MBA Employment or Entrepreneurship: Which Compensates Better?

Richard S. Ruback and Royce Yudkoff have, for the past half dozen or so years, taught a class at the end of the Harvard Business School two-year program about entrepreneurship through acquisition - which is finding, purchasing, and running a small business. From time to time, an article appears in the Harvard Business Review detailing their experiences and suppositions. I follow these observations with great interest.

One such article discussed the question as to which MBA graduate ultimately enjoyed higher compensation: the MBA who followed the traditional path of employment upon graduation, or the MBA who sought, financed and ran a small business upon graduation. 

Much of their number crunching had to be theoretical, simply because there is little to no data accumulated on some of the factors they wanted to evaluate around small business ownership. Also, there is no “average” number to put to many of the factors they wished to consider regarding the MBA graduates who sought traditional employment. Even pinning down an average starting salary is difficult, despite the data points they collect and sort through over the years.

For the exercise, they traced the path of a traditional graduate and a new CEO of a small business. Looking at financial compensation only, assuming such averages as salary growth over the first 10 years, the basic income of the traditional job seeker exceeds that of the MBA who bought a business to run.

However, that fails to take into account interest in the company that the business owner will realize. Ignoring the factors of business growth and the timing of cash flows and further assuming typical financing arrangements, the CEO’s compensation plus his share of ownership interest begins to climb significantly higher than the projected salary of the employed MBA. The authors do note, however, that bonuses, pensions, payouts, business growth and other potentially significant figures are not included in these conservative calculations. 

In the end, Ruback and Yudkoff decided, it would seem that financial compensation is fairly similar between the MBA who was hired for a job and the MBA who purchased a career. Ruback and Yudkoff concluded their article with the admonition that one should therefore consider not so much the money as the non-pecuniary compensations permitted in each situation such as flexibility, control over conditions and whether or not one would flourish in the business-ownership environment. 

I find this conclusion to be satisfactory, even while I would like to add one final element of non-financial compensation for consideration. As a proponent of wealth equality, I have made the case for the opportunity and responsibility that business owners have to seek not only their own best interests, but also the best interests of those they employ and the of the community their business serves. It is by the influence of the many small and medium business voices that any sense of true democracy can be returned to the decision-making that shapes economy and society. 

In the richest nations of the world, the gap is widening between the few that possess and control the capital and the many who merely work for scraps of pay and an illusion of the dream that they are prospering and prospering their nation. The common interests of the many small business upon which communities connect and function are the interests which should be brought to bear. The only individuals who can best bring those interests to bear are those who purchase, own and run those businesses.