In a company full of slackers, how can we regain productivity?

1. Define expectations in a memo to all staff regarding breaks and productivity etc. This makes everyone know you are aware that this is an issue, it also gets everyone on an even playing field- no one can say they did not know this was unacceptable. It is also reasonable to define "stealing time" and outline that this is a punishable offense up to and including termination. Enforce the items in the memo or you will never be respected.

2. Make the middle managers accountable for their employees performance- that means keeping an ear out for personal calls, walking around the office glancing at computer screens and into the break areas etc. Let their presence be known. If it is to the point that the manager's presence doesn't matter, then it is time for the managers to speak up. "Bill, I'm sure you've clocked out for your break while you are surfing the internet". If he says no, either get back to work or make him clock out. He'll get the message.
3. If the internet is a major issue, you can block websites like My space. Make mention in the memo that goes out that since the company provides internet access and the computers, there is no expectation of privacy and therefore all emails and web pages are subject to monitoring.
4. You should have internet usage, clocking in and out procedures, breaktimes clearly discussed in your company policies. If these issues are not in there- add them asap and make everyone sign that they have read the policies and have had an opportunity to ask questions.
5. People are not robots, they need to be social to some extent and not be micromanaged, but when the time comes that they are taking advantage, its time to step it up and take your control back.

You might consider a "pay for performance" system - there are many websites that describe this model.