Is it okay to compress rubber diaphragm in order add higher level of fluid to for clutch reservoir.

Most expand as fluid level gets low. If the inner part is popped out of the lid then yes it should collapse back into itself and remain there as long as fluid level is full. If low on fluid I would inspect for leaks. Around slave cylinder and master cylinder.

Now there is probably air in the system and will need bled if there is a leak.It is probably the slave cylinder.