Incentive pay for "master teachers," the foundation of President Reagan's plan to improve American education, neared final passage today after being approved by both houses of the California legislature.

But the price of passing this legislation in the nation's most populous state will be a $1 billion package of increased aid to public schools and the inclusion of teachers in the master teacher selection process.

California Superintendent of Public Instruction Bill Honig avoided the strong teacher opposition that incentive pay has encountered in other states by working closely with teacher organizations, proposing general pay raises for new teachers and giving master teachers more responsibility for training new or ineffective teachers.

Education officials here and in Washington say the California plan may become a model for the approximately 30 states considering incentive pay proposals.

California Gov. George Deukmejian (R) opposes tax increases to pay for a $4,000 annual raise for each master teacher and a $4,500 increase over three years in the starting salaries of new teachers. But he has endorsed the concept of incentives for the most skilled public school instructors.

State senate and assembly conferees are working out differences between two master teacher bills before the final incentive pay proposal is sent on to Deukmejian for his signature or veto.

Deukmejian has suggested that the legislature enact educational reforms, including longer school days and tougher graduation requirements but wait a year for state money to help finance them.

Educators and legislators are sticking with demands for sales or corporate tax increases to fund the changes now.

"Our principle is, no reform without money and no money without reform," said Joe Holsinger, a deputy state school superintendent. Demands for improvement in the state's faltering schools helped his boss, Honig, upset incumbent state school superintendent Wilson Riles in a statewide election last year.

A similiar effort to enact master teacher incentive pay in Tennessee has attracted attention across the nation. The Tennessee Education Association lobbied heavily and successfully against the master teacher proposal of Gov. Lamar Alexander (R). The TEA called the criteria for superior teachers too vague and the selection process too long and cumbersome.

National Education Association President Willard H. McGuire reacted sharply to Reagan's criticism of his organization's opposition to the Tennessee merit pay plan. "Experience indicates that personal relationships or subservient behavior is too often equated with 'merit'," he said.

California teacher organizations have expressed the same distrust of merit pay proposals heard in Tennessee. Marilyn Russell Bittle, president of the powerful California Teachers Association, said that merit pay has in the past "proved to be too political and too costly."

Nevertheless, her organization supports the $26 million master teacher proposals in combination with proposals to increase the annual starting salary for new California teachers from $13,500 to $18,000.

"It's the carrot approach rather than the stick approach," said state Sen. Gary Hart, a former high school teacher who has led the effort to get the new proposals approved.

The bill that Hart steered through the senate to a 31-to-5 vote calls for the designation of master teachers who would be called "mentors." They would be "nominated by their peers and school principals," with the local school board having final say.

Both the senate and assembly bills would make it possible for up to 5 percent of the state's 200,000 teachers to be named master teachers, with the state paying the extra cost. The assembly bill specifies that master teachers spend 60 percent of their time teaching, with the rest devoted to assisting younger or ineffective teachers. They would have no administrative duties and would not formally evaluate other teachers.

As in Tennessee, California teachers have asked how teachers and principals can decide what makes a good teacher and how parents could be kept from insisting that their children be enrolled only in master teachers' classes.

Scattered school districts throughout the country have recently experimented with merit pay and master teacher proposals. The Los Angeles city schools now pay an extra $504 per semester to 197 master teachers selected from the city's 25,000 elementary and high schools. Substitutes are provided so the master teachers may visit others' classes and advise them on their techniques.

Jaime Escalante, a Los Angeles teacher nationally recognized for his success in producing top mathematics students in an impoverished Hispanic neighborhood, said that he has not been selected for the master teacher program and feels that most veteran teachers "would not want to change their procedures" even if a master teacher suggested they do so.

Escalante also said that the extra pay the city gives master teachers is insufficient for the extra time involved. But he is enthusiastic about the $4,000 master teacher bonus progressing through the state legislature. "You're going to see a very positive response to that much money," he said.

National education officials said they know of only one state, Oklahoma, that has a master teacher plan in effect.

Weldon Davis, president of the Oklahoma Education Association, said that the program pays $500 extra a year to selected teachers who help train beginning instructors. Davis said the new program helped direct the energies of "an onslaught of people in the state legislature who had so-called good ideas of how to help education."

One tiny school district in the Oklahoma farming community of Seiling has for four years run just the kind of merit pay system that teacher organizations protest. Seiling School Superintendent Gerald Daughtery said that the 39 of his 41 teachers who signed up for the voluntary program can earn up to $1,000 a year above their salaries if they are designated master teachers. The designation is based on student scores on standardized tests. If the scores rise above a certain average, all teachers in the school receive a bonus. Individual teachers receive extra bonuses if the students in their own class exceed the average.

Standardized scores have risen a full grade level since the program began, Daughtery said.