The Trump administration is drafting an executive order aimed at penalizing defense contractors that fail to meet budget and scheduling requirements, Reuters reported Wednesday, citing people familiar with the matter.
The order would impose limits on executive compensation, stock buybacks, and dividend payouts for companies tied to delayed or over-budget military projects.
This move underscores a growing frustration within the Pentagon regarding the “entrenched” nature of the defense industry. The administration has signaled a desire to pivot toward a more agile production model for military hardware.
Market reaction and industry effect
The news has already sent ripples through the financial markets. As markets opened Wednesday:
The proposed restrictions target standard financial practices in the sector. For instance, Lockheed Martin (LMT) recently increased its dividend for the 23rd consecutive year and expanded its share repurchase authorization to over $9 billion.
Targets of criticism: Over-budget programs
The administration’s scrutiny follows years of fiscal overruns in flagship programs:
- The F-35 Fighter Jet (Lockheed Martin): Long criticized as one of the most expensive and delayed programs in U.S. history.
- The Sentinel ICBM Program (Northrop Grumman): This $140 billion project is projected to be years behind schedule and roughly 81% over its original budget.
Broader overhaul of Pentagon buying
The potential executive order aligns with a larger restructuring led by Defense Secretary Pete Hegseth. In November, Hegseth introduced reforms designed to:
- Streamline Bureaucracy: Granting direct authority over major weapons programs to bypass fragmented accountability.
- Accelerate Acquisition: Shifting from “unacceptably slow” procurement cycles to rapid technology deployment.
- Align Incentives: Moving away from a system where contractors are rewarded despite delays.
Industry’s counter-argument
While the White House focuses on corporate payouts, defense industry groups argue that government red tape is the primary bottleneck. The Aerospace Industries Association, representing giants like Boeing (BA), RTX (RTX) and General Dynamics (GD), has called for the elimination of over 50 regulatory hurdles, including:
- Stringent cost-accounting standards.
- Complex intellectual property rules.
- Oversight regarding cybersecurity compliance.
The White House has categorized current discussions as speculative until an official announcement is made. However, industry lobbyists remain on high alert as the Treasury Department continues to refine the proposal.