MBA rankings and the incentives they present

The issue of goals at the most abstract level, and the incentives we use to motivate people and institutions towards achieving those goals, is not new at all. Yet lately we have been forced to revisit it more and more often. Enron and WorldCom had to happen with Arthur Andersen for us to revisit the incentives of consulting and auditing companies. Just a few years later, the global financial crisis had to happen for us to revisit the incentives set up for the major credit rating agencies. As a follow-up, we in Europe are still in the middle of trying to revisit the incentives of EU governments within our complex evolving system governing sovereign debt. So, I look at the most respected rating institutions issuing MBA rankings every year and I can’t help but wonder: is a revisit of the incentives those rankings de facto impose on business schools due before we receive a good reason for it?

I challenge you on a quest to find one prospective MBA student, MBA candidate, or MBA graduate who has not consulted the Financial Times rankings at some point when choosing where to do a program. As an MBA candidate, I certainly consulted it constantly while applying. Indeed, the rankings do thorough research, data aggregation, and analysis that an individual can never handle, just like players in the bond market, for example, could never handle the due diligence of every single security out there. Add a media as reputable and credible as The Financial Times behind those rankings and you get a truly invaluable tool for anyone out on the search for a good program. Questioning the need for a trusted aggregator of up-to-date information about the MBA Programs market who crunches it in a ready-to-use form for the time- and the information-constrained applicant is not only futile but also irrelevant at this point.

What is becoming more and more relevant, however, is recognizing the growing influence the FT rankings have. The success of business schools offering MBA degree programs depends on their output, research, and impact, but first and foremost — alumni. The success of the alumni is, among other things, largely a function of the quality of inputs. And the quality of inputs, in turn, is increasingly dependent on the ranking of the institution. Logically, the next big question is what the ranking depends on.

The FT ranking, I believe, has done a great job incorporating a well-rounded set of determining factors, including gender, nationality, and ethnic diversity. However, the two factors with by far the highest weights, comprising 40% of a school’s rank (20% each) are still “Weighted Average Salary” and “Salary Increase”. To put this in context, if your aims when engaging in the MBA pursuit differed from higher pay, you are still kept in mind in the ranking process, but with the modest 3%-weighted “Aims achieved” factor. Since rankings are meant in the end to serve the customer, it is not at all a far-fetched deductive leap to say that people do an MBA for the pay increase or at least that is more than twice as important to them as anything else. To provide an extreme counterpoint, entrepreneurship is only now being considered for inclusion, and sustainability is, as of today, not a factor at all.

At first, this does not sound like a reason for concern. To put it bluntly, if you are teaching sustainability, living sustainability, and even managing your school sustainably, but your program is not much good, that’s how things should be – you simply do not belong in the Top 100. However, let’s take a little deeper look into this. Is it so eccentric to claim that a school that emphasizes sustainability, social responsibility, and impact might not necessarily attract more concerned participants, but will most likely produce more concerned, responsible alumni? Turning our heads to the average pay in different industries, is it not a test-worthy hypothesis that these alumni will end up taking on average lower-paying jobs? Not because sustainable businesses pay less but because people more concerned about making a social impact are typically less obsessed with pay and pay increases.

Going back to where we started, MBA programs, and especially MBA programs in the Top 100 of FT’s global ranking, undeniably produce a considerable chunk of today’s (and tomorrow’s) global leaders. Moreover, the FT rankings are also already the established authority (at least in Europe): sure, everyone can use an alternative search engine, but who would if there is already Google? So, I dare ask a perhaps controversial question: is not the Financial Times’ MBA ranking division at least partially responsible for the incentives that business schools face when making strategic decisions when choosing what to invest in, and what to emphasize? At the stage our world happens to be today, can we afford to incentivize the leading business schools to produce – first and foremost – excellent moneymakers, but leave social responsibility as an out-of-scope nice-to-have?

In his article from almost 20 years ago, “On the Folly of Rewarding A, while Hoping for B”, Steven Kerr(1) made the trade-off I tried to paint above simple and clear: we dream of innovating, but feel we must reward safe proven methods; we glorify teamwork, but most of the time feel obliged to reward individual performance; and most importantly, we crave a vision, but we reward quarterly results.

I am not writing a prescription here, I am raising questions that I myself need answers to. I hold the FT on a rather high pedestal, read it at school in between the demanding MBA classes, follow it on Twitter, and even follow the FastFT editor Megan Murphy (big fan!). This is precisely why I believe that the FT as an institution has the power, resolution, and skill to lead the entire community of media that rank MBA programs into starting a meaningful conversation about what kind of incentives we, as a society, want for our leading business schools.

1. Kerr, S. (1995). On the folly of rewarding A, while hoping for B. Academy of Management Executive , 9 (1).

For the interested, here is the complete methodology of FT’s full-time MBA ranking:

http://www.ft.com/intl/cms/s/2/5728ac98-7c7f-11e3-b514-00144feabdc0.html#axzz30wq0vyna