The tricky thing with trying to get a good kill rate balance in RTW is that there are two kinds of 'clashes' in any given battle. There's the small skirmish: maybe a couple of infantry units going at it alone; then there's the big melees with several units piling in from all angles.

If you reduce kill rate by too much, those small skirmishes tend to become drawn out tedious battles of attrition. The fact that I had 2 auxiliary units fight for 10 minutes before altering anything but morale highlights this, and adding hitpoints or lowering lethality would make the event comical. But then in the larger clashes where units are fighting on many fronts, without reducing the killrate, entire units can be wiped out in seconds.

Even with lowering lethality and increasing morale, a cavalry charge into the rear or flank of a unit will destroy it fast, as will a bunch of irate axemen or whatever. In RTW it is incredibly easy to flank the enemy, so you end up wiping out your foe pretty quickly. So do you compensate for this and end up with upsetting the balance of the smaller fights or what?

I really think one of the biggest problems with kill rates is something that is difficult to resolve. That is the silly rate that routing units die at. As soon as you rout a unit in close combat, you barely have to do more than just touch them to kill them. Tough elite units crumble like mere peasants and sending in several units to make sure you kill them off becomes a familiar sight. Because of this you try to over-compensate by making sure units don't rout too quick in the first place, even if it upsets the balance. Really CA ought to make killing routing units far more difficult so you are less willing to chase after them, which would also give them a greater chance of reforming and getting back in the fray.

When all is said and done though, I definitely think it's worthwhile tweaking morale and lethality and even movement speed by a bit, just to give a slight improvement over the vanilla battles if nothing else. Hitpoints and extra defensive bonuses are a possibility but are more likely to upset the general balance of things unless more effort is put into tweaking them.