How Managers with MBAs Impact Workers’ Pay & Company Performance

The MBA is the most popular graduate degree of the post-World War II era. Although not impossible, it is challenging to find thoughtful criticisms of the degree or its graduates. During the four years since BSchools launched, our research has come across very few such reports backed by solid evidence from credible experts.

So when one such study actually surfaced in April 2022, it invited intense scrutiny because its unusual findings made it newsworthy. What’s more, this curious report appeared after a recruiting season when rebounding employer demand for MBA graduates has rarely been stronger, and their starting salaries are again breaking records.

The surprising study draws two remarkable conclusions. First, it found that managers who earned business degrees at both the master’s and undergraduate levels actually cut their employees’ wages over time. Second, the research also found that despite earning substantially greater salaries, business school-trained managers were not more productive than their counterparts who lack such degrees.

Professors at the Massachusetts Institute of Technology, the University of Maryland, and the University of Copenhagen wrote the new working paper published by the U.S. National Bureau of Economic Research (NBER). They include Dr. Daron Acemoglu, an MIT Institute professor of economics; Dr. Alex He, an assistant professor of finance at the University of Maryland’s Robert H. Smith School of Business; and Dr. Daniel le Maire, an associate professor of economics at the University of Copenhagen.

Entitled “Eclipse of Rent-Sharing: The Effects of Managers’ Business Education on Wages and the Labor Share in the U.S. and Denmark,” the paper reports two findings about the relationship between management’s education and employee wages. At companies run by business school graduates, wages fell by 6 percent at United States firms and by 3 percent at firms in Denmark over an equivalent multi-year period.

Why? “Non-business managers share profits with their workers, whereas business managers do not,” state the professors.

When Management Won’t Share

If this lack of profit sharing among business school-trained managers is indeed the cause of the wage reductions as these researchers claim, that fact may have considerable national policy implications. For example, this distinction may be one reason why both wage growth and the percentage of GDP earned by workers stagnated for most of the period since 1979 in advanced Western economies like the United States.

The authors even argue that an inverse relationship exists between wage growth and the demand for managers trained by business schools; as wage growth slowed during that period, the hiring of managers with business school training soared. In fact, between the Second World War and the late 1970s, the pay of United States workers essentially rose in a lockstep correlation with how much those employees produced.

But since 1980, American workers’ output has soared by 3.5 times their pay, according to this Economic Policy Institute report. Incredibly, the typical U.S. worker in 2018 earned precisely the same inflation-adjusted wage as that employee did 40 years before in 1978, explains this report from the Pew Research Center.

Income inequality is still a complex issue explained by many factors, according to this 2020 analysis by the Rand Corporation. Certainly, Dr. Acemoglu’s team doesn’t ascribe all of the blame to managers who hold business degrees.

But as the three economists explain during this February 2022 YouTube video presentation, and as Dr. Acemoglu also points out during a more recent presentation organized by Dr. Eric Maskin of Harvard University’s economics department, the team does assign to such managers a substantial proportion of that responsibility. They write that the popularity of managers with business school training “can explain about 20 percent of the decline in the labor share [of income]. They also account for approximately 15 percent of the slowdown of wage growth since 1980.”

1979’s Ideological Shift

The professors also claim that the year 1979 is significant for another reason. Throughout the 1970s, economists like Harvard’s Michael Jensen and the University of Chicago’s free-market arch-evangelist Milton Friedman posited that managers weren’t sufficiently concerned with maximizing shareholder value. Starting with his infamous 1970 “Friedman Doctrine” op-ed piece in the New York Times entitled “The Social Responsibility Of Business Is to Increase Its Profits,” Friedman had argued relentlessly all over the press during that decade that corporations bear no responsibility whatsoever to their employees or to their society, but are solely responsible to their shareholders. In that essay, he wrote this famous pronouncement:

There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits.

By the late 1970s, most intermediate macroeconomic theory courses in American universities assigned Friedman’s essays on shareholder value as required reading. Because those courses were already required by most state accounting boards for CPA licensure, it wouldn’t be long before that ideology spilled over into business school courses.

So, besides kicking off decades of wage stagnation in America, the year 1979 was significant for another reason. It was the first year of an ideological shift in which leading corporate finance textbooks used by MBA programs emphasized that a manager’s objective should be to maximize shareholder value. Dr. Acemoglu’s team writes:

Classic textbooks in corporate finance, such as Brealey and Myers (1980) and Copeland and Weston (1979), espoused that the goal of managers should be to maximize shareholder value. Under their influence, (some) managers started viewing workers not as stakeholders in the corporation but rather as sources of costs to be reduced (Freeman and Reed, 1983; Rappaport, 1999; Freeman, 2010).

Soon to follow that trend would be the finance textbook we include as one of BSchools’ most popular business books of all time, Brigham and Ehrhardt’s Essentials of Managerial Finance. These days the treatise has been rebranded as Financial Management: Theory & Practice and continues in use by 100,000 business students every year around the world.

The paper’s authors then argue that the 1990s Silicon Valley-inspired trend toward re-engineering “lean” companies—where successful management required aggressively finding and deleting nonessential costs—also emerged about 15 years later as a doctrine taught in business schools:

Identifying and removing “unnecessary” costs started being viewed as an integral part of successful management. . . The dual emphasis on shareholder value and corporate leanness may have made managers unwilling to share rents with their workers.

The professors go on to argue that business school training doesn’t make graduates better managers. Their investigation finds that companies that hire them fail to benefit from increased sales, investment, productivity, or employment growth. In other words, the study doesn’t show that business school-trained managers contribute significantly more to the financial performance of their companies than the non-trained managers:

Our evidence suggests that business managers are not more productive. Firms appointing business managers are not on differential trends and do not enjoy higher sales, productivity, investment, or employment growth following their accession.

Precedents For MBA Criticisms

Although these latest criticisms of executives with business school training by Dr. Acemoglu’s team are definitely unusual, they are not entirely without precedent.

A 2016 Harvard Business Review interview explores disturbing conclusions about celebrity American CEOs. It profiles research conducted by Dr. Danny Miller, an organizational strategy professor at HEC Montréal, and Dr. Xiaowei Xu, an associate professor of finance at the University of Rhode Island College of Business.

When the professors analyzed the track records of 444 celebrated U.S. chief executives who landed magazine cover story profiles from Fortune, Forbes, and BusinessWeek, they discovered that the managers with MBAs tend to exhibit selfish behaviors that benefit themselves—but not also their firms. Although these CEOs reduced their companies’ market capitalizations, they still managed to shell out more money on acquisitions than non-MBA executives, even while on average winning a million dollars more annually through boosts in compensation.

Then in 2019, Institutional Investor Magazine published an exposé entitled “The MBA Myth and the Cult of the CEO.” Authors Dan Rasmussen and Haonan Li—hedge fund executives who earned MBAs from Stanford’s Graduate School of Business and the University of Pennsylvania’s Wharton School—originally sought to confirm a 1990s contention by Harvard’s Dr. Jensen. He argued that a CEO’s pay should strictly depend upon their company’s stock market performance, and nothing else.

Despite the extraordinary investigation detailed by their article, Rasmussen and Li couldn’t establish any correlation between a company’s share value and the CEO’s business school education. “MBA programs simply do not produce CEOs who are better at running companies,” they concluded.

The Enduring Demand for MBAs Among Companies

Nevertheless, those lackluster performance findings are difficult to reconcile with the latest surge in demand for MBAs. Such research seems to have little to no effect on the insatiable demand by American corporations and their boards of directors for executives and top management who earned business school degrees. If anything, that demand seems in 2022 not to be tapering in the wake of these reports—but to be intensifying.

After a two-year slump during the pandemic, employers are once again bidding up the salaries of new graduates. According to the Wall Street Journal’s management education expert Patrick Thomas, both the Wharton School and the University of Chicago’s Booth School of Business reported salary growth up $5,000 to a median $155,000 base compensation total in 2021. That’s an all-time record high at Wharton, where 99 percent of graduates received at least one job offer.

Meanwhile, many observers aren’t sure what to make of this new study, which has garnered more than its share of controversy on social media like Twitter. If business school-trained managers don’t contribute significantly more to profit or shareholder value than managers without such training, one has to wonder how the hiring and salary reports could ever remain so strong during so many years.

Moreover, despite their analysis that MBAs and other graduates trained by business schools fail to boost sales or profits, Dr. Acemoglu and his team acknowledge a curious irony.

They admit that among the 9,000 U.S. firms they surveyed for their research over 40 years, the proportion of managers with business school training skyrocketed—from only 26 percent in 1980 to 43 percent in 2020.

In terms of employer demand for business school degrees, that’s a 65 percent explosion.