For business students choosing a path out of grad school, two Harvard Business School professors have tried to apply some math to the decision. For many MBA students, taking the traditional and potentially lucrative route directly to a consulting firm or investment bank was the main point of going to business school. But what if entrepreneurship became alluring along the way?
Is an MBA unlikely as a business owner ever to earn the kind of income she would as a McKinsey or Goldman Sachs partner?
In their recent Harvard Business Review article, “Which MBAs Make More: Consultants or Small-Business Owners,” the Harvard profs Richard S. Ruback and Royce Yudkoff say their earlier studies found that “most graduating MBA students agree that being the CEO of a small firm dominates traditional post-MBA careers like consulting, investment banking, private equity, and the like on non-pecuniary dimensions,” such as enjoyment, fulfillment, flexibility, and influence. “Owners of small businesses can set their own hours, make their own management decisions, and take pride in the ownership of their work,” they write in the June 28 HBR edition. Owners also, apparently, suffer less angst.
But do they forfeit the six-figure starting salary and eventual million-dollar salary that their classmates who go into banking can expect to earn?
Ruback and Yudkoff admit that any answer is highly dependent on unpredictable factors such as the success of the small business, the entrepreneur’s ownership interest, the value of the carried interest, and the business’s ultimate sale price. And their calculation makes many assumptions about the growth of a traditional career path salary. In fact, they urge readers to recognize that their model is incomplete. “On one side of the coin, there are likely tax advantages from the entrepreneurship through acquisition payouts and increases from growing the acquired business. On the traditional path side of the coin, there might be pensions or bonuses that we’ve not captured,” they acknowledge.
Still, they figure that “the compensation is reasonably similar across the two paths.” If that assurance is enough to push the MBA grad you know off the traditional career path into entrepreneurship, they might be interested in a copy of Ruback and Yudkoff’s 2016 book, “The Harvard Business Review Guide to Buying a Small Business.”Follow Adrienne Jane Burke at @adajane