PAGE FOUR THE HARBUS NEWS FEBRUARY 2018

OPINION AND COMMENT

The MBA
as a Finance Case
Editor-in-Chief Sum,it Malik (HBS '19) exam,ines the MBA through the lens of a FIN case,
illustrating that even setting aside the substantial personal, professional, and experiential
benefits of the degree, students can expect a robust return on their investm,ent.

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Exhibit: illustrative Earnings Increase with MBA

SumitMalik of the program. The HBS rate of 2%, close to inflation.

Editor-in-Chief
With Round I MBA
admissions in the books and
Round 2 underway, we are
now seeing the mix of HBS
campus visitors shift from
Class of2020 hopefuls toward
Class of 2021 prospects. For
many, the decision to apply
entails weighing benefits
of the MBA-facilitating
personal and professional
growth, gaining access to a
strong brand and network,
taking the opportunity for
introspection and self-
reflection, honing managerial
skills-against the significant
financial investment, both
in terms of tuition costs and
forgone salary. In practice,
however, if you come to HBS,
you can expect the degree to
pay for itself within a handful
of years through increased
earnings, even if you shell
out sticker price.
Critically ,
notwithstanding the expected
financial return on investment
of the MBA, reducing the
benefits to economic terms
alone would miss the point
experience, designed around
a mission to "educate leaders
who make a difference in
the world," teaches students
to embrace and harness
diversity of thought, create
value for society before
claiming value from society,
and show leadership both
inside and outside the
workplace. Students and
alumni characterize the
strength of the community
and enduring relationships
that it fosters as invaluable.
The earnings premium
afforded by the MBA is a
single consideration out of a
much broader set.
Turning to the numbers,
in naming HBS its top
business school for 20 I 7,
Bloomberg compiled data
on median compensation for
a student entering the HBS
MBA program ($85K), salary
at the first job after graduating
($ l 50K), and compensation
6-8 years later ($280K).
The Exhibit illustrates
this earnings trajectory
in crimson, assuming the
roughly 9% implied annual
growth in post-MBA
compensation from $ l 50K to
$280K subsequently ramps
down to a long-term growth
For comparison, income
before obtaining an MBA of
$85K is plotted in black with
the same growth trajectory.
The result is that the costs
of the MBA-both the tuition
and fees of about $80K per
year and two years of forgone
salary-are recouped through
higher earnings within 5-6
years of graduation. Here, as
a purely financial investment,
the annual internal rate of
return is upwards of 20%
over 40 years of employment.
Importantly, this analysis is
illustrative and simplified:
I assume a student with no
partner or children, wage
growth follows the same
trajectory with or without
an MBA, and the MBA
is financed with savings.
Furthermore, post-MBA
salary is not perfectly
comparable with pre-MBA
salary given much of the
median compensation boost
is likely driven by rotation
into higher-paying and
potentially more demanding
industries.
While individual
circumstances vary, the
takeaway is that for most
there is a strong financial case
for the MBA. The Graduate
Management Admission
"Students and alumni chara.cteri.ze the strength
ofthe community and enduring relationships
that itfosters as invaluable. The earnings
premium afforded by the MBA is a single
consideration out ofa much broader set."
Council (GMAC), which not preclude becoming part
manages the Graduate of this community, a cause
Management Admission that HBS backs up with an
Test (GMAT) exam required annual financial aid budget
to apply to most business of over $30 million. Even
schools, estimates that for the most challenging,
MBAs across all business idiosyncratic cases, the
schools may see a cumulative university is committed to
earnings bump reaching ensuring that, from a financial
seven figures over the course perspective, the numbers add
of 20 years, relative to peers up.
who skipped the degree,
depending on wage growth.
The return on investment in Sumit Malik (HBS '19) is an
monetary terms at HBS is investor, writer, and entrepreneur.
amplified by the generous Prefessional!J; his background
financial aid offered by the is in venture capital and private
university: roughly half of equity at Warburg Pincus, strategy
HBS students are eligible as a board member ef Santander
for need-based fellowships, Asset Management Chile, and
which average $37K per year. investment banking al Goldman
HBS has a deeply rooted
interest in ensuring that its Sachs. Personal/); he writes far
academic and popul.ar publications
classrooms and campus are
repletewithdiverse,impactful and performs music and poi (light-
voices, which contribute to or fire-spinning). He previously
the academic experience received anA.B., summa cum l.aud~
in unquantifiable ways. from Harvard College and an S.M.
There's an ardent belief that from the Harvard Graduate School
financial constraints should ef Aris and Sciences.