Virtually every law firm in the country will have partners who could do better and contribute more to the firm. In many firms, a lack of a formal appraisal procedure means that their fellow partners are failing to take them to task. This can result in an established culture of underperformance within the firm, leading in some cases to complacency and poor profitability.

The problem of underperforming partners is particularly prevalent in small to medium-sized firms, where there can be a reluctance to confront difficult issues within the partnership on a formal level. This is clearly something that needs to be addressed if these firms are to increase their profitability. However, before firms can tackle the issue of underperformance, management needs to establish a means of judging who exactly is underperforming.

In recent years, there has been a shift in the goalposts in defining what is an underperforming partner. Growing numbers of large firms have reduced the number of equitants to maintain the highest possible profit per equity partner (PEP). A high PEP is key to recruiting and retaining top lawyers, so distinguishing between high and low earning partners is important.

However, an underperforming partner should not be confused with a partner who works in a less profitable practice area and so cannot generate high income levels, however high their performance.

If partner performance is judged entirely on profitability, those in the less profitable areas of the firm would suffer. A distinction must be drawn between those not producing sound financial results because of their practice area, and those who are genuinely underperforming. Without a formal assessment procedure in place, as is the case with so many firms, it can be difficult to know where to begin.

Appraisals should not be based solely on financial criteria such as chargeable hours, billing and recoveries. Other issues such as client service, leading and developing people, practice development, raising the profile of the firm, risk management and commercial acumen are equally important. Teamwork is considered important by most firms and an element of measurement should be by reference to the success of a team or unit, not just an individual.

A large number of firms rely on annual appraisals as a means of monitoring and improving partner performance. However, the typically more personal atmosphere at smaller firms often makes it difficult to formalise this sort of assessment. A large number of firms have no current appraisal system in place, and therefore have nothing against which to measure partners in the first instance. The absence of formality has thus become self-perpetuating.

An increasingly popular approach to this problem is the introduction of 180 and 360-degree appraisals, which provide an insight, not only into the relationship between partner and management, but between partner and staff and partner and client.

Having identified individuals' strengths and weaknesses, it is then easier to provide objectives to work towards. This in turn makes the review process easier, providing a comparison between partners and a list of targets against which to measure partners at their next review.

Besides the need to measure partner performance, a structured annual appraisal is advisable as a means of protecting a firm against claims of age discrimination. With new legislation coming into effect last year, the issue of partner performance is firmly under the spotlight. Setting formal SMART objectives – specific, measurable, attainable, relevant and timed – provides a tangible trail that can be used to cover a firm in case of any discrimination claims.

In addition, this system makes it easier to relate partner objectives directly to the firm's business plan as a whole. It gives partners a clear target, and provides employers with a good basis from which to judge the future performance of partners who are not generating sufficient business or profit.

Setting SMART objectives is also advantageous in that it provides a formal justification for a rewards system. Merit-based pay is becoming an increasingly popular method of driving partner performance.

A link between appraisal and this kind of reward is a good way to motivate partners. However, a distinction should be established between such a link and an eat-what-you-kill culture which, for most, is a move too far. A more moderate and often more popular route is a bonus pool, which provides an incentive for everyone to do well.

The potential for de-motivation is an important point and not one to be overlooked. As has been recently documented, there is a growing feeling among associates that becoming a partner is not the be all and end all of a career. Overly rigorous monitoring of performance could work to increase such a mood.

One high profile firm, for example, recently introduced a bonus scheme for assistant lawyers who worked more than 2,500 chargeable hours in a year. Such a scheme overlooks the need for work life balance, and if the bar on performance levels continues to rise, it could shift too far and actually become a detriment to performance.

Having said that, financial incentives can be extremely effective. A partner receiving a salary as little as 5% or 10% less than a peer will, despite the small discrepancy, feel psychologically less successful.

An element of comparability and peer pressure can either motivate the partner to up their game, or make the individual decide for themselves that it is time to move on to a more comfortable environment.

In rewarding bonuses, it is also important to distinguish between the hard worker and the workaholic. A partner who spends every waking hour in the office is not necessarily a greater asset to the business than one who puts in fewer, but more productive hours. Hours for hours' sake are of no benefit to the profitability of a firm, and performance should therefore be judged in terms of what a partner actually achieves, as opposed to the amount of time spent doing it.

Having an appraisal and awards system in place is one thing, but it is also necessary to plan for the possibility that certain partners will not improve performance simply as a result of such measures. Consistently underperforming partners should be reviewed more frequently than others and be set more regular targets. This introduces a means of comparison with other partners, applying peer pressure as a way of motivating and increasing performance.

Beyond this, the steps a firm can take depend on the partnership agreement and the firm's profit sharing arrangements. Those managing firms should tread carefully and follow a formal procedure in order to protect themselves from possible discrimination claims as a result of the careless handling of a delicate situation.

David Furst is chairman and head of professional practices at Horwath Clark Whitehill.