The head of the federal personnel agency has recommended a sweeping change in the Civil Service pay structure that would abolish "step" increases that provide automatic raises to nearly a million federal workers.

The proposal would do away with the in-grade raises that most federal workers get automatically as long as their work is acceptable. It was contained in a Jan. 6 memo prepared for the Cabinet Council on Management and Administration from Office of Personnel Management Director Donald J. Devine.

Devine, arguing that the automatic raises are "negative incentives" that stifle "creative and productive work," proposed to put the money into an "incentive pay pool" that would be distributed only to the best performers in Civil Service grades GS6 and above.

The merit pay plan is the latest in a string of administration proposals to change the Civil Service pay and benefit system in ways that have drawn cries of outrage from the federal work force.

The administration wants to put all new federal workers under the Social Security System and reduce benefits for those already under the federal employes' retirement system.

Federal workers are paying into the Medicare system this year for the first time. More than 9,000 federal workers have been laid off in the last two years. And on Tuesday night, President Reagan asked for a one-year freeze on federal pay.

In his memo, Devine also outlined proposals to curtail overtime pay, sharply restrict the bargaining turf of federal employe unions and give seniority less weight in deciding who will be laid off in federal workforce reductions.

White House officials declined to say how Devine's proposals were received by the Cabinet council, but other sources said the council endorsed them.

Devine's memo said all his suggestions had been widely discussed in the administration and there was a "broad consensus" for their approval.

Devine said yesterday that the memo was a "draft" that had been extensively revised, and that "nothing has been approved."

But Office of Management and Budget officials said OPM already had sent over proposed rules to put all four of the recommendations into effect. The rules are still under review, but one OMB official said it would be wrong to infer that the agency had the rules "on hold."

"When an EPA [Environmental Protection Agency] rule comes over that we think is perfectly horrible, you could say it's been held up," said the official. "That's not the case in this one."

Under the current pay system, most white-collar federal employes are eligible for 10 pay increases within their Civil Service rating.

Those raises, averaging about 3 percent, come on top of the general "comparability" pay increases recommended each year by the president and approved by Congress. Reagan's proposal to freeze federal pay for one year would affect that general pay raise, but not the automatic step increases.

In his other proposals, Devine suggested:

* A "management rights clarification" that would give OPM the power to define what is an "appropriate" bargaining issue for federal employe unions. "The advantages to clearly specifying what is negotiable and what is not negotiable are considerable, since they will ensure the protection of essential management prerogatives," the memo said. "At the present, labor raises many trivial issues, simply out of frustration with the fact they cannot bargain over pay and benefits."

The OPM does not have clear statutory authority to define bargaining issues for federal unions. That is done by the Federal Labor Relations Authority on a case-by-case basis.

But Devine's memo said recent decisions by the FLRA "have indicated that the FLRA might be amenable to OPM assuming a forward policy role." FLRA officials said they had no idea what Devine meant, and Devine said yesterday that he wasn't sure what the phrase meant either. "Somebody here probably does," he said.

* Changing overtime rules in a way that will "make federal government practices closer to, but still more generous than, private sector ones." Devine's memo said the change, requested by the Defense Department, would "remove an existing incentive to work overtime." Exceptions would be continued for air traffic controllers, law enforcement officers and firefighters.