New U.S. Executive Order Targets Stock Buybacks, Dividends, and Executive Compensation for Underperforming Defense Contractors

On January 7, 2026, President Donald Trump issued an executive order titled “Prioritizing the Warfighter in Defense Contracting” (the Order). The Order directs a performance-based approach to capital returns and executive compensation in the defense industrial base. The Order instructs the Secretary of War (the Secretary) to identify defense contractors for critical weapons, supplies, and equipment that are underperforming or insufficiently prioritizing, investing in, or producing for U.S. government needs and that have engaged in stock buybacks or other corporate distributions during the period of alleged underperformance. For contractors identified under the Order, the Secretary may pursue remedies “to the maximum extent permitted by law,” including actions under the Defense Production Act (DPA) and contract enforcement mechanisms under the Federal Acquisition Regulation (FAR) and Defense FAR Supplement (DFARS). The Order also directs the Secretary, within 60 days, to ensure that future defense contracts, including renewals, have provisions restricting stock buybacks and corporate distributions during periods of underperformance and aligning executive incentive compensation to delivery and production metrics.

In light of the Order, defense contractors should consider proactively assessing their current performance metrics, delivery schedules, and investment levels against contractual requirements and stated Department of War (Department) priorities. Contractors may also wish to review recent and planned stock buybacks, dividends, and other corporate distributions, as well as the structure of executive incentive compensation, to evaluate potential exposure under the Order’s performance-based framework. Contractors should also be prepared to engage with the Department on potential remediation plans if they are identified by the Secretary as underperforming, including demonstrating corrective actions, increased investment, or production adjustments aimed at meeting warfighter needs. In addition, contractors should anticipate heightened scrutiny in future contract awards and renewals.

Background

The Order asserts that in recent years, traditional defense contractors have been incentivized to prioritize investor returns over warfighter needs and that the United States does not produce sufficient quantities of defense items quickly enough to meet current demands. It cites examples of large contractors pursuing newer, more lucrative work while underperforming on existing contracts and using cash for stock buybacks and excessive dividends rather than building production capacity, innovating, and delivering on time.

Against that backdrop, the Order declares a policy that major defense contractors should not engage in stock buybacks or dividend payments at the expense of Department of War procurement requirements or necessary increases in defense production capacity. It further states that “effective immediately,” major defense contractors are “not permitted” to pay dividends or buy back stock until they can provide superior products on time and on budget, framing the forthcoming actions as a reprioritization of performance, investment, and production speed for U.S. defense needs.

Key Terms and Scope

Purpose and Overall Structure

The executive order directs the Department to address perceived underperformance and insufficient prioritization by major defense contractors supporting “critical weapons, supplies, and equipment.” It is structured around two core steps: (i) identification and engagement with contractors whose performance is deemed deficient (Section 3) and (ii) implementation of substantive requirements primarily through future defense contracts, including renewals (Section 4).

Secretary’s Review of Contractors

Section 3 of the Order authorizes the Secretary, within 30 days of the date of the Order and on a continuing basis thereafter, to identify contractors for “critical weapons, supplies, and equipment” that have “engaged in any stock buyback or corporate distribution” during an alleged “period of underperformance or insufficient prioritization, investment, or production speed.” The Order does not define any of these terms, leaving the Secretary broad discretion to identify contractors for enforcement.

Once a contractor is identified, the Secretary must provide notice to the contractor, and shall, “as needed,” engage with the contractor to resolve the issues identified in the notice. Where permissible under existing law, the contractor will be given the opportunity to submit a remediation plan within 15 days of notification. Any remediation plan must be approved by the contractor’s board of directors. The Order does not specify the required contents of such plans, leaving uncertainty as to the standards the Department will apply in evaluating adequacy.

Per Section 4 of the Order, if the Secretary determines that a remediation plan is insufficient or if the parties are otherwise unable to resolve the matter within the 15-day engagement period, the Secretary may, to the extent permitted by law, “initiate immediate actions to secure remedies” “that will expedite production, prioritize the United States military, and return the contractor to sufficient performance, investment, prioritization, and production.”

It is unclear how the Secretary will use this broad enforcement discretion. However, it is worth noting that the Order directs the Secretary to consider the following factors when determining whether to pursue an enforcement action: (1) the financial condition of the contractor; (2) the economic viability of relevant programs; and (3) “the potential mutual benefits offered by robust and sustained growth opportunities from the United States Government coupled with capital investments by the contractor.”

Requirements for Future Contracts

The most concrete mandates in the Order relate to Section 4’s requirements for future contracts and renewals for new and existing contractors. The Order directs the Secretary, within 60 days, to structure future contracts to prohibit stock buybacks and corporate distributions during any period of underperformance, noncompliance, insufficient prioritization, insufficient investment, or insufficient production speed, as determined by the Secretary.

Future contracts must also address executive compensation. Specifically, contracts must prevent executive incentive compensation from being tied to short-term financial metrics — such as free cash flow or earnings per share driven by buybacks — and instead require incentives to be linked to on-time delivery and increased production. In addition, upon a finding by the Secretary that the contractor is underperforming or noncompliant, future contracts must permit the Secretary to cap executive base salaries at current levels (subject to inflation adjustments) and to scrutinize incentive compensation to ensure it is directly tied to delivery and production metrics.

Finally, Section 4 instructs the Chair of the SEC to consider whether to adopt amended regulations governing stock buybacks under Rule 10b-18 that would prohibit the use of the relevant safe harbor for defense contractors that the Secretary identifies as underperforming, underinvesting, or otherwise noncompliant.

Practical Implications for Defense Contractors

The Order affects contractors’ governance and capital‑allocation decisions by tying stock buybacks, dividends, and executive pay structures to government assessments of performance, prioritization, investment, and production speed. Public companies may face particular scrutiny in light of the Order’s stock buyback focus and its direction that the SEC Chair consider changes to Rule 10b‑18 safe harbor availability for identified contractors.

Contractors should consider (i) mapping current programs supporting critical weapons/supplies/equipment and documenting production‑rate investments and prioritization decisions; (ii) reviewing governance processes for authorizing buybacks and dividends and ensuring the board can rapidly develop, approve, and implement a remediation plan if required by the Secretary; (iii) stress‑testing executive compensation metrics against the Order’s expectations (delivery/production‑linked incentives and potential salary caps); (iv) reviewing financing, liquidity, and covenant implications if distributions could be restricted during periods of asserted underperformance; and (v) monitoring Department acquisition guidance and any FAR/DFARS clauses that may be issued for new awards, options, renewals, or other contract actions.