IIM salaries and fees: what are the larger implications?

TOI carried a story saying IIM placement salaries had not kept with rising fees for the two year  MBA programme. 

The story quotes a director as saying that the rule of thumb was that the fee should not exceed the average annual salary. The fee seems to have exceeded the average salary at only two IIMs. But that is not the correct measure.

The correct measure is how many years it takes to repay student loans. Taking into account costs in the large cities, I was told this takes seven to eight years-  using average salaries. For those earning less than average, which would be half the cohort, the time taken would be a lot more. 

Moreover, one should not confine the analysis to the leading IIMs. The leading IIMs' fees are the benchmark for lesser IIMs and non-IIMs. At the latter, the pain felt by students would be more.

There are a few fundamental points about IIM fee pricing that tend to get overlooked.

First, what is the basis for the fee charged? IIMA used to charge Rs 4.8 lakh until 2007. Surely, costs cannot have multiplied five-fold since! The fee clearly is not based on cost-plus pricing but simply what the market can bear. If 450 students can pay Rs 25 lakh or more, why not charge that much?

Is that responsible pricing? At top B schools in the US, the fee typically does not even fully recover the cost. So there is an element of subsidy in the fee. On top of that, the schools offer a few scholarships based on merit and financial need. B schools in the US bear the cost of subsidy through large endowments, consultancy, executive programs and the rest. In other words, the fee at US B Schools is not intended to include a profit margin.

At the IIMs, there is not only a profit margin but the margin but must be obscenely large. What are the profits used for? The IIMs are structured as non-profit, non tax-paying trusts. So, they can have a surplus of only 20 per cent over cost. Any surplus above that has to be used. Typically, they have been using the surplus for infrastructure- more and better buildings, better facilities for faculty and students, etc.

The IIMs have also introduced variable pay for faculty (and, to a lesser extent, for non-faculty staff). Some of the surplus goes towards that. A portion of the fee is thus a straight transfer from students to the pockets of faculty. 

Secondly, the fee at IIMs has implications for the choice of employer or jobs. If students take out a large loan for the MBA program, they will be under pressure to take up only the highest paid jobs. That rules out most of the public sector, where there is a crying need for superior managerial skills. It could also preclude entrepreneurial ventures on the part of graduating students- risk-aversion amongst students will be the norm. Is that what the economy needs? Are the IIMs intended solely or mainly to produce talent for Big Tech, the international consulting firms and the top Indian business houses?

Thirdly, the fee have implications for the student profile. It is reasonable to expect that steep fees would deter the disadvantaged sections from applying, given the risk that repayment of loans could stretch out over a very long period when the family looks to the MBA candidate to take care of it. In other words, steep fees dis-favour inclusion.

There is a more important consequence of high fees at IIMs. Many of the graduates at IITs and NITs have offers from the same companies that go to the IIMs. They also have other opportunities such as going abroad from higher studies in engineering or management. High fees create incentives for students at IITs and NITs to pursue alternative opportunities instead of applying to the IIMs. This is certainly happening because the proportion of graduates from IITs and NITs has been falling over the years at the leading IIMs. The IIMs no longer attract the "cream of the cream" although they like to parroting that. Does this not have implications for the brand equity of the IIMs in the long run?

Unfortunately, there seems to have been  no discussion of the larger implications of high fees at the Governing Council or among the faculty. The IIMs keep rubber-stamping five per cent increases in fee ostensibly "to cover the cost of inflation"! So much for research-based policy making at the IIMs!

Unfortunately, after the IIM Act of 2017, the government has let go of all monitoring of IIMs. It seems happy that it does not have to fund many of the IIMs any more. The IIMs are accountable to Parliament, so government needs to shed its hands-off approach and look carefully into the functioning of the IIMs.