(FORTUNE Magazine) – Restricted stock is an increasingly popular form of executive compensation that the proxy rules haven't quite caught up with. Typically a company grants an executive a number of absolutely free shares, which he cannot sell during a so-called restriction period, generally around five years. If the executive quits during the restriction period, he forfeits the stock. Meanwhile he receives dividends and gets to vote the shares. Two forms of proxy abuse have developed here, one quite rare and one quite common. In the rare category we have F. Ross Johnson, late of RJR Nabisco. In the 1986 proxy, shareholders learned that he had been granted 40,000 restricted shares in 1985. Thereafter the drafters of the RJR proxy apparently dove to a depth of 600 feet and rigged the boat for silent running. The only mention of restricted stock in the 1987 and 1988 proxies is a bland statement that ''. . . no restricted shares became vested with respect to any executive | officer.'' But whether any grants were made went unmentioned. So information revealed in filings Johnson was required to make with the SEC is rather startling: From September 1985 through February 1988 he was granted 209,000 restricted shares with an aggregate market value of nearly $9.5 million. If the restrictions hadn't lapsed before RJR's takeover by Kohlberg Kravis Roberts, they automatically lapsed as a result of it. By then the stock had about doubled in price. The bottom line: Johnson received around $20 million, most of which the shareholders didn't know he had coming until the takeover. The far more common form of reporting abuse concerns dividends on restricted shares. They definitely count as pay: The Financial Accounting Standards Board and the Internal Revenue Service say these dividends should be charged to earnings and are tax deductible, unlike normal dividends but just like any other compensation. RJR Nabisco neglected to mention that in 1988 Johnson received dividends on unlapsed restricted shares of around $315,000. Other large omissions of this type occurred at Gulf & Western, where CEO Martin Davis received about $315,000 in cash dividends on unlapsed restricted shares for the last fiscal year, and at Ralston Purina, where $400,000 of dividends on CEO William P. Stiritz's restricted shares went into an interest-bearing account until the restrictions lapse. There's nothing wrong with accepting restricted stock or its dividends. Further, RJR Nabisco insists that its failure to report Johnson's major grants, while unusual, was within SEC rules. Clearly the failure of RJR, Gulf & Western, and Ralston Purina to report the amount of dividends on restricted shares was within the rules. But that's the point: How can the SEC permit so much compensation to go unreported? G.S.C.