Opinion: Aerospace And Defense Faces A Day Of Reckoning

At first blush, the Trump administration’s recent executive orders focused on the defense industry could be taken for empty, overblown declarations that will be forgotten once the White House changes hands. But that could be a grave mistake. These new orders targeting share repurchases, executive compensation and dividends by underperforming contractors are an attempt to reset how industry’s performance is defined and how it deploys capital.

At least half of major U.S. defense modernization programs were over budget, behind schedule or both at the start of 2026 versus a solid 80-85% in 2006, industry observers and analysts note.

Washington’s response to this long-standing problem is becoming clearer: less financial engineering, more industrial investment. By pressing contractors to prioritize capital expenditure—particularly in production capacity expansion—over shareholder returns, policymakers are aiming to rebuild if not accelerate throughput, strengthen the industrial base and reconnect financial outcomes with warfighter needs.

Some contractors have taken steps to revise 2026 executive compensation frameworks to align better with program performance, thus tying incentives more directly to cost, schedule and delivery metrics. That is a meaningful shift—and a welcome one. At Northrop Grumman, for instance, annual incentive compensation at the upper echelons now triples nonfinancial strategic performance metrics and adds two new benchmarks: on-time delivery and production capacity.

But will such industry steps be sufficient? Don’t bet on it. Recent experience underscores why.

On the KC-46 Pegasus, Boeing has absorbed billions of dollars in charges tied to fixed-price development risk stemming from design, production and quality issues that proved more complex than anticipated. Similar patterns—large write-downs, margin erosion and protracted delivery timelines—have surfaced across multiple programs and contractors. They point to deeper execution challenges that executive compensation incentives alone are unlikely to resolve.

Cost overruns and schedule delays are execution problems rooted in program management, supply chain fragility, requirements instability and, at times, overly aggressive contractor bidding. Adjusting incentives without addressing those fundamental issues risks treating symptoms rather than causes.

The real test is whether the industry is prepared to go further. That would mean more disciplined bidding on fixed-price work, deeper investment in digital engineering and production readiness, and a willingness to trade near-term operating margins for long-term credibility. It would also mean accepting that capital allocation decisions will be judged not only by shareholders but by their contribution to delivering capability on time and on budget.

Whether that shift occurs sooner rather than later will depend less on policy design than on industry’s outlook. Aerospace and defense contractors have long responded decisively to pressure they believe will endure—and have just as often waited out pressure they assume will pass. If Washington is expected to sustain scrutiny, tighten contract terms and intervene more directly where performance falters, behavior will change. Investment will shift, and execution will improve.

If not, the pattern will persist. Adjustments will remain incremental, and financial engineering will continue beneath the surface. Moreover, performance gains will be measured at the margins.

But with U.S. debt now exceeding the country’s annual gross domestic product and the Pentagon and related agencies receiving $1 trillion-plus a year, the stage is being set for a future Truman Committee to investigate defense industry waste and inefficiency or for automatic sequestration budget cuts to be enacted.

At that point, Washington’s options would narrow and harden. Expect tighter contract structures, more intrusive oversight and reduced tolerance for financial flexibility. Tools the government has historically used sparingly—profit constraints, more prescriptive program controls and even cancellations—will move closer to the center of policy.

That is why this moment may prove different. The question is no longer whether the government will demand accountability but whether it is prepared to enforce accountability in ways that reshape how the industry operates. For aerospace and defense primes, the choice is increasingly stark: Adapt to a model that rewards consistent execution and reinvestment—or risk having that model imposed upon them.

Anthony L. Velocci, Jr., was editor-in-chief of Aviation Week & Space Technology from 2003 to 2012.

Editor's note: This column was updated to clarify the percentage of major U.S. defense modernization programs that were over budget, behind schedule or both at the start of 2026.