earnings while studying for an MBA as this will be greater for people who were on higher pre-MBA salaries. Then there is the length of time remaining in a graduate’s career: younger people who tackle an MBA at an earlier age will enjoy the benefits of the investment in their education over a much longer period.
*Associate Professor Jenny George is associate dean at the Melbourne Business School.
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