My boss talked to me about reorganizing my department structure where he would like to move someone who is currently my peer, although not with the same level of responsibility that I have, under me and would have another engineer in my department report to him (this person is currently a Program Manager and has no one reporting to him). I also have an open position for an additional engineer and he wants me to change this position to another Program Manager position and have my other engineer report to this new person. In addition to that I have a 3rd engineer and a supervisor that the direct labor group reports to (12 ppl - my skips) who would still report directly to me.
He says he wants to do this to help me be able to work at a more strategic level and have other people under me that are dealing with more day to day tactical issues. I have been overwhelmed with my work load and have been looking to him for ways to alleviate the situation so I do appreciate his wanted to make changes. However, I have some concerns.
The person he wants to move into my department has been a poor performer that probably should have been let go or had the "come to Jesus" meeting over a year ago. My boss finally gave him some harsh feedback during his performance review a few weeks ago, but it hasn't been long enough to tell if there will be any true improvement.
The engineer he wants to report to the person mentioned above has been with my company for about 6 months and he has been struggling to succeed. I am struggling to manage him a little bit because I think he requires more hand holding than I have time to give or than someone in this position should require. I'm not sure how hard to be on him since he is still relatively new to the company. I have tried to set certain goals / objectives for him which I think he is trying to meet, but I just don't think he always knows what to do.
The other engineer I have in my group has been doing a great job and we have a very good relationship. I know that she has been feeling a little stressed and overwhelmed (as have I). I would really like to be able to reduce her workload to something more manageable.
I am concerned about the challenge of managing the new person that my boss wants to add given that he has been a poor performer and I don't know yet if he's going to turn things around. He has managed hourly employees before, but I'm not sure what his experience is with managing engineers and I am concerned with his ability to manage the struggling engineer. I also don't know if it is appropriate to basically promote him (although my boss says it wouldn't be a promotion) by giving him someone reporting to him when he has not yet proven himself as a good performer himself. I am also concerned about my other engineer and the plan to put her under the new person I am looking to hire. I have developed a great coaching / mentoring relationship with her and she is really excelling. I don't want to put a wall between us by making her my skip.
Does anybody have any suggestions / thoughts about this organizational structure and the concerns I have mentioned?

Collaboration
This is an opportunity to collaborate with your manager.
Sounds like he has your best interests at heart. Share your concerns, and place them in the context of wanting the team to be maximally productive over time. You will need to have specific recommendations of your own, though, so here are some things to think about:
Balance is good. Having a manager who manages one person might not be a good idea. The right number for "span of control" will vary with the work, but 5 to 10 would cover most managerial roles.
Match the skills to the job. If someone is struggling, find a role where they can succeed (ie, match their skill level to the job).
Delegation and coaching are your best strategies. You need to help your team be more successful, but distributing work downward. By identifying what work can cascade down, you can identify who might fit best where.
Re-orgs are hard; there are almost always trade-offs that leave someone in a less-then-ideal situation. Stay in touch with the productive goals of your group, and organize around that. Folks are happiest in their work when the team is most productive.
John Hack
Don't re-organize people .. just change responsibilities
Generally speaking ...
IMHO flatter is better in small organizations. I would simplify structure rather than complicate it. Worry less about who reports to whom, and more about who is responsible for what. Identify the things that your manager wants you to be doing and the things that he wants someone else to be doing, and come up with a plan that delegates the latter to others.
As you know, managing/supervising is hard. Don't give supervision responsibility to a marginal performer, unless that person has demonstrated competence at supervision previously. The likelihood of the supervision being done well when the person is already struggling is small. Remember, when you give someone a crappy supervisor, you are hurting the subordinate at least as much as the supervisor.
About the specific proposal ...
Thanks for the feedback
Thanks John and tomjedrz. You both raise good points. I have discussed this some more with my manager and raised my concerns regarding putting the current PM in a position of authority over the struggling engineer. I also suggested we look at the roles and responsibilities for each individual before we decide on reporting structure. I did suggest to him that I thought that it may make more sense for them to work together in teams to support their respective product lines than to have the engineers report to the PMs. He is open and listening to my suggestions, but there is still a lot to figure out and decide out between us.
One thing that makes it a little difficult is that I do believe that my boss is looking at this as a bit of a sink or swim opportunity for this PM and is maybe trying to test him. This does not jive very well with my management style. I suggested to my boss that I felt like this employee was more likely to take it as a "reward" that he was being given someone to report to him and that may demotivate him from further improvements instead of having the opposite affect my boss is intending. I think he is starting to see it from my perspective and agrees that although we still want to move this person into my group, we shouldn't have the engineer report to him right away (if at all) as this person needs an opportunity to prove himself as an individual contributor first.
Thanks again.