By Abby Schultz
President Donald Trump use of an executive order to make sure defense contractors invest in their companies and deliver weapons and equipment on time for the U.S. military is unusual, but perhaps not out of line for a major industry's biggest customer.
Trump signed an executive order on Wednesday calling on defense companies to stop "putting stock buybacks and excessive corporate distributions ahead of production capacity, innovation, and on-time delivery for America's military" -- a move that initially hammered defense stocks.
The order also declared that the government will make sure future defense contracts allow the Secretary of Defense to cap executive base salaries at current levels if companies don't toe the line, "while scrutinizing executive incentives to ensure they are directly, fairly, and tightly tied to prioritizing the needs of the warfighter." Pay will be allowed to be adjusted for inflation.
Defense stocks rebounded on Thursday after Trump said later Wednesday that he would call for increasing U.S. military spending by 50% to $1.5 trillion in 2027. Shares continued to make strong gains on Friday.
The base salaries for CEOs of major defense contractors such as Northrop Grumman, Lockheed Martin, and RTX are between about $1.5 million and $1.8 million, according to Equilar, a compensation research firm.
But the median level of total CEO compensation among defense companies in the S&P 500 -- including extras such as stock options and incentive pay -- was $20.8 million in fiscal year 2024, Equilar found. Northrop Grumman CEO Kathy Warden was among the highest paid with a base salary of $1.8 million and total compensation of $24.4 million in 2024, based on the latest data available.
Defense companies CEOs are generously paid compared with other industries. The median net total compensation for CEOs of S&P 500 companies was $17.1 million in 2024, Equilar said.
The CEO pay ratio -- that is, the relationship between the compensation of CEO and median worker pay -- is about 189:1 for defense companies in the S&P 500, slightly less than the 192:1 ratio for all S&P 500 companies, according to Equilar. The median worker pay at defense companies in the S&P 500 was $108,548 in 2024.
News of the government's aggressive stance toward defense companies first emerged in Trump's social media posts. In a Truth Social post shortly after 2 p.m. ET on Wednesday, he said of defense companies: "Until they [build new plants], no Executive should be allowed to make in excess of $5 Million Dollars which, as high as it sounds, is a mere fraction of what they are making now." The executive order didn't include the $5 million figure.
A $5 million cap on executive pay is "unrelated to sensible economics" and is a "bad idea," David Larcker, senior faculty of the Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford University, said in an email. "If the government selects the wrong set of pay levels and incentives, investment decisions and shareholder and stakeholder value creation will suffer."
But, "underperformance is a different issue," he said. "This seems like a contractual issue that can make some sense and one that is imposed by a major customer. This is pay for performance and something that the board of directors would include in their decisions in CEO pay."
Kevin Murphy, vice dean of faculty and academic affairs at USC Marshall School of Business, agrees, saying in an interview that he tends "to believe markets are better allocators of capital than the government."
But the fact the government is the defense industry's biggest customer gives the government legitimate leverage. "The Pentagon has every right to try to incentivize companies to speed up deliveries and production on the goods they are purchasing," Murphy says.
For the most part, the Trump administration has been much more business friendly, he says. "This is an aberration." But, he continues, "I'm fairly confident the president believes in incentive compensation. He thinks these threats as his form of incentive compensation, along with calls to tie pay to production results."
Write to Abby Schultz at abby.schultz@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
January 09, 2026 12:20 ET (17:20 GMT)
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