Defense contractors must prepare for the Secretary of War’s review of contract performance and potential imposition of limits on dividends, stock buybacks, and executive compensation.
By Dean W. Baxtresser, Kyle R. Jefcoat, Edward N. Siskel, Joel H. Trotter, Douglas K. Yatter, and Pascal Jakowec
Link to Key Points: Key Points:
- The Order contemplates prohibiting stock buybacks and dividends and imposing limits on executive compensation for contractors designated as underperforming by the Secretary of War.
- The Trump administration has expressed an interest in realigning contractor incentives toward production speed, capacity, and on‑time delivery to accelerate procurement and strengthen the defense industrial base, and away from a perception regarding prioritizing investor returns.
- In the near term, contractors should anticipate engagement from the administration through the review, notice, and negotiated resolution process outlined in the Order; in the longer term, contractors should anticipate new FAR/DFARS clauses expressly restricting buybacks/dividends during underperformance and tying executive pay to performance.
On January 7, 2026, President Trump issued an executive order titled “Prioritizing the Warfighter in Defense Contracting” (the Order). The Order directs the Secretary of War (the Secretary) to identify “underperforming” defense contractors that are not investing their own capital into necessary production capacity, not sufficiently prioritizing US government contracts, or whose production speed is insufficient as determined by the Secretary. The Order seeks to prohibit designated contractors from conducting stock buybacks and issuing dividends to shareholders until the performance issue is cured. Additionally, future contracts will be required to link executive compensation with performance metrics, and defense contractors must cap executive base salaries during times of underperformance.
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