Executive order limits stock buybacks and executive pay at certain defense contractors 

January 20, 2026

The White House issued an executive order January 7 — Prioritizing the Warfighter in Defense Contracting — that has the potential to impact stock buybacks and executive pay at defense contractors.  With the stated purposes of accelerating production and increasing capabilities and readiness, the order focuses on contractors that are underperforming on their contracts, 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 of War. Among other things, it calls for a review of existing defense contractors and new clauses in future contracts with new and existing defense contractors that bar stock buybacks and mandate certain executive pay actions while a contractor is deemed to be underperforming. 

Within 30 days of the order, and ongoing, the Secretary of War will identify defense contractors for critical weapons, supplies and equipment that are underperforming in the ways identified in the order and that have repurchased company stock or paid dividends during the period of underperformance. Within 15 days after a contractor is notified of its underperformance, it must submit a remediation plan approved by its board of directors to the Secretary.

If the Secretary considers the remediation plan to be insufficient, the Secretary may initiate immediate actions to secure remedies, including through voluntary agreements with the contractor, enforcement actions under the Defense Production Act and contract enforcement mechanisms within the Federal Acquisition Regulations and Defense Federal Acquisition Regulations Supplement.  

Within 60 days of the order, the Secretary will roll out a process to ensure future contracts with any new or existing defense contractors contain the following:

• A prohibition on stock buybacks and corporate distributions during a period of underperformance;
• A statement that executive incentive compensation won’t be tied to short-term financial metrics that can be driven by stock buybacks, such as free cash flow or earnings per share, and instead will be linked to on-time delivery, increased production, and facilitation of investments and operating improvements; and
• A provision allowing the Secretary of War to cap at current levels (except for inflationary increases) executive base salaries at underperforming contractors while the Secretary scrutinizes the incentive pay to ensure it’s directly, fairly, and tightly tied to operational metrics.

It isn’t clear whether the order applies to all defense contractors or only those providing critical weapons, supplies and equipment (as referenced in part of the order), and whether there are impacts for subcontractors. Also, the order doesn’t provide specific parameters for determining underperformance or sufficient remediation. Instead, it appears to give the Secretary of War significant discretion in making determinations as to how to measure whether a contractor is making adequate capital investments and prioritizing government contracts, and whether production speed is sufficient.

Although aspects of the order are vague, defense contractors should consider taking preparatory steps, including:

• Reviewing their compliance with existing contractual performance standards
• Evaluating planned share repurchases and dividends
• Assessing the effectiveness of various operational incentive plan metrics and whether to include them in 2026 annual incentives
• Staying abreast of additional resources and information on the scope of the order and how the government will implement the order
• Having a plan for potential engagement with government representatives

The order appears to be in keeping with the administration’s approach to advancing the implementation of its policies through federal contracting, as it has done on other topics.

Note: Mercer is not engaged in the practice of law or accounting, and this content is not intended as a substitute for legal and accounting advice. Accordingly, you should secure the advice of competent legal counsel and accountants with respect to any legal or accounting matters related to this document.