That seems to be a conglomeration of the rules from RTW with the Barbarian Invasion horde mechanic thrown in. In RTW, occupying the city got you about 1 gold for every 100 population. The population was left intact, which could cause public order penalties if the population was high (there's no penalty for different culture in M2TW, is there?). Exterminating killed off 3/4 the population, but got you 10 times as much gold: 1 gold for every 10 population. In M2TW, it'll lower your relations with the faction that owned the settlement before you took it, and with the Papal States if the previous owner was Catholic. Sacking was possible to hordes in BI. In BI, sacking a city killed off about 80-90% of the population, brought in a little more money than extermiting, and had a chance (not automatic, just a random chance) of damaging buildings in the city. I don't know how closely that's followed in M2.