Yes, it was excessively severe but SMU's actions at that time painted the NCAA into a corner where they needed to either give SMU the punishment both agreed would be applicable if SMU continued or send a message to evereyone that the really won't impose threatened penalties.
Yes, most of the better football schools at that time (and the entiretly of the SWC) had been paying players going back to the depression days. In most cases however, it was done in a blink, blink, nod, nod manner where officials within the schools, athletic departments and leadership of the coaching staffs could claim "I knew nothing about this". SMU had weekly meetings (termed 'board meetings') where school officials (including the president), athletic department officials, members of the coaching staff and boosters discussed the football team's needs, prospective recruits, what they believed would be needed to land these recruits and how to best reach these goals.
Beyond this, they had be caught red handed three times over basically six years and reached an agreement on the third time (to keep the penalty somewhat reasonable) that among other things they would stop paying player, with the next penalty being the death penalty. Within a few weeks of this agreement, someone (likely one of the boosters, working with the school president) resumed payments to a few players that had been promised them a couple years earlier during recruitment. When leadership at the university changed, the payments stopped and the players were told that because of the NCAA ruling, the school could not pay them. One of the players, angry that the payments stopped took the stamped envelopes of the payments he did receive to a local newspaper. If they never paid after the ruling, the player could have complained and SMU sould have responded "Yes, we admitted guilt and agreed there would be no further payment.". As they violated the agreement, the NCAA had little choice but to impose the death penalty.
