Yes, troops above a certain level take more than one spot. Since it's apparently hard to make them take in more spots, they just decrease the max size.
If you want to build up an army of many troops that aren't really good, you can take Rhodok infantry (leave them at the third upgrade) and Khergit cavalry. Well, for archers, the only good archer who shouldn't take up a lot of space is max tier nord archer who should take 2 slots if my memory is correct, but the problem with these is that they have terrible armour and they often use their throwing weapons instead of bows. I once had an army with 30 archers, all top tier Nord. I went to siege a castle, put them on top of my party list, hoping their fast bows would take down the enemy clusters but what do you know, they all showed up with throwing axes that didn't fly high enough and got killed in less than a minute. If it weren't for Rolf, I'd be dead.
My advice is to take top-tier troops though, your army will be smaller, but you will be significantly stronger.
Try something like this:
50 Nord paladins (top-tier Nord infantry, OP lads in heavy iron and ginormous axes)
20 Vaegir archers (seems to be the best kind of ranged infantry in this game, the troops are fast, so are their bows, so you can position them on a good hilltop in about a minute, plus their armour is quite alright)
10 Swadian, Khergit or Vaegir melee cav (just to finish off the routers, this mod is generally easier if you base your army on infantry).
That's roughly what I have. Now, I built up me and my companions so that they're multitasking tanks. Each one has an OP unique 1H+shield/2H and a (cross/)bow and arrows. I usually charge with those when fighting infantry.
When you're fighting cavalry, it's best to take all your troops to a hilltop and put them together. I tried facing the heavy Dark Knights with cav, but it was hopeless. I clustered up my troops, left the heroes on the first line and blam, they got rid of the horses, and the inf and ranged killed the dismounted enemies with throwing weapons or arrows.
Hope this helps.