Within a year, a substantial number of civil service employees at the Defense Department will be working under a new personnel system that could dramatically change how they are paid and promoted.

Yesterday, at a Pentagon ceremony, President Bush signed legislation that permits work to begin on a National Security Personnel System. It allows the department to leave the 15-grade General Schedule and put more weight on job performance when making salary decisions.

The changes planned by the Pentagon, much like those proposed for the Department of Homeland Security, are among the most ambitious attempted on a large scale inside the government since the 1978 Civil Service Reform Act.

"We, along with our partners at the Office of Personnel Management, the unions and other stakeholders, will begin working on the system immediately upon enactment and hope to begin the implementation" of the National Security Personnel System later this fiscal year, the Pentagon said in a statement issued before Bush signed the fiscal 2004 defense authorization bill.

What the new system means for the 746,000 civil service employees in the department will not be known for months, perhaps years. The legislation allows the Pentagon to apply the new system to no more than 300,000 employees at first. To apply it to the remaining Defense civilians, the department has to certify that the new system treats employees fairly and ensures that personnel decisions are based on merit and not politics.

Throughout much of this year, Defense Secretary Donald H. Rumsfeld urged Congress to grant him broad authority to revamp civil service rules as part of his 21st century transformation agenda. Yesterday, Bush picked up on that theme.

The new system, Bush said, will allow the Pentagon to "place the right person in the right job to meet the challenges we face."

The legislation, Bush said, "gives DOD managers the flexibility to place civilian workers where they are most needed, without needless delay. It speeds up the hiring process so that new employees will not have to face a wait of many months before beginning their service. . . . It introduces pay-for-performance bonuses and streamlines the promotion process, making a career at the Defense Department more attractive to talented workers.

"These are landmark reforms, the most ambitious of their kind in a quarter-century, and similar in scope and purpose to those enacted for the Department of Homeland Security. To win the war on terror, America must fully utilize the skills and talents of everyone who serves our country, and this bill will help us achieve that goal."

Defense officials said they will base personnel changes on an April 2 Federal Register notice that described the "best practices" of existing personnel projects and alternative systems. Creating "pay bands" and numerical ratings to link pay with job performance were among the changes outlined in the Register notice.

As the Pentagon develops its policies, Defense officials will collaborate with union representatives. The process provides for 30 days of review, 30 days to resolve differences and 30 days to notify Congress of any differences before implementation can begin, the officials said.

In addition to changing pay and job classifications, the legislation allows the Pentagon to streamline the disciplinary process by setting up an in-house panel to hear employee appeals. Employees being fired or suspended may take their cases to the Merit Systems Protection Board, an independent agency. The measure also permits the Pentagon to redefine procedures for resolving labor disputes.

Ironically, the starting points for many of the Pentagon's ideas -- the defense research and science laboratories -- are off-limits to the National Security Personnel System until October 2008. Some of the labs told senators they wanted to stick with their individually tailored pay and personnel rules rather than risk getting absorbed into a one-size-fits-all system that might curb their flexibility.