The ROI of an MBA Degree

by Brett Rudy - May 23, 2019
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Those with a Master of Business Administration (MBA) degree tend to enjoy a higher pay scale than those who hold “just” a bachelor’s degree. But the pay increase within a specific role may not be as much as you think. And the cost may not be worth the gain. Find out if MBA degree holders truly do earn more, or whether there may be other factors at play.

Contributing Factors Toward Greater Earnings from an MBA

While college should be all about self-discovery, following your passion, and learning, it is so much more. This is especially true when pursuing graduate degrees that students hope will land them in a higher pay scale.

While certain business roles may require or encourage employees to hold an MBA, even without these requirements, new grads or workers with an MBA can have a leg up.

  • An MBA Opens Doors – All other things being equal, MBA degree holders are more likely to get a response to a job application when compared against candidates with a bachelor’s degree or lower. Especially for more junior roles where candidates have less work experience, an MBA on a job application can make a resume stand out.
  • Negotiation Power – In addition to having more job prospects, entry-level candidates with an MBA may be able to negotiate a higher base salary than candidates without the degree. Over time, the pay gap between MBA-holders and non-MBA holders widens as each employee type receives raises and other pay increases from their initial starting salary.
  • Networking – Motivational speaker, Jim Rohn, is credited as saying: “You’re the average of the five people you spend the most time with.” While obtaining an MBA, you are surrounding yourself with many more than five like-minded and motivated individuals who could potentially influence your career today and in the future. Supporting this point, a 3,000-person survey by Performance-based Hiring Learning Systems found that 85% of all jobs are filled via networking.
  • Correlation vs. Causation – The types of individuals who are motivated enough to obtain an MBA may have a stronger drive to climb the corporate ladder versus those who do not. Thus, these same individuals may ultimately succeed at a higher rate, and earn more in the workforce. (Note: It is recognized that not everyone is able or willing to pursue a graduate degree, and there’s no way of measuring the work ethic of those who did versus those who didn’t.)
  • Specialized Education – While seemingly the most obvious, the learning gained from additional schooling should provide students with more sophisticated knowledge required to succeed in their careers. This in turn should lead to greater advancements and higher salaries. While more true for new grads, as employees gain more on-the-job experience, this work experience may become more valuable than their schooling.

Education & Experience Differentials and Impact on Pay

Salary.com data typically finds that clients adjust base pay by 5% for every 2 to 3 years of experience above expected, and also 5% to 10% for additional degrees obtained by the incumbent beyond the requirement. These adjustments vary depending on the area of study and its relevancy to the employer’s industry.

The amount of adjustment applied can be quite variable and is ultimately at the discretion of the employer’s internal compensation team. Salary.com typically suggests avoiding adjustments beyond 20%, but substantially less is also common. It depends on the role and the candidate’s experience level.

However, it should be noted that pay premiums are only made when the compensable factor being adjusted for (e.g., education or experience) has a recognizable impact on the incumbent’s role and the organization as a whole. Thus, for some roles, an MBA may not equate to an increase in pay scale.

MBA vs. non-MBA Salaries for Popular Business Jobs

According to the Salary Wizard on Salary.com, when comparing pay scales of employees with 5 to 6 years’ experience of those with a bachelor’s degree versus those with a master’s degree or MBA, the lift in average salary was only 1.3%. This analysis compared 18 common jobs at random across six functional areas, with data pulled in April, 2019.

However, what this data does not show is that those with an MBA may improve their likelihood of being hired in the first place, advance to higher roles, or advance within their careers at a quicker pace – all factors that will place them in a higher paying role. Within a role, an MBA is merely a single compensable factor.

Salary with MBA vs. No-MBA

The Actual Return on Investment for an MBA

As Salary.com data shows, within a typical role, an employee earns just 1.3% more for having an MBA vs. an employee in the same role who has a bachelor’s degree. For example:

Employee #1 with bachelor’s degree earns $50,000.

Employee #2 with MBA earns $50,650.

According to Top MBA, “the cost of an MBA degree can vary, but the average tuition for a two-year MBA program exceeds $60,000.” One of the top business schools can cost substantially more.

At this incremental $650 a year, it would take 92 years to pay off that MBA.

However, if Employee #2 with the MBA gets promoted to a different role at $60,000, all of a sudden, the ROI timeframe is reduced to 6 years as this person earns $10,000 more a year – but they are in a different role.

Long-term Earnings for MBA Holders

Within one role, MBA holders may not make much more than non-MBA holders, but individuals with an MBA may be more successful over the course of their career.

This 2018 Financial Times study shows that the positive impact on salary from getting an MBA can last for years: “Every year up to 2014 and since we began collecting data, MBA graduates always at least doubled their salaries within three years of completing their degree.” This rate of increase is likely much higher than it would be for college graduates without an MBA. When one limits the sample to Forbes’ Top 50 MBA programs, post-MBA starting pay was up 50% over pre-MBA for full-time students.

An MBA with three years of experience is almost certainly NOT doing the same job that he or she was before enrolling for the MBA. In other words, the MBA did not enable the salary increase by itself, but can be used as a tool to advance in an organization.

 


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