On January 7, 2025, President Trump signed an Executive Order, “Prioritizing the Warfighter in Defense Contracting,” that aims to warn large defense companies that have contracts with the federal government to be prepared for tighter standards on existing contracts, or to experience some new restrictions on certain corporate profit-seeking activity. The EO:  

• Prohibits any current major defense contractors from paying dividends or buying back their own stock “at the expense of accelerated procurement and increased production capacity.” 

• Directs the Secretary of War (formerly known as the Secretary of Defense) to identify a list of any defense contractors that are underperforming, not investing their own capital, not “sufficiently prioritizing U.S. government contracts,” or “whose production speed is insufficient,” and whether they have engaged in stock buybacks or corporate distribution of dividends. The Department of Defense would then be required to enter remediation and negotiations with the contractor over a certain time period, and to take enforcement action if the issues cannot be resolved.   

• Directs that any new government contracts with defense companies, going forward from within 60 days of the EO, include provisions that prohibit stock buybacks and corporate distributions if the contractor is also deemed to not meet any of the criteria for remediation mentioned above.  

• Directs that any new government contracts with defense companies, going forward from within 60 days of the EO, require that pay and compensation packages for executives of defense contractors be linked to performance on contract requirements (such as on-time delivery of services or efficient production), rather than short-term financial performance or profit of the company.  

• Directs that any new government contracts with defense companies, going forward from within 60 days of the EO, put a cap on base salaries for executives of the company (allowing for cost-of-living adjustments for inflation), if the company is found to underperform on the contract by the Secretary.  

This EO was signed as Trump also announced that he would request a $1.5 trillion defense budget for 2027 – a massive 50% annual increase from current levels. Trump and Secretary Pete Hegseth have also made comments that they intend the measures in the EO to pressure defense contractors to speed up production of military weapons and equipment. 

 The EO is also a notable use of White House authority to target the behavior of specific private sector companies that receive significant amounts of U.S. taxpayer dollars to provide defense equipment and services. The White House would typically have the leverage of these federal contracts alone – which are critical to these companies’ bottom lines – to pressure the companies into compliance with whatever standards they choose. However, this EO attempts to go a step further by directing decisions about how a company’s executives are paid, how they can distribute profits, and even on requiring that they prioritize US government contracts more than any other obligations they may have. 

In 2023, a Department of Defense study found that leading defense contractors spent more money in recent years on paying out dividends to shareholders and buying back their own stock than on research and development and capital investment (e.g. to build more factories). “Stock buybacks” refer to the practice of a company buying back its own stock from shareholders, which  raises the price of remaining shares (because there is now less stock available on the open market.) If corporate executives have stock options, they can use strategically-timed buybacks to boost the value of the stock options when they’re exercised.. 

Impact:  

It is not clear what effect, if any, this EO will ultimately have on the pay and bottom lines of individual defense contractor CEOs. For example, the provisions on CEO salary caps say that only the base salaries of the executives may be capped at their current level – meaning that executives could still receive more compensation above and beyond any cap in terms of stock options and other benefits. Stock-based compensation is far larger than base pay for the vast majority of large company CEOs. 

The EO also does not cap executive pay, nor does it actually ban stock buybacks by contractors. It provides a lot of leeway to the Secretary for how to determine what defense contractors would be considered to be “major” defense contractors who are subject to these requirements. It would also be up to the Defense Department to determine the relevant performance metrics that a company would need to fall beneath before their stock buybacks and distribution of dividends to shareholders were banned, or before their executives’ pay was subject to a potential salary cap. If any companies that are initially warned are able to meet production targets or promise other relevant changes to the Trump administration, their ability to pay exorbitant salaries or buy back stock may never be affected.  

Nevertheless, as EPI has studied for years, CEO pay in the US is wildly out of proportion to the typical American workers’ pay (at a ratio of 281:1 in 2024). CEOs of some of the largest US defense contractors, like Northrop Grumman, Lockheed Martin, and General Dynamics, make millions in total annual compensation.   Because of the massive scale of defense contracts, a lot of this compensation can be attributed to the benefits of U.S. taxpayer dollars (for example, in 2024, Lockheed Martin was awarded federal government contracts totaling about 71% of their net sales). It would be a reasonable goal to try to use the leverage of federal contracting dollars to force major companies to change their behavior, but it’s not clear that this EO alone will result in changes to defense contractors’ profit-seeking behavior, rather than meeting the Trump administration’s goal of pressuring defense companies to massively up production. Further, because these companies get the vast majority of their revenue from taxpayer dollars, strong oversight is needed on their activities and performance. However, that oversight was often provided by exactly the types of employees that the Trump administration has worked to fire through “DOGE,” including the Defense Department’s Inspector General. This EO puts arbitrary, vague financial metrics in place of real, good public administration, while also gutting the dedicated civil servants who would ordinarily be responsible for monitoring and enforcing rules for contractors.