Is an MBA degree worth it? After lost wages and tuition does this opportunity payout? Would you be better off just sticking to your current position for the next decade?
The majority of us will work to earn a our living. In today's society you could be working a long time. Although I am attempting to quantify the monetary advantages of an MBA, I cannot even begin to assess the emotional, intellectual, and social rewards of an MBA. Can you really put a price on enjoying your employment? If you are like me then you had to suffer through countless student summer positions that redefined boredom and uselessness firsthand. Perhaps you had a position that tried your patience to the point of driving you to the brink of insanity? If you have, then I'm sure you can agree that finding enjoyable employment is PRICELESS. I believe an MBA will help me with this, but it may not do that for everyone.
With that stated, let's continue with the analysis of this opportunity.
To test the value of an MBA I assembled a few scenarios. All of these involve certain assumptions, which anyone can criticize, but as they were used in all cases I would argue much of the error caused by incorrect assumptions cancels out.
To provide a sufficient time scale I chose to look at 10 years. All of the scenarios started with 1 year of employment at my current position. After that they explore a variety of paths. I then compared them to the base case of staying at my current position. All cases assumed an 8% pay increase every year, but it doesn't matter as the affect is irrelevant as I explain further down.
- Scenario A: Base case. Do not return to school. Work at your current job with steady pay increases every year.
- Scenario B: Work in previous position for 1 year, return to school, enter new industry at a slightly lower salary, but receive a 50% one-time increase after 3 years in after gaining experience. (Note: This increase would either come from changing organizations or being recognized for your new expertise within your current organization)
- Scenario C: Work in previous position for 1 year, return to school, enter previous industry at same salary with potential to enter management position, but never get the chance.
- Scenario D: Work in previous position for 1 year, return to school, enter previous industry at a higher salary with potential to enter management position.
- Scenario E: Work in previous position for 1 year, return to school, enter previous industry at a higher salary with potential to enter management position and extra compensation
- Scenario F: Work in previous position for 1 year, return to school, enter previous industry with a much higher salary with potential to enter management position and extra compensation
Results:
- Scenario A: 1.00 times base case since this is the base case
- Scenario B: 1.09 times base case
- Scenario C: 0.87 times base case (the only case that was worse than not taking an MBA)
- Scenario D: 1.34 times base case
- Scenario E: 1.34 times base case
- Scenario F: 1.68 times base case
For specific values I looked at my current position and where I could reasonably be in 10 years if I didn't go back for an MBA. Fortunately for me I have my professional association's salary surveys to consult (APEGGA Salary Survey Page) (2006 Results). For post MBA positions I checked various Canadian business schools placement statistics. All the MBA information I found was similar to what is posted at Queen's. (Site with stats) (2007 Results)(2006 Results). All of the results were discounted to today's dollars. If possible, I would recommend all people contemplating an MBA to complete a similar exercise so you can really see the effect.
I ran sensitivities on the influence of discount rates and inflation rates of salary. The discount rate had no effect. The inflation rate of salary directly affected the magnitude of the difference between the cases, but the cases always ranked the same.
The only scenario that didn't workout for the better was the case where I returned to my previous employment position and nothing changed. Even taking a pay cut to switch industries was beneficial provided you are able to see a large, one-time increase in your salary after 3 years.
In other words, don't take an MBA and go back to doing the exact same thing you were doing before.
None of these scenarios considered the substantially rewarding situation of starting a business that becomes incredibly successful or catching that one-in-a-million opportunity that is out there if people are really willing to dig for it. Those opportunities would be much more rewarding. Perhaps a senior management position?
In conclusion, financially an MBA is worth it. You should easily be able to get the MBA to payout. The magnitude of financial benefit is a directly proportional to what you do afterwards. How much and when? Well, that lies squarely on your shoulders.
Other related links with in my blog:
3 comments:
Excellent summary of a complicated topic. I know a lot of people who are trying to decide whether or not an MBA is worth doing will find this really useful. In fact I've posted a link to it at find-mba.com
Best wishes,
Maren
I like how you approached the problem of "Is an MBA worth it?". I've done similar analysis myself.
Although, here's a few things which I think you should consider:
1. the probabilities of the different scenarios. What if scenario C was 70% as likely as occuring than everything else. This would wholly change the conclusion of your decision analysis.
2. You need to consider the salary of the person is making before he enters an MBA. I am leaning toward not applying for an MBA because I already make $100K (which is the average salary an MBA grad makes). I can't justify paying 30-70K because I don't think I can recoup it with an MBA degree, even in 10 years.
Well, just a response to your points:
1. The truth is that "you" have a significant influence on the probabilities of the scenarios. If you know where you want to go with it afterwards then you can alter your own destiny to a certain extent.
2. If you check the salary stats I used you will see that I too was in the 100k ballpark. True, that is the starting salary for some of the more popular industries, but there is definately significant upside potential with an MBA that I didn't consider. I purposely kept things very conservative. There is also the "home-run" potential that you might get to start something or get that top exec job, which is made a little more obtainable if you prepare for it.
3. Don't forget the sanity factor. This could make or break the deal for some people. If an MBA will let you work in a different capacity and keep you from hating life it could well be worth it.
Thanks for your comments. I appreciate them.
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