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Rohit Singh
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Thu, 16 Mar 2006

IIM Salaries...

There seems to be an undercurrent of resentment against the high salaries being offered to IIM people, along the lines of "what have these 20-somethings done to deserve this". I can understand the envy, but not the argument that nobody's worth that much. That argument really is silly. The textbook explanation, and a correct one, would be that this is an issue about demand and supply and the salaries are simply determined by the market.

But apart from these black-boxish explanations that my in-house economist might offer, it is also quite easy to demonstrate to the sceptics exactly why they too would be willing to *pay* such enormous salaries if they were the employer. The really high salaries are typically offered by finance companies and banks. A finance company makes its money by dealing in large amounts of Other People's Money and charging a small service fee. These money management roles scale up quite easily-- even a 2-3 person firm can manage a fund worth billions of dollars. Now suppose, company A and B are both managing Other People's Money, each with a corpus of $100 million. That is actually a rather *low* estimate and a bigger number would make my argument only stronger. Now, A and B have both one fund-manager each, but A's is smarter and can get them a 5% higher return than B. Both company A and B take 5% of returns as service charge (again, a low estimate) and so company A stands to make an *extra* $250K. Isn't it easy to see why the pay difference between the two fund managers could easily be 50-100K? Observe that most other industries can't afford to reward performance so lavishly. Extend this argument to its natural conclusion and it's easy to see why even a fresh recruit for a finance company can easily make a ton of money. It also explains why the admins and the IT guys and the janitor in these companies won't make obscene amounts of money-- they are not the ones dealing with Other People's Money.

Of course, this does not explain why *MBAs* make so much money. After all, there is no guarantee that the MBA you hired will be the right guy for your finance firm. But then again, if you are hiring for Barclays and you want to hire from India, which places would have the highest probability of giving you the most-likely-to-be-successful hires ? Yupp, IIMs. Sure, you could hire from the IITs or the other top colleges but many of their best finance-oriented students end up at the IIMs anyway. Your firm's growing and you really do need to hire some new people, so you might as well hire from the place least likely to give you bum candidates.

Indeed, I'd say that the IIM salaries aren't done climbing yet. They have a bit of a way to go before they match those offered to graduates of top US B-schools.

Actually, a similar argument applies to PhD admissions and explains why these days the top univs will almost never accept an undergrad who has not demonstrated some interest in research by taking an initiative to do an undergrad research project.

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