How should MBA ROI Be Calculated?

The importance of the ROI in an MBA cannot be overemphasized. A business degree is a major investment and many students incur debts to pay for their one or two year 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 38000 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 70000 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 emphasise 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 not so 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…” Thomas Cline, Co-author of “The ROI of the MBA”