I'd like to clarify a misconception

Denzera · July 7, 2008, 4:34pm

So, a common theme on this board - repeated often by VictorWega - is that people who attend, or are considering attending, a top B-school without much professional experience, do not get the full value out of that MBA degree. i.e., the recruiters who love top MBAs so much will tend to ignore those with little experience, and those without much experience will end up with much lower salaries and thus ROI on the degree.

In that light, I found this statistical breakdown on HBS</a>' website very interesting:

Professional Experience: % accepting new jobs and median base salary (class of 2007):

One year or less (2.4% of class): $115,000
More than one year, up to three years (23.6% of class): $115,000
More than three years, up to five years (55.1% of class): $115,000
More than five years (18.9% of class): $110,000

In other words, it almost doesn't matter how much experience you have when you enter HBS - if you're good enough to get in, you're good enough to get the top jobs, or at least, there's no bias against you.

I was unable to find a similar breakdown for Wharton or Stanford GSB.

sakky · July 8, 2008, 1:35am

Well, the major problem with HBS's salary survey (and, frankly, all MBA surveys), is that they measure just that: salaries. Yet the fact is, many MBA jobs, especially the most desirable ones, provide relatively little of their payout in the form of salaries, but instead pay much (and in some cases, the vast majority) of their packets in the form of bonuses. Top finance jobs are particularly known for this; as during a good year, almost all of the pay you earn from working in, say, private equity, hedge funds, or venture capital will come in the form of the bonuses, to the point that those guys (rationally) care very little about their salaries, as it is such a minor part of their overall package. Yet the fact is, it is practically impossible to get into VC/PE/HF's without prior experience in finance - usually in investment banking. Heck, it's pretty hard to get into those fields even if you do have prior investment banking experience. The same could be said for working for startup firms which tend to pay relatively low salaries, at least in the beginning, but holds the potential for immense wealth in the form of equity/stock-option capital gains.

Having said that, I actually agree with your general thesis, which is that the payout for somebody to go to a top MBA program with zero work experience is probably quite high, from a relative standpoint. However, my analysis rests on a different set of criteria, which is that even if that guy probably isn't going to be competitive for many of the top-paying jobs (which is not the same as the top salaried jobs as explained above), he's still probably financially better off than if he had just toiled away in a low-paying entry-level job for a couple of years. Or, if you want to put it in terms of a learning and human capital standpoint, you are almost certainly going to learn more by going to a top MBA program than you would in an entry-level job (simply because most entry-level jobs, frankly, don't teach you very much).

Denzera · July 8, 2008, 10:03am

Your statements about the compensation structure for financial-sector post-MBA jobs are, of course, correct. Though for top MBA programs, it's still only about a third of the students who go into finance; about a third go into consulting and a third to jobs in industry, nonprofit, or entrepreneurship (and so forth). So the average and median bonus is less than you suggest. In particular, bonuses in consulting are kinda insultingly low until you reach partner.

However, I don't see any reason to believe that, just because bonuses are a big portion of compensation for post-MBA finance jobs, these bonuses are somehow unfairly allocated based on how much work experience prior to MBA someone has. Clearly there is no salary differential, and because of that I think the burden of proof rests on you. And bonuses are based more on fund or desk performance - or an individual's performance - than they are on an individual's background.

More importantly, though, even for finance jobs, first-year bonuses are **not **the majority of compensation, except (if you look in the breakdown by industry) for LBO funds, and even then just barely. While bonuses may go up precipitously, there is no strong commitment to them up-front coming out of MBA. And after 1-2 years with that firm, your bonus structure will be based much more on your performance than on your previous resume.

So salary data is still fairly meaningful for proving my point - that for your first post-MBA job, pre-MBA experience doesn't matter.

sakky · July 9, 2008, 1:22pm

[quote]
However, I don't see any reason to believe that, just because bonuses are a big portion of compensation for post-MBA finance jobs, these bonuses are somehow unfairly allocated based on how much work experience prior to MBA someone has. Clearly there is no salary differential, and because of that I think the burden of proof rests on you.

[/quote]

Then just consider the fact that there is relatively little salary difference between the top and lower-ranked investment banks. It's not like Goldman pays you a significantly higher salary than do other Ibanks. But I think there is little disagreement that the best candidates who want to work in Ibanking prefer to work at Goldman.*

Hence, the burden of proof is now put back to you.

*Even given that, there is a special characteristic of firms like Goldman that I will discuss below.

[quote]
And bonuses are based more on fund or desk performance - or an individual's performance - than they are on an individual's background.

[/quote]

Exactly - which is why it is so important to get into a good fund in the first place. To take VC/PE as an example, much academic research has shown that the great bulk of the returns in that industry is disproportionately garnered by the very top firms, and consistently so throughout the years. Put another way, you're probably not going to make very much by joining a mediocre VC/PE firm. But, it's nearly impossible to even get an interview at those top firms without extensive prior work experience or strong industry contacts (which is itself a function of prior work experience).

[quote]
While bonuses may go up precipitously, there is no strong commitment to them up-front coming out of MBA. And after 1-2 years with that firm, your bonus structure will be based much more on your performance than on your previous resume.

[/quote]

But again, this all depends on even getting the job in the first place. You can't perform if you can't even get the job.

Now, we can talk about the unique characteristic regarding Goldman and other firms. In fact, Goldman actually pays a *lower salary than certain smaller boutique Ibanks, and arguably pays even a lower bonus. Similarly, McKinsey doesn't pay as much, either in terms of salary or bonus, than certain small no-name consulting firms that I know about. For example, I know a guy who used to work at a small IT consulting firm and then got his MBA and joined McKinsey and joked that he actually ended up making less at McKinsey than he did before he even got his MBA, and he's working far harder to boot! But of course people don't really join those firms for the money per se, but rather for the prestige and networking opportunities which probably means that they hope to convert their tenure at that firm into a golden job afterwards. To take that McKinsey guy as an example, he freely admitted that he took the job not for the immediate money, as he could have easily gone back to his old employer and at least gotten his old high-paying job back, but for the potential to get a far better job later, something that his old job could not provide. In short, he believes (with much justification) that the McKinsey name will open doors in a way that his old no-name employer never could. Similarly, Google doesn't really pay its MBA's that much in terms of salary, but that hasn't stopped it from becoming the most desired MBA employer in the world (according to Fortune Magazine). People want to work for Google because of its golden brand name and its strong perceived networking opportunities.

Now, I've said before and I'll say again, I don't disagree with your general premise that somebody who has little pre-MBA experience can nonetheless benefit greatly from going to a B-school. I am simply saying that a salary survey doesn't really prove the case that pre-MBA experience doesn't matter.

sakky · July 9, 2008, 2:39pm

[quote]
More importantly, though, even for finance jobs, first-year bonuses are not the majority of compensation, except (if you look in the breakdown by industry) for LBO funds, and even then just barely.

[/quote]

It should also be added that, regardless of the proportion of salaries to bonus, there is little disagreement that the salaries in finance are relatively low compared to the salaries in other MBA jobs. Speaking of a recent MBA year that I happen to know very well, I distinctly remember that industrial firms like Johnson & Johnson and Raytheon were paying significantly more in terms of salaries than were the Ibanks and other finance firms. But of course, in terms of total compensation, the finance jobs easily dominated. Nevertheless, a cursory examination of just salaries would lead you to the erroneous conclusion that the finance guys were being paid relatively poorly. That again reinforces the notion that salaries are an unreliable metric.

Denzera · July 10, 2008, 11:13am

I completely agree that:

<ul>
<li>Getting into a good or "top" firm / fund is crucial to long-term total compensation</li>
<li>Especially at top firms and funds, low-totem-pole positions are underpaid relative to industry because of the value associated with havi ng the name on your resume</li>
<li>(except for Google, who pays everyone really well - particularly engineers)</li>
</ul>

However, I need to dispute the following:

[quote]
Then just consider the fact that there is relatively little salary difference between the top and lower-ranked investment banks. It's not like Goldman pays you a significantly higher salary than do other Ibanks. But I think there is little disagreement that the best candidates who want to work in Ibanking prefer to work at Goldman. [including the factor that the prestige on the resume helps get better jobs later]. Hence, the burden of proof is now put back to you.

[/quote]

There is no logical connection between your statements and your conclusion. I concede your statements that early-career MBA-track workers will take jobs at the best firm they can, regardless of compensation. However, that has nothing to do with my point which is about whether compensation varies as a function of the quantity of pre-MBA experience.

I presented evidence that salary does not vary with amount of pre-MBA experience. Like, not even a small, reasonable amount - it varies not at all, except for a slight decrease for the most experienced candidates, which we can discard as a function of smaller sample size. Based on that, I asserted that it was more likely than not that bonuses and other compensation also did not vary by experience level. A reasonable scientist would agree, I think, that since this is the first hard evidence we have on the subject, that that should be the hypothesis. Whether and how salaries vary based on quality of employer is immaterial, because the variable we're studying here is amount of pre-MBA experience, not anything else.

Given that I have hard data, albeit imperfect, I think the burden of proof to show that bonuses vary considerably by pre-MBA experience - enough to qualitatively change the decision on whether a young MBA admittee should attend or get more experience - is on you.

[quote]
...Put another way, you're probably not going to make very much by joining a mediocre VC/PE firm. But, it's nearly impossible to even get an interview at those top firms without extensive prior work experience or strong industry contacts (which is itself a function of prior work experience).

[/quote]

Now, if that were true, it would be a strong argument in your favor. But I do not believe it to be true, or at least not strongly true. Let us take a small group of the top PE firms - say, Blackstone Group, Carlyle Group, KKR, GS Capital Partners, and Thomas Lee Group. I happen to know that they all recruit at HBS, Wharton, Stanford, and many also at Columbia and Sloan. Generally, from what I understand, all it takes to get an interview if you're an MBA at those schools is a relevant summer internship in PE. Everyone is already so pre-selected that they're willing to talk to anyone with demonstrated interest, and it's worth the Associates' time. That was my impression from talking to a career services staffer at HBS and another at Columbia. If you know differently, let's hear it.

Regardless, you're expecting me to believe that among the following two options, the first one is more likely:

(1) The salaries are the same across experience tiers because those with more experience are more likely to get the top jobs which thus pay lower salaries, averaging out with the non-finance/consulting people who, ALSO because of their greater experience, will get higher salaries than those with less experience - and the net result is that the average salary is the same.

(2) As the salary figures indicate (despite not being a perfect measure of compensation), there is in fact no difference in average compensation between low and high experience tiers for MBAs.

I'm sorry, there are too many moving parts and it comes out too exactly the same for me to believe (1). Occam's Razor is saying I'm right.

calicartel · July 10, 2008, 1:01pm

[quote]
I presented evidence that salary does not vary with amount of pre-MBA experience. Like, not even a small, reasonable amount - it varies not at all, except for a slight decrease for the most experienced candidates, which we can discard as a function of smaller sample size.

[/quote]

So how do you explain the following info on Kellogg's website regarding salaries relative to work experience?

Salary Acceptances by Work Experience
Experience % Range Average Median
1-2 Years 4 $35,000-165,000 $103,500 $97,500
3-4 Years 48 38,000-180,000 105,500 100,000
5-9 Years 47 42,500-160,000 105,300 105,000
10-15 Years 1 90,000-140,000 112,250 107,500

Recruiting</a> at the Kellogg School

VectorWega · July 10, 2008, 1:41pm

My primary problem with students attending MBA programs right out of undergrad has little to do with starting salaries.

Some of the issues I have with it are:

<ol>
<li>Without real world experience, undergrads don't know what they want to do in life, and certainly don't know how to best utilize an MBA to fulfill their career objectives.</li>
<li>I would imagine that most students who can get directly into HBS from undergrad are (on average) better and brighter than the average HBS MBA. If HBS students are the best of the best, then an undergrad going directly into HBS has the potential to be the best of the best of the best. It is quite probable that these students will NEVER need an MBA and even if they do, how do they know that a certain school is right for them if they don't even have work experience.</li>
<li>Those with 0 yrs work experience generally provide very little to class discussions and are generally seen as lower performers by classmates. Considering your classmates will be a large part of your early business network, their perception is very important. Along with the experience factor, there is a definite maturation process that occurs between the ages of 22 and 26 that I didn't fully realize until I worked with some 23 yr olds.</li>
</ol>

BTW, I agree that anyone attending HBS/Wharton/Stanford will have great opportunities to get a high paying job. However, the further down the rankings you look, the more crippling that lack of work experience will be. And lets be frank...most of these undergrads that are shooting for HBS right out of undergrad don't have a snowball's chance in hell of getting in.

Most undergrads seeking an MBA are looking into it for all of the wrong reasons. Some want big pay days early and others are scared to go into the workforce with their current credentials. Very few really understand the big picture implications of their decisions.

BTW, someone just told me Wal-Mart is paying 120k. Not sure of the complete truth to that figure, but I know they pay simiarly to the salaries listed above. I'm sure there are a ton of career growth opportunities for an MBA located in Bentonville, Arkansas.

For "top performers," I'd recommend 3+ years of experience regardless of starting salaries

VectorWega · July 10, 2008, 1:52pm

p.s. Most MBA applicants with limited experience won't be getting into Harvard. They may shoot for HBS but will often settle for a lower level program. This is a shame, because it's quite probable that a little patience would have afforded them an opportunity to go to a top school.

Denzera · July 10, 2008, 2:42pm

[quote]
So how do you explain the following info on Kellogg's website regarding salaries relative to work experience?

Salary Acceptances by Work Experience
Experience % Range Average Median
1-2 Years 4 $35,000-165,000 $103,500 $97,500
3-4 Years 48 38,000-180,000 105,500 100,000
5-9 Years 47 42,500-160,000 105,300 105,000
10-15 Years 1 90,000-140,000 112,250 107,500

[/quote]

Looks like the variance is still rather low - less than 10% - and the majority of it is in the 10-15 years category. The difference in attending after 1-2 years vs 5-9 years is pretty minimal. In fact, I'm shocked that people with 10-15 years experience aren't able to get higher salaries. This really reinforces the idea that if you can get into a top school, you should go. There's no advantage to waiting.

Victor - I'm not really talking about going straight out of undergrad. First of all, nobody except truly extraordinary people get in straight out of undergrad, at least to top programs. We all know this, and it's such a small percentage that it's not worth talking about.

But the difference between applying after your 2-year analyst program, vs after you've worked your way up a few rungs in 5 years' time, seems to be minimal.

sakky · July 10, 2008, 4:09pm

[quote]
Based on that, I asserted that it was more likely than not that bonuses and other compensation also did not vary by experience level. A reasonable scientist would agree, I think, that since this is the first hard evidence we have on the subject, that that should be the hypothesis. Whether and how salaries vary based on quality of employer is immaterial, because the variable we're studying here is amount of pre-MBA experience, not anything else.

[/quote]

And that is precisely where we disagree. Like I have said, compensation figures vary tremendously, from industry to industry and even within industry.

[quote]
Given that I have hard data, albeit imperfect, I think the burden of proof to show that bonuses vary considerably by pre-MBA experience - enough to qualitatively change the decision on whether a young MBA admittee should attend or get more experience - is on you.

[/quote]

Actually, no, I think the burden of proof is still on you. After all, you are the one making the provocatively counterintuitive claim, not me. Extraordinary claims require extraordinary proof. I, on the other hand, am arguing the null hypothesis, * which requires no proof at all*.

Think of it like a criminal case. I am the defense. That means that I don't actually have to prove anything at all. It is up to you to prove a strong case because the burden of proof is on you.

[quote]
Now, if that were true, it would be a strong argument in your favor. But I do not believe it to be true, or at least not strongly true. Let us take a small group of the top PE firms - say, Blackstone Group, Carlyle Group, KKR, GS Capital Partners, and Thomas Lee Group. I happen to know that they all recruit at HBS, Wharton, Stanford, and many also at Columbia and Sloan. Generally, from what I understand, all it takes to get an interview if you're an MBA at those schools is a relevant summer internship in PE

[/quote]

No, you're wrong on several counts. Some of the top PE firms will recruit on-campus, but many (probably most) do not. The vast majority of interviewing in VC/PE does not happen on an on-campus basis, but rather through social networking. And like I said, social networking success is a strong function of your prior experience.

Secondly, your statement that all you require is a 'relevant' summer internship is incomplete because you don't discuss what you mean by that. The most relevant such internship is obviously at that very same PE firm that you hope to get a full-time job at. But then that begs the question of how one even gets such a summer internship if you have no prior experience and no social network.

[quote]
That was my impression from talking to a career services staffer at HBS and another at Columbia. If you know differently, let's hear it.

[/quote]

Uh, you should ask that staffer just how important social networking is to VC/PE recruiting. Anybody who knows anything will understand that it is paramount.

But don't take my word for it. Consider what these people had to say. Carefully consider what is stated in bold.

*...professionals pointed out that private equity recruiting is spotty, opportunistic and unstructured compared to investment banking recruiting. Typically PE firms don’t come on-Grounds to employ several students at a time. Therefore, the importance of networking is crucial for private equity hiring. Firms are not necessarily going to come to Darden to interview two to three students, but private equity firms expect students to come to them and network aggressively to learn and show keen interest in the industry. *

Everette</a> Fortner's Blog - Darden School of Business

It isn't rare for private equity houses to hire grads fresh out of business school, he said, but **9 times out of 10, the students who nab these jobs are the ones who had private equity experience under their belt before even starting their MBA program*.

In the clubby world of private equity, most people usually land their jobs through persistent networking.

"These are highly prized jobs and often the firms don't recruit in large numbers. **They're looking for people with very specific experience **and may hire just one person a year," said Regina Resnick, assistant dean and managing director for MBA career services at Columbia Business School. *

Why</a> MBAs are in hot pursuit of private equity jobs - Feb. 13, 2007

<a href="1">quote</a> The salaries are the same across experience tiers because those with more experience are more likely to get the top jobs which thus pay lower salaries, averaging out with the non-finance/consulting people who, ALSO because of their greater experience, will get higher salaries than those with less experience - and the net result is that the average salary is the same.

(2) As the salary figures indicate (despite not being a perfect measure of compensation), there is in fact no difference in average compensation between low and high experience tiers for MBAs.

I'm sorry, there are too many moving parts and it comes out too exactly the same for me to believe (1). Occam's Razor is saying I'm right

[/quote]

I am simply asking you to believe that salaries are a poor way to measure MBA outcomes because, like you said, there are too many moving parts. I said it before, and I'll say it again. It's too difficult to compare different industries to each other. Finance is a notoriously "low-salary" industry.

Denzera · July 10, 2008, 10:00pm

Sakky, I love ya man, but you're dodging the point here. I readily concede that networking is important to getting PE jobs; I readily concede that top PE firms are reluctant to hire MBAs (or anyone) without prior experience in the field.

All i'm trying to get you to believe is this: the next time someone asks whether a few years' experience is enough for getting top value out of an MBA, or whether they should wait longer, the answer should be "go as soon as you can get admitted to a top program", because there's no evidence of post-MBA compensation varying by pre-MBA experience **quantity<a href="though%20quality,%20certainly">/B</a>.

Here is the percentage of top MBAs who go into the PE world (VC or LBO), where previous experience and extensive networking is de rigeur:

HBS:</a> 15%
Wharton:</a> 8%
Stanford:</a> 15%
Sloan:</a> 6%
Kellogg:</a> 5%
Columbia:</a> 6%
Chicago:</a> 6%
Tuck:</a> 6%

For the 85-95% of MBA candidates who will not be accepting a job in those sectors of the financial industry, the salary data (from HBS and the Kellogg stats from calicartel) is a very good guide: basically, the quantity of experience doesn't matter.

If you're willing to concede that, then I'm willing to concede that for MBAs entering the PE world, quantity of experience is very likely to matter greatly in the bonuses shortly post-MBA. Fair?

cbreeze · July 11, 2008, 12:03am

FWIW, the PE firm where my S works DOES consider pre MBA experience(quantitively and qualitively) in terms of compensation it offers to new MBA graduates. This difference can be as much as 30%. However, the gap can close rapidly based on performance. His firm only recruits at the top 5 programs.

Denzera · July 11, 2008, 9:54am

...and the top 5 programs would be which, exactly?

cbreeze · July 11, 2008, 1:26pm

S/H/W/C/C

This is only for recruitment. Doesn't include senior lateral transfer personnel who may have gone to other schools and a few superstars who have no MBAs.

gellino · July 11, 2008, 1:43pm

I think the top three are uniformly considered to be Stanford, Harvard, Wharton. #4-8 are more interchangeable to me. While UChicago is considered more quantitative than even most of the other top schools, it has the highest acceptance rate and lowest GMAT of the eight schools. Columbia has made recent improvements in the last decade, but had an acceptance rate of ~ 50% up through the mid '90s. I think the posting Denzera had about the % going in PE really sums up the schools' relative strength and is the order I had in mind doing applications. Harvard and Stanford are above all the rest and Wharton is slightly above #s 4-8, all of which are considered about the same. I know in observing the applications of friends and colleagues, this has been the relative desirability of each of the programs.

On what basis do you say UChicago and Columbia are viewed as any better than Kellogg, Tuck, MIT? On a GMAT, acceptance rate, salary basis, UChicago lags all three.

cbreeze · July 11, 2008, 2:01pm

[quote]

On what basis do you say UChicago and Columbia are viewed as any better than Kellogg, Tuck, MIT? On a GMAT, acceptance rate, salary basis, UChicago lags all three.

[/quote]

Hey, where did I say that I am ranking these programs? All I said is my S's firm recruit from the top 5 programs. These are the only 5 schools his firm recruit from. And they are the considered top programs. I am not slighting Kellogg, Tuck, MIT in the least. I am not looking to debate rankings of these schools.

Jeez, chip on your shoulders today?

gellino · July 11, 2008, 2:34pm

Since you are saying his firm is recruiting at the top five MBA programs and then list the five schools, you are implicitly ranking the programs. The rest of the thread was discussing the value of additional work experience and you come in and say that my son's firm's recruits at five schools; so they must be the top five. You don't perceive how one could find that insulting and egotistical?

cbreeze · July 11, 2008, 2:36pm

Most PE shops are small and as it has been pointed out, prior experience and networking are utmost important. Why would one shop recruit from SHWCC (as my S's firm) and not from Sloan, Tuck, Kellogg who according to some, may rank higher? That's because the top bosses went to SHWCC and not S/T/K .Each shop differs depending on its network.

Gellino, you have been hanging around CC too long as you perceive ranking order in the most innocent sentence.

calicartel · July 11, 2008, 4:22pm

That's mostly true. Also, given that the majority of PE shops are staffed with former investment banking associates, it's not surprising that, other than H/S/W, Chicago and Columbia may have a slight edge as they tend to send more individuals (as a % of their overall graduates) into that industry than Kellogg (consulting, marketing, general management), Tuck (general management, consulting), and Sloan (tech/entepreneurship).

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