Executive Compensation and Governance Action Items and Considerations Following Executive Order “Prioritizing the Warfighter in Defense Contracting”

On January 7, 2026, the president issued an Executive Order titled “Prioritizing the Warfighter in Defense Contracting” (the “Order”). The Order directs the Department of War and other agencies to take immediate and forward-looking actions intended to reshape financial and governance incentives at major defense contractors.

The Order places executive compensation squarely within the government’s performance and accountability framework for defense contractors, affecting incentive design, capital-return-linked pay, and, in certain circumstances, executive base salaries. This alert highlights key action items and considerations for boards of directors and general counsel, with a focus on executive compensation and related governance issues.

For executives, the Order introduces the possibility of reduced incentive payouts, altered performance metrics, and, in certain circumstances, constraints on base salary growth tied to performance remediation.

Key Executive Compensation Action Items and Considerations for Covered Entities

1. Immediate Prohibition on Dividends and Stock Buybacks. The Order states that, effective immediately, covered defense contractors (“covered entities”) may not pay dividends or engage in stock buybacks until they are able to deliver “a superior product, on time and on budget.”

While framed as a capital allocation directive, this restriction has direct executive compensation implications because:

• Incentive plans tied to shareholder return or EPS may underperform if dividends and buy-backs are unavailable, even when operational goals are met.
• Equity awards may deliver less value than expected, as valuation assumptions and performance targets were set assuming capital returns that are no longer permitted.
• Compensation committees may need to reassess pay-for-performance alignment, where lower financial results reflect restricted capital tools rather than management execution.
• Public disclosures may require additional explanation to describe compensation outcomes that diverge from traditional shareholder-return metrics.

Boards and compensation committees should recognize that restrictions on capital returns may materially affect incentive outcomes even if compensation plans are not formally amended.

In practice, these restrictions may require compensation committees to exercise discretion more frequently to address incentive outcomes that no longer reflect management execution. Where discretion is used, committees should ensure that the rationale for any adjustments is clearly documented, particularly in anticipation of heightened scrutiny of compensation decisions.

2. Board Readiness for Performance Identification and Remediation. Within 30 days of the Order, and on a continuing basis thereafter, the secretary of war is directed to identify defense contractors for critical weapons, supplies, and equipment that are underperforming, insufficiently investing in production capacity, not prioritizing U.S. government contracts, or producing at insufficient speed, and that engaged in stock buybacks or corporate distributions during the relevant period.

If a contractor is identified:

• The secretary must provide notice describing the performance concerns; and
• Where permissible under applicable law, the contractor may be given the opportunity to submit a board-approved remediation plan within 15 days.

For contractors already identified and studied as of the date of the Order, an additional review may not be required, at the secretary’s discretion.

While the Order does not mandate compensation-related remediation, boards should anticipate that incentive alignment may be reviewed where performance concerns relate to investment, production capacity, or delivery obligations.

3. Contract-Driven Redesign of Executive Incentives and Potential Salary Constraints. Within 60 days, the secretary of war is directed to ensure that future defense contracts and renewals include provisions requiring that:

• Executive incentive compensation should not be tied to short-term financial metrics, such as free cash flow or earnings per share, particularly where driven by stock buy-backs; and
• Incentive compensation be linked to operational performance, including on-time delivery, increased production capacity, and required investments and operating improvements.

Future contracts must also permit the secretary, upon a finding of underperformance or insufficient prioritization, investment, or production speed, to:

• Cap executive base salaries at current levels (with inflationary adjustments permitted), and
• Maintain such caps for a period sufficient to review incentive compensation alignment.

These provisions reflect an expectation that executive compensation be explicitly aligned with operational execution and production readiness.

Boards should also consider how contract-mandated salary caps may interact with existing employment agreements, annual increase practices, and change-in-control protections. In particular, base salary freeze provisions may constrain future pay actions even where incentive compensation is under review or being redesigned.

Governance and Compliance Implications for Covered Entities

For Boards:

• Compensation committees should anticipate increased scrutiny of incentive structures, particularly those tied to financial capital return metrics.
• Boards may be asked to approve remediation plans and oversee compensation alignment in response to performance concerns.
• Existing long-term incentive, retention, and change-in-control arrangements may warrant review for consistency with future contract requirements.

For General Counsel:

• Compensation provisions embedded in government contracts may create enforceable obligations with employment, disclosure, and securities-law implications.
• Required changes to compensation programs may intersect with executive agreements and proxy disclosures.
• The Order’s reference to potential amendments to the Rule 10b-18 safe harbor for stock buy-backs suggests parallel securities-law developments that may affect compensation metrics.

Near-Term Preparation Checklist for Covered Entities

Boards and general counsel at defense contractors may wish to consider the following steps:

• Reviewing compensation metrics and capital-return assumptions to identify reliance on dividends, stock buybacks, or EPS;
• Assessing flexibility in executive agreements and incentive plans to permit modification of metrics, payouts, or salary increases if required;
• Coordinating cross-functional review of future contracts among executive compensation, government contracts, employment, and securities teams;
• Enhancing board documentation and process to reflect alignment between executive incentives and operational performance objectives; and
• Evaluating whether compensation committees should adopt a prospective “remediation-ready” incentive framework that can be implemented quickly if performance concerns are identified.

Conclusion

The Order introduces immediate constraints and future contractual requirements that elevate executive compensation as a core governance and compliance consideration for defense contractors. While implementation will depend on future contract language and enforcement actions, boards and general counsel should expect executive compensation to play a more prominent role in defense-contract oversight.

We will continue to monitor developments and are available to assist with compensation design reviews, contract negotiations, and board-level governance planning.