If your employee is responsible, he'll care about his job to be productive, even if you don't watch him. If he isn't, then no amount of watching will make him responsible.
You shouldn't constantly monitor your employees. Instead, give them time to clear their mind and do non-coding-related activities such as:
Play computer games.
Browse the web.
Watch videos or listen to netcasts.
Read articles or books.
Work on open-source software or their own personal projects.
Chat with their co-workers or online peers.
Take walks in the neighbourhood, do sports, go to clubs and other activities.
These tasks and others don't interfere with the work much, and actually contribute to productivity. And along with pair programming, you can be more certain your programmers will work. Don't judge your employees by how they spend their time at work - instead judge them by the overall progress they do in the long run.
Moreover, some tasks that your employees do at their free time, may eventually bring your company publicity and esteem. Part of the reason Joel Spolsky's "Fog Creek Software" company is so well-known is because of the Joel on Software blog, which is one of the most-read weblogs about software management. This in turn resulted in a lot of publicity to the Fog Creek products.
If your employees are productive, you should not really be concerned what they are doing on their work time.[EricSink] Google allows its employees work on non-work-related-tasks 20% of the time (while Google still owns the intellectual rights to their creations). I would go a step further by saying you simply should allow your employees to do as much non-work-related leisure as they feel they need to on their working hours. Tell them you expect long-term results, not 100% productivity-of-time.
[EricSink] Eric Sink wrote a wonderful entry about the tolerance of his former boss on his weblog. (Here's an update.)