I have to say the pay is by no way "spoiling". It is no where near the top tier pay (for interns) seen in the industry.
There's no way I would've turned down the Fog Creek opportunity back then, though, it sounds like a very well planned program at an awesome company. There were many internships in the Philadelphia area, for developers, that paid half that salary with no perks on top of the pay at all. On the other hand, the interview process at nearly all the companies consisted of sending a resume and sitting down for 30 minutes to talk about past experience. I interviewed at 4-6 companies a year to get my 3 internships, with a ~75% acceptance rate (offered the internship), and not one involved multiple interviews or a single code screen. The west coast interview process just doesn't exist out here.
Palantir - 7,500 - 1,200 for housing if you choose
Facebook - 6,200 + free housing
Salesforce - Varies per year, 34.50/hr for rising junior, housing.
Cisco - 22/hr
Quora and Dropbox are both missing from this list but they both have higher salaries than Palantir, but not by too much.
[1] http://www.glassdoor.com/blog/25-highest-paying-companies-in...
Also, there are other places in the industry that pay even higher. But I'd include those with Quora and Dropbox as Tier 1.
In short, Fog Creek is at most Tier 2, along with Google / Facebook, etc.
As covi mentioned, Palantir, Quora, Dropbox all pay about roughly the same but are very willing to negotiate and pay more if necessary.
Are 4 interns really more useful than 3 seniors? Really?
You're paying for more than the intern's time - you also get first crack at hiring them full time (with a 3 month interview to decide who you want). In the current job market, that's worth quite a bit.
Those interns will turn into salaried FTEs whose first three year's annual compensation – amortised signing bonus, stock grants, and performance bonus included – will be ~150k. Compared to new graduate FTEs, interns are positively cheap!
The ~6.5k, housing inclusive, perks out the wazoo also all come from highly profitable, competitive companies falling over each other to recruit from a highly constrained pool. There are only so many Stanford, MIT, and CMU graduates a year, and an even smaller number of hackathon winners, open source contributors, inveterate interns, etc. For many, this is the last time they'll ever openly be on the job market.
I didn't find the groceries/food to be all that expensive.