Does Working Before B-School Cost Grads $112,000?

Boston University

Is the admissions strategy followed by the world’s most elite business schools cheating MBAs out of a small fortune?

It seems an almost preposterous question, given that the average starting salary for Harvard Business School graduates taking jobs in finance or consulting is now $125,000 and that one 2011 graduate of Dartmouth’s Tuck School of Business earned a pay package at graduation worth a staggering $863,000. But that is exactly the bombshell that a Florida researcher tossed at the B-school ivory tower with a new e-book out this month.

The notion that requiring the vast majority of applicants to have three to five years of work experience does a big financial disservice to MBAs appears in Ronald Yeaple’s MBA Myths Unlocked, but it got its first airing in a little-known paper he wrote with Mark Johnston and Keith Whittingham of Rollins College, published in 2010 in the Journal of Education for Business.

The upshot of their argument is that by delaying graduate business education, students forgo several years of higher post-MBA salaries, while driving up the opportunity cost of attending the program. At the same time, pre-MBA work experience does not command the kind of premium with recruiters that would make waiting worthwhile, something that Yeaple cautions may not be true at top-tier business schools where graduates fetch the highest salaries.

The study, based on a survey of 1,902 Rollins MBA graduates from 1996 to 2006, quantifies just how much you lose when you snooze. Working for two years prior to entering a full-time MBA program resulted in a net loss of income of $112,466 by age 30, an amount with a net present value of more than $80,000. Enrolling in an MBA program immediately after college would, the authors say, leave the graduate in much better financial shape.

“The evidence presented in the present study clearly refutes the claim that students are financially better off in the long run by waiting to acquire significant work experience prior to pursuing an MBA degree, particularly when the opportunity cost of forgone salary is considered,” the authors wrote. “From a financial perspective, the results hold potential significance to prospective students.”

There are good reasons why business schools expect most applicants to have a few years of experience. For one thing, recruiters want it and are willing to pay for it. The fact that higher starting salaries for graduates help schools advance in some rankings (although not Bloomberg Businessweek‘s) surely doesn’t hurt, either.

But all that is starting to change. At some schools, including the University of Rochester’s Simon Graduate School of Business, where 24 percent of the class of 2013 has less than three years’ experience, younger applicants make up a sizable portion of every class. Special programs such as Simon’s Early Leaders Initiative, and Harvard’s 2+2 program, which requires students to get two years of work experience before starting their MBAs, are making it easier for younger applicants to get a foot in the door.

And the growing interest in graduate management education by younger applicants does not appear to be slowing down. Worldwide, 44 percent of GMAT test-takers in 2011 were under 25, up from 37 percent in 2007, a trend driven largely by test-takers in East and Southeast Asia.

If the research is true, maybe all these younger applicants are onto something. But the far more interesting question, at least to me, is whether it should prompt a little soul-searching by B-school admissions committees. Requiring a few years of work experience might make for a better, more rewarding, program, as students bring prior experience to bear on class projects and case studies. And it might help schools compete in the rankings. But is it worth $112,000?

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