Defense giants were most clearly in the crosshairs of President Trump’s recent executive order on defense firms’ stock buybacks and CEO salaries—but smaller firms will be affected as well.
“There’s a subtle, longer-term impact on all other contractors, including even private companies and maybe even some smaller companies,” Tyler Evans, a partner in the Steptoe law firm’s government contracts group, told Defense One.
“Although the EO discusses ‘large’ contractors, that does not protect mid-size or potentially even small contractors from facing similar scrutiny,” Luke Levasseur, a partner at Fox Rothschild, said via email. The White House order “presents substantial compliance challenges to contractors, even those that are performing their contracts well, timely delivering required contracted-for products and services, and have invested sufficient capital into their operations. Notably, difficulties with application of the EO may arise even if DOD has recently rated a contractor’s performance highly.”
Large defense contractors spent more on stock buybacks and dividends since 2020 than on other capital investments, like building facilities, to the tune of $110 billion, Bloomberg reported. But several companies have already signaled their intent to align with the administration’s policy direction.
“Our incentives are already tied to the delivery of performance for our customers, including executive pay, Leonardo DRS CEO John Baylouny told Defense One, noting the company thinks the administration is on the right path.
A Lockheed spokesperson said the company shares the Pentagon’s and White House’s vision and “will continue to invest and innovate at scale.”
HII stopped buying back stocks last year to focus on shipyards, CEO Chris Kastner told reporters ahead of this week’s Surface Navy Association’s National Symposium.
“That’s our top priority…invest in shipyards, pay a dividend, and then if there’s any excess, would potentially do M&A or do a share buyback. But right now, the first item is crowding the rest of the things out,” Kastner said.
But depending on the Pentagon’s implementation of the executive order, defense contractors will have to consider how they handle executive compensation and incentives.
“How do we handle our incentives? What are we tying it to? Is there any way that somebody could claim that while we’re underperforming in a contract, or not sufficiently investing or breaching the contract, or something like that, that we haven’t fairly tied incentives to improving contract performance versus just getting revenue or cash in the door, or stock price, if it’s public company, that kind of thing,” Steptoe’s Evans said. “So I do think it will have a longer-term impact for all the different contractors.”
But the ambiguity in the executive order could also be a problem.
“If you’re not in the select group—they probably know who they are…there’s no way they’re going to be able to implement a contract clause, or multiple, if they do that, [in a way] that really spells out what these standards mean in terms of underperforming or not sufficiently prioritizing government contracts,” Evans said.
There’s also a “significant risk” of False Claims Act allegations, he said.
“If you have a disgruntled employee, if there’s a competitor…they can just say, ‘well, look, they weren’t doing so hot on that contract,’ or ‘they weren’t investing in this way,’” while buying back stocks and executed certain executive pay incentives, he said. “It could raise all sorts of issues.”
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Pentagon invests in rocket-maker. The unusual $1 billion deal doesn’t necessarily buy an ownership stake in L3Harris Technologies’ rocket motor business; it’s described as a foundation for future multi-year procurement talks.
Upsides? The solid rocket motor industrial base has been historically problematic, but has stabilized in recent years, Michael Cadenazzi, the Pentagon’s head of industrial base policy said at the Honolulu Defense Forum this week.
“I think the acquisition of Aerojet by L3Harris was a net success in terms of delivery. And they’ve reported they’ve closed backlog over the past few years, which is great. We want to continue to build on that success. This current investment has helped that,” Cadenazzi told reporters, noting that additional investments to speed up munitions and rocket motor production across the industrial base, including new entrants, are expected. “We’re excited about the fact that this may no longer be a roadblock, because it has traditionally been a roadblock through munitions production.”
But the deal raises questions, Capital Alpha analyst Byron Callan said in a recent newsletter. Among them: Why is public money flowing to L3Harris, not other missile/rocket suppliers? And: “If a return to taxpayers via DOD is to be realized from this deal, how will conflicts of interest be avoided?”
Go deeper: The solid-rocket-motor supply chain has long been challenged. Some companies have been spending their own money to increase production. For example, Northrop Grumman has spent more than $1 billion over five years to increase its weapons production, including propulsion manufacturing capabilities. The goal is to double production by 2027, Gordon LoPresti, who leads Northrop’s missile products business, told Defense One.
HII expands its UK unmanned-systems facility. The extra 6,500 square feet in Portchester, England, will support Remus 620—including assembly and torpedo-tube launch and recovery—autonomy integration, and “development of our new Romulus USV fleet for the UK and nearby continental Europe,” company officials told reporters Monday. The facility would also support increased production, training, and logistics for customers in the U.K. and Europe.
Helping hands. Booz Allen Hamilton is teaming with mega-venture capital firm Andreessen Horowitz to marry tech startups with government customers, the New York Times reported Monday. The move comes as the Defense Department and White House look to spend more on military tech and encourage more private capital investment.
SecDef’s factory tours. Defense Secretary Pete Hegseth unveiled myriad changes to how the Pentagon researches, develops, and buys technology Monday while visiting SpaceX’s Starbase launch site. The new policies—plus a new AI strategy—are designed to streamline defense-industry interactions with the Pentagon and make weapons faster.
- “Mission Engineering and Integration Activity, MEIA, will tell industry what problems we’re trying to solve. And DIU will help program offices adopt what industry has already built,” Hegseth said Monday.
- A little more: Hegseth also visited Lockheed Martin in Texas on Monday after stops last week at Rocket Lab and Divergent, a digital manufacturing company, in California.
- “Our job is to get bureaucracy out of the way,” he said in California. “The best ideas, the best innovation, the fastest, most capable—you are going to win in President Trump’s Pentagon. That’s the only baseline we want to set.”
- FWIW: While at Lockheed’s F-35 facility, Hegseth said the company should “win a lot. Because you make incredible, exquisite platforms.”
Acquisition breadcrumbing? The Army’s strategy to buy small quantities of gear quickly before committing to a bigger order is creating consternation for some drone companies, Defense One’s Meghann Myers reports.
- “The way the Army is approaching this now…they want flexibility and they want routine competition, because they know that we’re going to keep investing and keep improving the systems,” Jason Dickinson, general manager for the Ghost-X drone program at Anduril, told Defense One. “But because it’s a little opaque for us right now, it’s very hard to right-size your production capacity.”
The Army’s take: Spending more on small drones is a clear signal that should reassure drone makers.
