Saturday, July 5, 2008

OMG -The economics of an MBA

One important question that well settled professionals have to be think about before their MBA apps is the economics of the whole thing. Cos, barring those ludicrous few who would want to join the peace corps in Africa at minimum wage, most MBA applicants are looking for a substantial pay-hike, post MBA. So lets get some numbers going.

I will stick to the oil and gas space cos thats what I have been doing in grad school and then at work (for a combined total of 6 grand years). For this simple exercise I'll use MK as an example. MK is one of my closest buddies, we went to undergrad together, we were room-mates in the first year at undergrad, we applied to US grad schools together, and to top it all like me MK works in Houston in the oil and gas space for the past 3 years, with one of the 5 biggies. MK was contemplating an MBA last year after 2 of his office-mates got their Havard tickets. But after some fairly large amount of thinking he decided against it, from a simple economics stand point. Heres his arguement against the MBA:

(1) Cost of MBA in a top school : 120k
(2) Loss in salary for 2 years : 250k
Loss : 370k

Expected mean/median/mode salary package post MBA: 120k
Salary package at current job in 2 years if no MBA: 135k
Salary loss at end of 2 years: 15k

Loss in 2 years: 385k
Loss in Matching 401K @7% of salary/annum: 17k
Loss in 2 years: 400k
Actual Loss (amount he would have saved in those 2 years): 190k
(20% savings+120k mba cost+401k contributions)

Assuming he continues to save post MBA, and he can save on avg 30k/annum, he will break even only after 6 years. This is a bit of an unknown part of the equation as salary projections post MBA in terms of growth rate is not something I am too familiar with, so I have just assigned 150k as an avg for the first 7 years post MBA. But for those 7 years that ~200k which he lost in his MBA would have grow to about 400k on a 10% compunded basis. If you tweak the numbers even further and put in the fact that for each of those 7 years he would be contributing an additional 25k per annum, the number stands at 660k.

Yes you read it right thats -660k USD.

No wonder he isnt planning on doing an MBA.

PS: If you are wondering about the accuracy of the math, assign 40k in savings per annum post MBA for the first 7 years, and use a compounding rate of 10%.

Next post: Do MBAs make good analysts in the stock market in other words do they have the expertise to be a good analyst or is it more jargon bombarding and fancy verbosity of the obvious is what they do??


Starwalker said...

I have one issue with your calculations- Projected post MBA salary

If he were to shift industry, your projectios may be correct (theres a wrinkle to it too) but were MK to return to his industry post MBA, the start would be appreciably higher than he would have reached without an MBA.

Whether MBA's deserve it or not is a seperate question, but the fact is having an MBA is a shortcut to leadership position in a company. This line of argument is what i have seen people use for not going to college if they have a god vocational training. Of course the difference post-mba is not as big a proportional leap as difference post-college, but the amount of leap is substantial.

In short, don't assume the growth trajectory would be anywhere similar, and don;t look at it from a short term perspective (in a cereer, a few years is short term)

OMGparishilton said...

@star: I agree, my goal here is to put forward the bear arguement, in my friend's case though I am convinced that he doesnt need to do an MBA for career progression, moreover i also believe that mba as a career progression short-cut is most needed by those who are stuck in a rut, not for those who are high flying.

Starwalker said...


Anonymous said...

Those numbers are believable, I think, but the issue really is whether or not it's necessary to further one's career, as you mentioned. For many people, an alternative somewhere in the middle, such as an online masters program would be more than sufficient, along with being far cheaper and relatively self-paced.