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The heading of this report is an important question that comes up for discussion every once in a while, in strategic meetings. Are MBAs compatible with highly evolving organizations? Does hiring top MBAs still make sense? Or alternative approaches (discussed later) may yield a higher return on the outlay p.a., i.e., the pecuniary benefits that must be paid to the employee.
Directors and managers making the hiring decision have a fiduciary responsibility to make shareholder wealth enhancing decisions, decisions that would yield the highest returns, and enhance organizational wealth long-term; thus, this topic is vital for ensuring efficient stewardship and effective agency of shareholders' equity.
The average salary of the Top 50 global MBA programs in 2021 stands at $156,800/- (see data and calculations at the end of the report), and as with all executive salaries, the average MBA salary is expected to increase yearly at a stable rate. Thus, with a yearly cost of about $150k per new MBA hire, this decision should be weighed carefully against alternatives to determine whether hiring new MBAs is the right move for the company to pursue its objectives.
Analysis of salaries of top MBAs reveals that companies hiring a top MBA (from top 50 international schools) can expect to pay between $151,019 to $162,581, as per a 95% confidence interval. This means that there is a 95% probability that if a company hires a recent MBA graduate from a top 50 global schools, they would have to pay somewhere between $151,019 to $162,581.
Beyond financial considerations, it is also important to understand whether the classical business school training, which, arguably, doesn't evolve swiftly, is compatible with the rapidly changing business environment. When hiring, the organization must understand the evolving business environment and evaluate how decisions made today would impact the organization tomorrow. An important question that should be raised: 'If MBAs are hired today, how would they perform in, say, five years, when the business environment has changed.'
Below, the most critical factors that companies should consider are expounded:
Culture and compatibility
The cultural compatibility of the candidates is a crucial issue that's usually present on the list of key factors of assessment for the recruitment committee. Broadly, cultural compatibility is about the candidates' disposition and related concerns, as explored in the interview process. Usually, this is discerned through a formal interview, questionnaires—conversations, etc.
However, is this method ideal, especially, is it warranted? Should it be used? Do MBAs have the right mindset for top companies?
The short answer is that this method of probing the disposition of candidates, while it may be appropriate for hiring graduates from, say, engineering or science-related fields, is inadequate for understanding and discerning the mentality of MBAs. This method is especially insufficient for those who may have resigned from a reasonable position to go to business school to acquire an MBA.
The reason is that these are individuals that have spent a significant amount of time trying to understand the nature of formal and informal questions from recruiters and have been trained formally regarding how to 'maneuver' and steer successfully through the interview process. These are individuals with the capacity of gathering public information regarding the company they are trying to enter, and then, let's just say, 'present themselves' as ideal fits, as per the information they gather, so they are perceived as perfect fits; this doesn't mean that they, in all actuality, may be ideal fits.
One needn't present a game-theoretical diagram to show how they see their desired outcome maximized by presenting an image of compatibility, exactly what the company wants to see. But, of course, this may not be their true personality at all.
Philosophically, a fundamental problem that cannot be overlooked is the nature and mindset of people that, as per their innate nature, are drawn towards power, with this mindset then leading them to pursue a top MBA as a 'vehicle' that would get them there, provide them the position of power they intrinsically desire.
There is nothing wrong with ambition, of course; however, the presence of a certain type of self-centered ambition, with a tacit disregard for broader consequences, is incompatible with the notion of managers being agents of shareholders, and the wealth maximization of the firm being their fiduciary responsibility.
It may be argued that this type of mindset may not be widespread in business school MBA candidates, but only in a minority. However, if we look at the cases of managerial hubris, practices of irrational empire-building, irresponsible and frivolous use of corporate recourses, etc., by C-suit executives, we find that these practices are widespread, with many bad actors holding an MBA. There are uncountable cases of unethical and flat-out corrupt individuals destroying shareholder wealth, both at a smaller scale, and at a large scale as well (notable cases: Enron, Global Crossing, Tyco, Worldcom, and Parmalat) (Kim et al., 2018; Dagnino et al., 2013).
Let's come back to the hiring process. If a highly trained (in understanding culture), and arguably, highly ambitious individual is invited to apply or self-applies to a company, and they really want to get in, wouldn't it be simple for them to present a type of personality compatible with what the company is looking for? Absolutely!
When a trained individual really wants something, they may behave in a Machiavellian manner, they'll sing the sweet song that the company has wanted to hear, and they'll say all the right words that would resonate and standout with the recruitment team; nonetheless, there can be no guarantee that at that moment, they are being genuine and honest, even if there are hints or clues of honesty in their tone and answers, there is no way of knowing if it's a Machiavellian charade or the honest truth.
Lastly here, it is also important to understand that bad actors, once inserted in a project, division, or function, can have an insidious impact on the culture of that work unit. It takes years to develop a constructive, productive culture, yet it can be badly damaged in a short amount of time; self-centered behavior from executives, promotes self-centered behavior in employees (Zhong & Robinson, 2021; Perrow, 1986, pp.13 − 14).
Alternative methods of filling managerial and executive positions are elaborated later in the report.
The functions of the Roles. Are MBAs fit for all functions of the business?
Another important issue is the specific organizational functions and areas where the firm is trying to fill vacant positions. Is the firm trying to fill in a technical finance role? Or the role of a deputy project manager? Does the firm need recruitment in the strategic analysis department or the Marketing department?
These questions are very important for deciding whether MBAs should be hired or if the firms should consider alternatives.
The teaching method of choice for most top MBA programs is the case study method. Fundamentally, the case study method is a discussion-based approach based on real-life situations that business executives have faced in the past. There are usually 3 case studies discussed daily. However, while this approach has its advantages, it also has significant disadvantages as well.
The dean of Harvard Business school has said that Harvard Business School is designed for generalists, not specialists, and other top business schools also have a similar strategy (BI, 2019). Harvard and other universities have also put in a considerable 'marketing effort' promoting generalists. Nonetheless, this has implications for the practical functioning of such graduates.
Before we move forward, it is important to understand that if an institution is selling a product, primarily, and then through its other publishing arms, it supports the method it used, and outcomes achieved, through that product it is selling, it should be classified as marketing and not empirical evidence; all skeptical inquirers should take it with a grain of salt. . .
If you are working to fill a finance-specific executive role, such as deputy accounts manager, finance manager, treasury analyst, etc., any role that requires in-depth, position-specific skills, a generalist would be a misfit for such a role. Even if a generalist is recruited for such a role (due to brand value, i.e., we hired a Harvard MBA, we are such a prestigious corporation), they would require 'on-the-job training for that role, which should be absolutely unacceptable if you are paying a salary north of $150k.
No amount of 'case studies discussed can teach a student advanced derivatives based hedging approaches, etc. Learning about sophisticated instruments requires in-depth domain-specific knowledge, not 'discussions.' The practical usage of such instruments must be understood to manage such instruments and intricacies related to them.
Similarly, if a Yale MBA is hired as a project manager, and the firm is using an agile approach, such as Scrum or Kanban, that individual would need on-the-job training as well; they would need a complete course in project management and related methodologies, and such individual wouldn't be a best fit at all.
If you hire a generalist for a marketing role, it wouldn't be ideal either. Marketing as a subject has moved away from the old methods of starting with a segment or typical customer target in mind and then developing a strategy, and an integrated marketing communication mix, etc. Marketing is moving more and more towards algorithmic models, big data mining, and other very technical approaches. Algorithmic approaches have revealed how flawed it is to have a notion of who a specific customer may be, and what strategies may yield the highest returns.
A data scientist may generate far greater insights and results in, say, 1 week than an individual that has 'discussed' specific past problems for 24 months can in a year. Business school training is losing credibility in the marketing domain, and we are likely to see a further shift towards data-driven models based on testing, even by smaller firms, as these systems become cheaper to acquire.
The typical Harvard generalist type MBA would be less desired in this area, more and more, as time passes. As mentioned in the first part of this report, firms must think 5 years in advance when hiring. It wouldn't be ideal to fill the marketing department with generalists; instead, the organization should invest more in emerging technological capabilities to gain a competitive advantage.
Finally, the role that top business schools would market the most in the future is most likely to be a strategist. The underlying message of most marketing materials by business schools is also likely to pivot in this direction, and we may see core pitches such as: we produce CEOs, and if you want to be a CEO, get a top MBA.
This message is likely to stick, due to the requirement of judgement in the implementation and formulation of strategy. Formulating strategic direction and strategy implementation are also domains that are unlikely to be automated in the future; thus, more and more MBA programs are likely to focus on strategic thinking and analysis.
However, the business environment is evolving rapidly, in the opposite direction to how business schools have taught classical strategy based on the works of Michael Porter, Robert Kaplan, Gary Yukl, etc. The industry has, and is, moving more towards approaches that actually work.
These old models and prisms of thinking are being seen as obsolete, as agile models and an integrative mindset, which did not originate in business schools, are being adapted more by practitioners; the distributive thinking, with a win-lose mentality of the old business school order, just doesn't work as well as agile approaches and an agile, integrative mindset.
And we know that the agile approaches did not originate in universities but were developed by industry. Some business school heavyweights ridiculed and criticized them as well, limiting the potential of publication of such approaches.
An apt analogy: Insisting on learning the obsolete approaches, or hiring professionals trained in outdated methods is similar to hiring spitfire aircraft trained pilots for an air force that must use F-35 Lightning IIs.
While business schools are likely to move more and more towards these emerging approaches, we must understand that there are better, more efficient methods of learning these approaches; besides, business schools have no authority over these approaches as they didn't develop them — these approaches are practitioner developed.
Even if business schools start teaching them, it would be like learning to ride a horse from someone who has never ridden a horse and doesn't know how it feels to control a beast by pulling on the reins as the wind blows the hair of the horse in the rider's face.
Business school faculty are academics and not practitioners; they have never implemented such emerging approaches in real-world scenarios but have only 'analyzed' how they were implemented in the past; of course, their marketing can make prospective candidates believe that they are the mecca of emerging strategic thinking, but that's just inaccurate. They, unfortunately, would have to say stuff like that to attract candidates
Learning emerging, practitioner created methods from business school faculty and then discussing them, believing that this would make these candidates proficient in these approaches is . . . well, just make-belief, that too an expensive one, usually priced at more than $100K (the approximate fee of top business school programs).
What are alternative strategies companies can use to fill positions
Surely, firms must rethink their approaches and reconsider their strategies regarding filling positions. What strategies can be implemented depends on the specific function, or role that needs to be filled and the tasks/duties of the role.
Some roles require I-shaped professionals, and others require T-shaped professionals.
(Some people have deep specialization in a specific domain and don't operate much outside of that domain; these people, in agile parlance, are known as I-shaped professionals; T-shaped people, on the other hand, are people with a recognized specialization and role; nonetheless, they also have skills that aid in a wide variety of roles. Their skill sets are versatile and can aid and assist others in a wide variety of domains).
If the firm is looking to fill a very technical finance role, such as 'manager compliance (accounting standards),' then, of course, it would benefit more from an I-shaped professional, preferably an accountant. Similarly, a data-driven role in testing marketing strategy would be more suitable for a data scientist, not a master's in business, as the business graduate would suggest that the company hire external data analysts/consultants, with the company ending up paying the graduate and the data analysts both, a suboptimal condition.
Therefore, for some roles, that require deep domain-specific knowledge, the company should look to hire I-shaped professionals, not generalists, as on-the-job training for extended periods can build up as strategic inefficiency. Competitors, over time, can gain a competitive advantage if they deploy a strategy of hiring domain specialists for these types of roles, as they wouldn't require extended on-the-job training, and they would hit the ground running from day one.
For filling such roles, the firm has to be strategic in its recruitment. Hire early career professionals in the required field, train them periodically, and provide them incentives to stay with the firm long-term. For example, in a finance role, it would be more beneficial to hire a part-qualified CFA, CPA, CIMA, as per the needs of the role, rather than hire an MBA in finance, etc.
The MBA in finance gained through the case study method is incomparable with a CFA charter, or a CPA designation, as the rigor and scope of the professional qualifications are far greater than an MBA. A branded MBA in finance is, and should be considered, far inferior to top finance qualifications that have continuous pass rates close to 10%, while almost all accepted MBA students are essentially guaranteed an MBA once they are accepted (This is a consideration that investment management firms, such as hedge funds, etc., take incredibly seriously, and prefer designations such as CFA over an MBA in finance).
For project management and related roles, it would be more beneficial to incentivize, internal, lower-ranked professionals, to gain a PMP designation; promoting those that do succeed in the certification process and examination would incentivize the certification process. They can study for the PMP exams while they gain firm-specific experience, and if an incentive structure encourages them to stay, they will become assets in the long term for the firm. The syllabus of PMP certification is also routinely updated, and the examination also tests real-world agile-related scenarios.
A stable cohort in the certification process would ensure that there are always candidates that can be promoted. Such an approach would be far superior than hiring fresh-face MBAs for project management-related roles and then providing them on-the-job training until they understand the functionality of the projects and the firm's strategic vision. Such an approach should be classified as incredibly inefficient.
Furthermore, it may be argued that hiring MBAs is the best approach for filling leadership and strategic positions. This supposition may not be accurate. Developing strategic and business acumen of employees internally, for a specific firm, is a far efficient method. In such an approach, the firm can gauge certain employees' potential and progress through performance assessment; rather than hiring an external MBA, the firm would know exactly what they are getting for their money through internal hire/promotion.
Developing strategic and leadership acumen internally can be done through incentivized courses conducted by top academic consultants in larger organizations. Nevertheless, smaller firms may not be able to afford training consultants; there is a middle ground; such firms, for strategic and leadership positions, can incentivize employees to attain examination based part-time qualifications from reputable universities . . . even a part-time MBA in strategic management. The employee would develop his skill set while working for the company, newly attained knowledge would be applied as it is learned, and the firm would not need to provide on-the-job training (Like Satya Nadella, Microsoft CEO).
Finally, it is important to understand here that a lot of MBA hiring can be explained through understanding behavioral psychology, rather than strict financial principles of shareholder wealth maximization. Hiring teams and directors may perceive professional qualification as inferior to top MBA due to the brand recognition of the schools; furthermore, they may be satisfying their own need of self-esteem by hiring from 'branded schools.'
For example, directors may sanction hiring top MBAs so they can satisfy their own pompous mindset. They may be able to talk about this publicly: "I have 10 Stanford MBAs working under me. I am at that level now."
Their need to feel accomplished and to satisfy their hubris may tilt them toward such a hiring approach. For example, some people are drawn more towards an Audemars Piguet watch, while a nonbranded reliable watch can also tell time accurately. Of course, this is to satisfy their need for self-esteem.
No objections can be raised against people satisfying their need to feel accomplished, as long as they do so with their own money. However, it is absolutely unacceptable for managers to satisfy such wants at the expense of shareholders; that would unarguably be a corrupt agency by the director/manager.
Overhiring of MBAs, therefore, isn't always the ideal solution. The company must first understand and explore alternative solutions, as elaborated in this report. Strict financial scrutiny of new hiring and understanding whether any psychological factors are impacting directors and managers are also crucial. Lastly, for firms growing exponentially, the alternative methods explained in this report may not be viable. In such cases, hiring MBAs may be the last choice, but caution should be exercised regarding the factors detailed in this report.
Note: All critical viewpoints expressed in this report are of an author that does hold an MBA degree from a prestigious school, as well as an accounting charter from the biggest global professional body of management accountants, a master's level qualification in strategic management, and is PMP certified as well.
For a further consultation regarding hiring and assessing the suitability of candidates, or the type of candidates that should be hired for certain positions, please do contact us!
Data and Calculations:
References
Business Insider. (2019). The dean of Harvard Business School explains what personality types he looks for in MBA candidates. Business Insider. Retrieved from https://www.businessinsider.com/harvard-business-school-generalists-versus-specialists-2018-9#:~:text=Harvard%20Business%20School%20dean%20Nitin,overall%20leadership%20and%20management%20skills.
Dagnino, G. B., Minà, A., & Picone, P. M. (2013). The hubris hypothesis of corporate social irresponsibility: evidence from the Parmalat case. In Integrity in organizations (pp. 576-601). Palgrave Macmillan, London.
Kim, M., Xiong, G. & Kim, KH. Where does pride lead? Corporate managerial hubris and strategic emphasis. J. of the Acad. Mark. Sci. 46, 537–556 (2018). https://doi.org/10.1007/s11747-017-0547-4
Perrow, C. (1986). Economic Theories of Organization. Theory and Society, 15(1/2), 11-45. Retrieved June 22, 2021, from http://www.jstor.org/stable/657174
Rankings ft.com. 2021. Business School Rankings. Available at: https://rankings.ft.com/home/masters-in-business-administration> [Accessed 10 June 2021]
Zhong R, Robinson SL. What Happens to Bad Actors in Organizations? A Review of Actor-Centric Outcomes of Negative Behavior. Journal of Management. 2021;47(6):1430-1467. doi:10.1177/0149206320976808