Overview
On January 7, 2026, the Administration issued an executive order that will call out a number of defense contractors and establish a new framework for evaluating contract performance and restricting executive compensation, dividends, and stock buybacks going forward. The order maintains that “traditional” defense contractors have been incentivized to prioritize investor returns and stock prices over national defense and that many large contractors have been prioritizing these objectives over US national security needs.
In particular, the order focuses on what it describes as underperforming large defense contractors that have been pursuing new awards, stock buybacks, and shareholder distributions instead of improving performance through investments in production capacity, innovation, and on-time delivery. The order also takes issue with contractors that tie executive compensation to short-term financial metrics like stock price.
Contract Performance, Stock Buybacks and Distributions
As an immediate consequence of the order, the Secretary of War has been tasked with identifying defense contractors that provide critical weapons, supplies, or equipment that are deemed to be:
- underperforming on their contracts
- not sufficiently investing in or prioritizing their U.S. Government contracts; and
- engaging in stock buybacks or corporate distributions while underperforming or not engaging in sufficient investment or prioritization.
Individual contractors are expected to be identified within 30 days, and the order anticipates that the list of identified contractors will be updated over time.
Once identified, contractors will have 15 days to submit a board-approved remediation plan for acceptance by the Secretary. However, contractors that have already been notified about the Administration’s concerns may not be afforded the same opportunity to respond.
If the Secretary does not accept the remediation plan, the order contemplates that the Secretary may take action to return the contractor to sufficient performance, expedite investment and prioritization by the contractor, including through other voluntary agreements with the contractor, authorities under the Defense Production Act, and enforcement mechanisms available under procurement regulations, potentially including terminations for default and even suspension and debarment from U.S. Government contracting. Competitors could also raise a contractor’s placement on this list in bid protests challenging agency past performance evaluations or responsibility determinations.
In addition, according to the order, identified contractors could have the U.S. Government’s support withdrawn from foreign military sale cases and direct commercial sales involving non-U.S. governments. The order also directs the Securities and Exchange Commission to consider amending its regulations regarding stock buybacks to prohibit identified contractors from using the safe harbor at Rule 10b-18, which helps public companies avoid market manipulation claims when engaging in this practice.
By March 2026, defense contractors can expect new contracts and renewals to incorporate a clause prohibiting stock buybacks and corporate distributions while a contractor is underperforming, not complying with a contract’s terms, or engaging in insufficient investment or prioritization.
Executive Compensation
Separately, the order also contemplates that there will be additional provisions in the new clause, or a separate clause issued around the same time, that require a contractor’s executive compensation to not be tied to short-term financial metrics, such as “free cash flow” or stock price. The clause is expected to require that executive compensation instead be tied to on-time delivery, increased production, and “all necessary facilitation of investments and operating improvements” that are required to rapidly expand U.S. stockpiles and capabilities.
In addition, while the Secretary is reviewing incentive compensation of underperforming contractors to ensure that it is “directly, fairly, and tightly” tied to investments and operating improvements, new contracts are expected to require that the contractors cap base salaries of executives at the Secretary’s direction, with allowance for inflation.
Outstanding Issues
The order raises a number of issues that defense contractors should consider.
Pre-Identification Engagement: The order suggests that the Administration has already engaged with a few large defense contractors about the concerns identified in the order. Accordingly, although timing is tight, concerned contractors may have an opportunity to engage with the Administration before the initial 30-day period expires in order to explore reaching a compromise before being publicly identified and subject to the consequences of the order.
Available Remedies: Although the order contemplates that identified contractors will be subject to various negative consequences, contractors should keep in mind that a number of the consequences identified in the order are not without a remedy. Contractors can seek payment under the Takings Clause and other authorities if forced to make investments through the Defense Production Act and even terminations for default allow contractors to submit claims for payment.
Moreover, because the order’s investment and prioritization standards are likely not included in most if not all of the contracts at issue, contractors can even seek full termination for convenience or breach damages if their contracts are terminated based on new, non-binding standards. And contractors will continue to have traditional administrative defenses to government claims of under or non-performance under the FAR/DFAR or similar contract terms.
False Claims Act Risk: For all defense contractors, the new clause(s) will likely present a significant False Claims Act risk because the ultimate contractual standards established for underperformance, insufficient investment and prioritization, and potentially even breach will likely be relatively vague and frequently in the eye of the beholder. A contractor that engages in stock buybacks or corporate distributions while holding defense contracts would be subject to heightened risk that the U.S. Government or whistleblower plaintiff would later claim that there was an issue with the contractor’s performance when these actions took place and that the contractor, therefore, violated its agreements and submitted false claims for payment to the U.S. Government.
The scope of what constitutes “underperformance” is not clear on the face of the Order and contractors should proactively prepare response plans to address claims of underperformance given short timelines to prepare remediation plans and the penalties if plans are deemed insufficient.
Executive Compensation Risk: Similarly, the new clause(s) will likely be vague in terms of distinguishing between when incentive compensation is tied to short-term financial metrics and is instead tied to on-time delivery, increased production, and “all necessary facilitation of investments and operating improvements” that are required to rapidly expand U.S. stockpiles and capabilities. Moreover, although the clause(s) may define the scope of covered executives by referencing state corporate law, other provisions in procurement regulations use vague concepts like “employees in management positions” to define the concept of an executive.
As a result, defense contractors will face heightened breach of contract, False Claims Act, and compensation freeze risks if they do not carefully tailor their incentive compensation programs to be responsive to the order. For example, maintaining an incentive compensation program directly tied to stock price seems highly risky under the order’s language. Contractors also need to start considering whether to include freeze clauses in compensation contracts to avoid being stuck between opposing breach of contract claims from the executive and U.S. Government.
Civil and Commercial Contractors: Although the order is directed at “traditional” and large defense contractors, largely civil and commercial contractors with some defense agreements would be covered by the order unless the clause(s) take a narrower approach. Accordingly, the new clause(s) should for now be viewed like defense cybersecurity clauses, which impose significant compliance obligations on an organization if it has a single defense contract.
