well its bad configuration the variable only needs width if u specify height then all the in the css it will force the image to that height it only looks like that on the userinfopane but if u go to his profile it should show the image was resized well unless u configured the css for there too however just follow the below and it should work for u
SystemSettings/Members/UserProfiles: (it specified width there nothing about height)
http://oi59.tinypic.com/n2lx06.jpg
change setting to 165
CSS/ipb_style.css: (ur forcing ur image to stretch to that particular height even though the dimensions arent suited for it)
http://oi57.tinypic.com/mryfyb.jpg
change .ipsUserPhoto_variable to
.ipsUserPhoto_variable{
width: 165px;
}
that will fix ur problem