President Reagan proposed today to simplify the civil service structure and gradually extend the pay principles of private industry to the federal work force in what Office of Personnel Management Director Constance J. Horner termed "an epochal reform."

The president, traveling in Bali, signed a domestic policy council recommendation to expand throughout the federal work force a "performance pay system" tested over the past five years at two naval weapons laboratories, here and in San Diego.

Under the new system, the 18 civil service grades would be consolidated into six broad "pay bands." Raises would be based more according to performance, job descriptions would be simplified and federal managers would be given much more flexibility and authority in rewarding workers.

The president's proposal, however, apparently does not seek to alter the system of so-called "comparability" raises given annually to federal workers.

The China Lake demonstration, as it is known, has resulted in easier recruitment, greater retention of skilled scientists, engineers and technicians, and more employe and management satisfaction than under the traditional civil service system at two "control" weapons laboratories, according to the Office of Personnel Management. Personnel costs at the demonstration sites have been about 5 percent higher than at the control labs.

"This is an epochal reform, as significant at least as the [1978] Civil Service Reform Act -- not mere tinkering around the edges," Horner said today. "Under this system the federal worker who does a good job will get promoted, get paid better, know what's expected and will no longer be a passive participant engaged in paper actions," she said.

According to OPM, this initiative comes in response to a widespread perception that the current federal pay system is not working, that civil service morale is low and that the system fails to attract and keep the best employes. "We have a federal system that stymies every attempt federal managers make to deliver for the American people," Horner said. "We have a 6,000-page book of rules that means the personnel office runs the government, not the responsible line managers."

The Civil Service Reform Act signed by President Carter created the Senior Executive Service, replaced the Civil Service Commission with OPM and the Merit Systems Protection Board, and allowed experiments with various merit pay systems, among other changes.

Under the China Lake demonstration project that the president hopes to expand, job classifications are simplified and the general schedule (GS) grades grouped into six broad pay bands. Managers are required to sit down with the employe at the beginning of the year and write a performance plan, and assess the employe at the end of the year. Workers receive one of five performance ratings from "demonstrably successful, and clearly deserving of recognition" to "substantially below fully successful."

Workers rated fully successful or better receive a salary adjustment equivalent to or exceeding a within-grade increase.

The system eliminates what OPM has come to consider automatic longevity-based increases that are given even to poor workers. Under the China Lake system, while good workers slowly move to the top of the pay band, poor ones move downward in comparison.

"The process requires managers to make adult decisions," sad Denny Kline, public affairs officer at China Lake and a manager under the system.

Burrell Hays, technical director at China Lake, said, "When I sit down to write the performance review, I've got to make hard choices. The good people know who they are and the poor people also know who they are. Everybody would know if I missed by very much."

John Mulholland, field service director for the American Federation of Government Employees, said in response to today's announcement, "We're willing to look at anything if the standards are fair and objective criteria are used." Mulholland said the union was concerned, however, that for the China Lake experiment, the administration "deliberately chose a place where there was no collective bargaining and where the union had no input."

Rep. Mary Rose Oakar (D-Ohio), whose subcommittee on compensation on employee benefits will hold hearings on the proposal, said, "My staff has seen the [China Lake] experiment and it's a great experiment. But I must reserve judgment on whether it is the right system for everybody."

Reagan's recommendation asks OPM to draft legislation that would phase in a China Lake-type personnel system across the government. Horner estimated that implementation might take three to five years.

Employe attitude surveys show overall satisfaction higher at the demonstration sites than at the control labs -- the Naval Surface Weapons Center in White Oak, Md., and Dahlgren, Va., and the Naval Air Development Center in Warminster, Pa.