Trump says he’ll block defense contractor stock buybacks. Here’s what his executive order actually does.

• President Donald Trump issued an executive order targeting military contractors' corporate spending.
• The order grants the Defense Secretary the authority to seek spending limits via defense contracts.
• It gives Defense Secretary Pete Hegseth newfound sway over exec pay, stock buybacks, and dividends.

On Wednesday night, President Donald Trump went to war with military contractors.

The companies, he said, issued shareholder dividends and "massive" stock buybacks at the expense of using the funds to manufacture weapons and equipment for the US military.

Trump said he would ban buybacks and dividends, and demanded that executive salaries be capped at $5 million until military equipment manufacturing improves.

It appeared to be part of a broader push by the Trump administration to assert more government control over corporations. But an accompanying executive order, also issued Wednesday night, offered more nuance.

The executive order also begins with a lengthy complaint criticizing defense contractors for pursuing "more lucrative contracts" while delivering late and over budget on existing ones.

In the eleventh paragraph, the executive order explains how the Defense Department would enforce Trump's priorities: Through the enforcement of future contracts.

The order requires Defense Secretary Pete Hegseth to ensure that, in future military contracts, the executive compensation for contractors isn't tied to "short-term financial metrics," but to increased production, delivery time, and other improvements "required to rapidly expand our United States stockpiles and capabilities."

Trump's order doesn't include the $5 million salary cap that he posted about on social media. Instead, it empowers Hegseth to require contractors to cap executive base salaries at existing levels if they don't meet the Defense Department secretary's performance expectations.

It also requires the government's defense contracts to forbid companies from issuing stock buybacks and other payments to shareholders during periods when they have not met Hegseth's expectations.

Trump's order gives Hegseth wide discretion to define the "period of underperformance" or "insufficient prioritization of the contract" where those restrictions kick in. The executive order says those definitions will be "determined by the Secretary."

The arrangement "puts the Secretary of War into the shoes of the Securities Exchange Commission" by giving Hegseth the power to determine how the companies can handle their finances, said Harold Koh, a professor of national security law at Yale Law School.

"Their policy with regard to corporate distributions is a matter of corporate finance, Koh said. "It's not a matter of defense performance."

The executive order, in essence, is a directive on how the Defense Department — which the Trump administration calls the War Department — should treat military contracts in the future.

The companies can accept those terms, or lose out on contracts that could instead go to competitors.

"It's really a question of whether the contractor accepts those terms," said said Koh, who served as the top State Department lawyer during the Obama administration. "It's a statement of policy about the way the contracts should be written going forward."

Trump issued the order at the same time he said he wants to dramatically increase the Pentagon's budget. He announced he wanted to raise US military spending by 50%, from $1 trillion to $1.5 trillion.

In another social media post on Wednesday night, Trump took particular aim at Raytheon, one of the largest Defense Department contractors. Trump said the company will not be allowed to do additional stock buybacks "until they are able to get their act together."

"I have been informed by the Department of War that Defense Contractor, Raytheon, has been the least responsive to the needs of the Department of War, the slowest in increasing their volume, and the most aggressive spending on their Shareholders rather than the needs and demands of the United States Military," Trump wrote.

Pentagon spokesperson Sean Parnell said the order demonstrates the Defense Department's "obligation is to our warfighters; not Wall Street."

"After numerous years of failing to meet contractual obligations, under President Trump's order, defense contractors will no longer be allowed to leave our warfighters behind while giving themselves massive payouts from stock buybacks," Parnell said in a statement.

Koh told Business Insider that the executive order grants the Defense Secretary enormous discretion to determine whether particular companies meet manufacturing expectations. Hegseth could determine which companies can retain control over their executives' salaries, and which ought to be capped, he said.

"The order that was issued is only sort of half the story," Koh said. "The question is: Where are the exemptions coming from? Who has the authority to exempt someone from these criteria because of their personal contacts?"