President Donald Trump signed an executive order on Wednesday aimed at overhauling the relationship between the federal government and the defense industrial base, implementing strict new financial penalties for contractors who fail to meet production targets.
The order, titled “Prioritizing the Warfighter in Defense Contracting,” explicitly prohibits underperforming defense firms from engaging in stock buybacks or issuing dividends until they can demonstrate they are producing “a superior product, on time and on budget.”
In the text of the directive, the President argues that for too long, traditional defense contractors have been “incentivized to prioritize investor returns over the Nation’s warfighters.” While acknowledging that the U.S. produces top-tier military equipment, the White House stated that production speeds are currently insufficient to meet the demands of a dangerous global landscape.
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“Effective immediately, they are not permitted in any way, shape, or form to pay dividends or buy back stock, until such time as they are able to produce a superior product,” the order reads.
Under the new policy, the Secretary of War, Pete Hegseth, is tasked with conducting a review within 30 days to identify contractors responsible for critical weapons and supplies who are lagging on contracts or failing to invest capital into production capacity.
If a contractor is flagged for underperformance, they will be given notice and a 15-day window to submit a remediation plan approved by their board of directors.
Executive Pay and Future Contracts
The directive goes beyond immediate financial freezes, seeking to fundamentally restructure how defense executives are compensated in future agreements.
Going forward, the administration intends to prohibit executive incentive compensation tied to short-term financial metrics, such as earnings per share driven by buybacks. Instead, bonuses must be linked to on-time delivery and the expansion of U.S. stockpiles. The order also empowers the government to cap executive base salaries at current levels if a firm is found to be non-compliant or underperforming.
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Enforcement and International Sales
The White House outlined a broad enforcement strategy for firms that fail to correct course. If the Secretary determines a remediation plan is insufficient, the government may utilize the Defense Production Act to secure necessary remedies.
Furthermore, the order directs the Secretary, in consultation with the State and Commerce Departments, to consider halting advocacy efforts for underperforming contractors who are competing for international foreign military sales.
The order also requests that the Chairman of the Securities and Exchange Commission (SEC) review potential amendments to regulations governing stock buybacks to remove “safe harbor” protections for defense contractors identified as underperforming.
“Every firm across our economy has a right to profit from prudent investment and hard work,” the order states, “but the American defense industrial base also has the responsibility to ensure that America’s warfighters have the best possible equipment and weapons.”
The costs for publishing the order will be borne by the “Department of War,” according to the final provision of the document.
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