Author’s note: This article provides our perspective on executive compensation design and governance. Questions about contract enforcement or authority are best addressed with expert counsel in each respective area.
Defense contractors’ approaches to executive compensation and capital allocation, primarily through future contract terms, could be affected by an executive order issued by President Donald J. Trump in early January.
At a high level, Executive Order 14372, Prioritizing the Warfighter in Defense Contracting emphasizes closer alignment between contractor performance, investment and production outcomes as well as U.S. military needs. In that context, it contemplates potential limitations that could limit:
The order directs the Secretary of War to identify defense contractors supporting critical weapons, supplies and equipment for review based on specified performance, investment, prioritization, and production considerations. While the order cites several potential factors — including periods of underperformance, contractual non-compliance, insufficient investment or prioritization, insufficient production speed, or engagement in stock buybacks or other corporate distributions — it does not define how those factors will be applied in practice. If the secretary determines that a contractor falls short under these considerations, the contractor has a 15-day remediation period following notification. If the remediation plan is deemed inadequate, the Secretary may take immediate actions to secure remedies.
The order also specifies requirements for future contracts, which may provide insight into the aforementioned remedies. The order indicates that future contracts must emphasize incentives tied to on-time delivery, increased production and operating improvements rather than short-term financial metrics such as free cash flow and earnings per share. These provisions could include actions to “cap executive base salaries at current levels (with inflation adjustments permitted) while scrutinizing executive incentives to ensure they are directly, fairly and tightly tied to prioritizing the needs of the warfighter.”
While the order appears to apply primarily through new contracts and renewals, questions remain as to whether and how similar expectations could be raised in connection with existing contracts. The permissibility of such an approach under the Defense Production Act or other defense-contracting statues should be evaluated with counsel. There is also uncertainty about how the triggers for invoking the limitations will be interpreted.
It is further unclear whether any compensation limits would apply solely to base salary or extend to other elements of compensation, including incentives. While the order does not specify a hard-dollar cap on executive compensation, a post by the president on Truth Social appears to endorse a cap of $5 million on defense contractor executive compensation. Any such limits would apply for a period sufficient to allow the secretary to review whether incentive compensation is directly, fairly and tightly aligned with the specified performance metrics.
Questions also remain regarding how incentive compensation would be assessed for sufficient alignment with U.S. Department of Defense priorities. While future contracts could specify compensation tied to on-time delivery, increased production and operating improvements, it is less clear how these metrics would operate in practice and how incentives would be designed to continue supporting shareholder value.
Additional uncertainties include:
Create a detailed schedule about historical stock buybacks, dividends and other corporate distributions to better understand which future actions may be limited, as applicable.
Document the timeliness of deliveries under recent contracts and understand how your current contracts are drafted as well as how existing performance metrics and timelines for delivery might meet the goals that have been articulated.
Ensure your management team has precise details on how every element of your compensation program ties to the priorities that have been articulated. Given the potential for time-sensitive discussions, organizations may need to be prepared to evaluate options and make decisions on an accelerated timeline. Compensation professionals need to prepare management to make these decisions with the best information available.
