Letting prisoners go is actually a good idea sometimes, since the AI has to pay for their upkeep. Prevents him getting better stuff into play. For example, I rout a French army of peasants, town militia and some archers that has been around since the game's beginning. I let them go and they retrain to full strength. If they come at me again I know that I can beat them easily. If I kill them all then the French might fill their upkeep cost with armored sergeants and chivalric knights in the next stack he sends at me, since he has teched up quite a bit in the intervening period. I have actually made my life harder and missed out on the chivalry and diplomatic bonuses.
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