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HBS #1 for ROI

If you subscribe to classical economic theory, then the results of the 2003 Forbes Magazine survey of the best business schools will warm the bottom of your free-market driven heart. For the third year in a row, HBS ranked first among U.S. and international business schools based on the “return on investment” that alumni achieved over a five year period.

To compile the data, Forbes sent 18,000 questionnaires to full-time M.B.A. graduates from the Class of 1998, representing 99 M.B.A. programs around the world. The survey asked for pre-M.B.A. salaries as well as compensation in three of the five years post-graduation, including the value of exercised stock options during this period. To calculate the five-year M.B.A. gain, Forbes compared graduates’ five-year earnings (discounted back to 1996 and adjusted for cost of living) with the costs of attending a full-time M.B.A program, both in tuition and forgone salary.

Under this methodology, HBS graduates from the Class of 1998 captured an additional $149,000 over tuition and foregone compensation, an 88% gain. On average, HBS alumni achieved salary increases of 13% annually since graduation, earning a median compensation of $195,000 last year.

The payback period for a Harvard M.B.A. was 3.1 years, exactly the average of the 85 schools ranked (schools with less than 15% response rates were not ranked).

While happy to be ranked on top, HBS students did not find the Forbes methodology particularly compelling. “The markets are generally ‘right’ but the standard deviation of compensation within an MBA class is so large that it makes average salaries mostly irrelevant,” commented Younes Zemmouri (OI), “in fact, averages often reflect the industry biases of some MBA programs, as well as a variety of other factors that have little to do with the intrinsic value of the program.”

Moreover, salary gains were not the primary consideration in students’ decision to attend HBS. Zemmouri also commented, “Bizarrely, I have a hard time thinking about my career in terms of NPV.” Echoing these sentiments, Philip Tseng (OI) reflected, “Financial gains did not motivate my decision to come to HBS. Matter of fact, if my goal was to achieve the highest wealth possible, I would have been better off staying at my job which offered a very handsome compensation package.”

If not by financial gain, then how do HBS students measure the value of their M.B.A.? Tseng continued, “I measure worthiness not only in financial terms, but also in less tangible terms like new relationships, friendships, and opportunities.”

“The education and networking stand-alone are worth the financial investment”, offered Faisal Al Hamad (NF), “I was also very motivated by the skills I would learn during the two years at HBS.”

By paying a premium for these skills and relationships, employers apparently agree. Interestingly, the compensation premium commanded by HBS graduates may be well justified. In a related article, Forbes compared the performance of the 57 US companies run by CEO’s who earned their M.B.A.’s at Harvard to the performance of the S&P 500. Over the past 12 months, the stock prices of HBS-led companies increased 59% on average versus a gain of 23% for the S&P.

Forbes Top 10 U.S. Business Schools
1. Harvard
2. Columbia
3. Chicago
4. Dartmouth (Tuck)
5. Yale
6. Penn. (Wharton)
7. Stanford
8. UNC (Kenan-Flagler)
9. Northwestern (Kellogg)
10. Virginia (Darden)

October 6, 2003
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