This isn't illegal because of the compensation involved, it is illegal because there is clearly no common purpose to the flight, common carriage applies.
In order for the flights to be legal, the guy would first off need a commercial pilot certificate, and secondly he would need a 135 certificate because the company he is providing transportation for for does not have operational control over the airplane. For that matter, he'd need his own airplane, or the FBO would need to be part of the 135 certificate.
This operation needs to stop. As I said before, take it up the chain of command at your FBO. What should happen is they will probably cut the rental as this would clearly violate any FBO rental agreement and the FBO insurance policy, and also a kind letter to the renter's company explaining the situation (they probably don't know the ins and outs of FARs) and why they will need to find alternate transportation for their employees.
You may have a legal duty to report to higher-ups, because if an accident does happen, the investigation will discover that the operation was conducted illegally, and the investigators will start asking questions at the FBO. When it is determined that an employee of the FBO had knowledge of the operation being conducted, the FBO will no longer be free from liability UNLESS they determine that you had a duty to report to them (you do) which was not followed. At that point, you'll be fired and open to any liability in civil suit and possibly certificate action as well.
I'm not a lawyer, but looking the other way is a bad idea.