Defense Secretary Empowered to Impose Salary Restrictions and Dividend Bans at Defense Contractors

The Trump administration’s January 2026 policy targeting defense contractor compensation has set off alarms throughout the investment community. In a series of statements and a subsequent executive order, President Trump criticized what he termed “excessive” executive compensation, bloated dividend payments, and aggressive stock buyback programs—all of which, he argued, divert resources away from production capacity and military readiness.

The core tension underlying this policy is straightforward: The administration is proposing to significantly expand the defense budget to $1.5 trillion, but it wants to ensure contractors reinvest those gains into manufacturing capabilities, equipment maintenance, and delivery timelines—not shareholder distributions or inflated executive paychecks.

Unpacking the Executive Order: What Defense Secretary Pete Hegseth Actually Controls

The January executive order doesn’t immediately freeze dividends or impose salary restrictions across the entire defense industry. Instead, it establishes a structured process that places substantial decision-making authority in the hands of the secretary of defense—Pete Hegseth—to identify problematic contractors and enforce consequences.

Here’s the mechanism: Hegseth is directed to review defense contractors against specific performance criteria. Those criteria include underperformance on existing contracts, inadequate investment in production facilities, insufficient prioritization of U.S. military work, or failure to maintain timely production schedules. Once the Defense Secretary identifies contractors falling short on these metrics, they receive written notification of the deficiencies.

Critically, the contractors then have a 15-day window to submit a remediation plan. This isn’t automatic punishment—it’s a formal notice-and-response process. If a contractor fails to submit a plan, if the Defense Secretary deems the proposed plan inadequate, or if the contractor later fails to execute the agreed-upon improvements, the secretary gains broad enforcement powers: renegotiating contract terms, invoking the Defense Production Act to mandate increased output or accelerated timelines, and enforcing dividend or buyback restrictions.

The Salary Cap Provision: A New Tool for the Defense Secretary

Perhaps the most direct assault on executive compensation comes from a provision embedded in the executive order’s contract language requirements. For future defense contracts, the Defense Secretary gains the authority to impose salary caps on defense contractor executives if the company fails to prioritize government work, misses critical deadlines, or underinvests in its own business.

This represents an unprecedented expansion of governmental control over private-sector executive compensation tied to government contracting. Previously, such salary restrictions were rare outside of industries receiving direct government rescue packages. The Defense Secretary’s new authority means that a contractor’s compensation structure—historically the domain of corporate boards and shareholders—now becomes a negotiable element of doing business with the Pentagon.

Which Companies Are Most Vulnerable?

As of mid-February 2026, the Defense Secretary has not publicly named specific contractors as violators. However, analysis of the 10 largest U.S. defense contractors reveals which companies distribute the most capital to shareholders—and thus face the highest risk of running afoul of the new rules.

Defense Contractor Dividend Yields and Recent Buyback Activity

The data presents a clear risk hierarchy. Lockheed Martin, paying a 2.3% dividend and executing $2.4 billion in buybacks year-to-date, sits at the top of the exposure list. General Dynamics and L3Harris follow closely, with both companies maintaining substantial buyback programs alongside respectable dividend yields.

For context, the average dividend yield across these 10 defense companies stands at just 1.0%—barely below the S&P 500’s current 1.2% yield. Yet the concentration of capital returns at a few firms (particularly Lockheed Martin and L3Harris) makes those two companies the most obvious targets should the Defense Secretary decide to make a high-profile enforcement example.

What “Banned” Really Means (For Now)

A critical distinction: dividends and stock buybacks are not yet banned across the board. The executive order establishes a conditional framework. Dividends and buybacks remain permissible for contractors meeting performance standards and adequately reinvesting profits.

The stick applies specifically to underperformers—those judged by the Defense Secretary as failing production targets, missing deadlines, or starving their operations of necessary capital investment. For those contractors, the penalty includes both dividend suspension and buyback prohibition.

The executive order also contemplates additional consequences, including renegotiation of existing contracts and invocation of emergency production authorities under the Defense Production Act—mechanisms that could compel contractors to shift resources toward military production at accelerated timelines.

Implications for Shareholders and Long-Term Strategy

For dividend-focused investors holding defense stocks, the policy introduces meaningful uncertainty. Income-producing defense positions—particularly those concentrated in Lockheed Martin and L3Harris—now carry the risk of dividend suspension if the Defense Secretary judges the company’s investment levels or performance inadequate.

The 15-day resolution window means Defense Secretary Pete Hegseth could move quickly against identified contractors. Investors should monitor public announcements from the Pentagon for any naming of specific underperformers or disputes over remediation plans.

Longer-term, this policy signals that executive compensation and shareholder distributions at defense firms are now subject to government discretion in ways previously unthinkable. This represents a fundamental shift in the relationship between the Pentagon and its prime contractors—one in which financial performance to shareholders is subordinate to military readiness and production capacity objectives.

The ultimate outcome depends on how aggressively the Defense Secretary chooses to exercise these new enforcement powers.