Is doing an MBA really worth it ?

This is the time of the year, when the B-Schools are sending out the admission offers to the selected students. Economic Times has reported that the leading B-Schools , IIM-A and IIM-B have already finalised the list. Getting selected in a top B-School like IIMs is certianly very diffcult and is prestigious too. The extent of competition is so high, that out of 2.40 lakh candidates who took the CAT exam, 0.14% or 315 students made it to IIMA. ET says that 91% of the students selected by IIMA are engineers.

Until recently, the decision to do an MBA was a virtual no-brainer. In the last one-year, two things have changed, which makes the decision a difficult one, particularly for an engineer who has a good job. The fees have gone up and average salaries of MBAs have gone down.

Firstly, the fees have been increased considerably. IIMA announced last year a steep hike to Rs 11.5 lakh for the PGP and followed it up with another hike of Rs 1 lakh , making it to Rs 12.5 lakh for the two-year course. IIM-B also has increased the rates by Rs1.5 lakh to Rs 11 lakh. IIM-C which had kept it rates significantly lower, has also doubled the fees to Rs 9 lakh per student. The other IIMs, L, I and K have also increased the fees. ISB which has always been the most expensive B-School in India has also increased the fees to Rs 16.5 lakh. The Tier-II schools also have increased the fees. For the purposes of this post, let us take that on average a student needs to spend to Rs 4 lakh per year on fees alone. To this add, living expenses of  Rs 1.5 lakh per annum.

An engineer with 3 years experience in a leading company, ( the preferred candidates in most B-schools), would surely be already earning Rs 4.5 lakh p.a. If the engineer leaves his job, he/she would forgo Rs 10 lakh of income. Assuming, the engineer would have got hike and bonus in the second year.

To this add the expenditure of preparing for an MBA entrance. This is not insignificant. A minimum of Rs 1 lakh.

The total investment incurred on the 2 year MBA comes down to Rs 22 lakh, including  Rs 10 lakh in opportunity cost, due to loss of income.

In the past, the difference in salaries between an engineer and a B-School graduate was very high. With the global financial crisis the top-paying jobs have reduced considerably. The average salaries in campus placements, as reported by the IIMs,have fallen by 25-30%. IIM-A has reported that the average  domestic salary in 2009 placement was Rs 12.17 lakh p.a. The average salary reported by IIPM is Rs 4.2 lakh p.a. For the purposes of our estimates, if we take that the average salary at a Tier-II B-School for an Engineer-MBA is Rs 7.5 lakh p.a.. Please note that this is the average, indicating severals MBAs who will be hired below the average. Public Sector Banks for e.g pay no more than Rs 4.5 lakhs p.a.

Thus, the difference in the salary between an Engineer and an average Engineer-MBA is just Rs 2 lakh p.a. The engineer if he/she had continued in the good company would have reached Rs 5.5 lakh p.a. By spending two years at the B-school and incurring Rs 22 lakh in costs, the additional income is Rs 2 lakh p.a.

The payback period for recovering the money invested in a B-School is as high as 11 years. Even if one assumes that the rate of increase is higher for an MBA, the payback is not less than 8 years. If the MBA starts at a below average salary levels it is likely that he/she would never recover the investment made on an MBA.

Whereas, the case for joining the top IIMs remains strong, the case for Tier-II schools is beginning to get weak particularly for Engineer-MBAs. My advice to Engineer-MBAs with experience stick to Top10 B-schools only. Fresh engineers with a job offer on hand, do not go beyond Top 50. Others, can use MBA to tide over the recession and get ready for a job.