Somewhere out there - perhaps even in the game manual - population is described as the tax-paying, weapon-toting, card-carrying members of your empire.  That is, it's not the entire population, just the ones loyal to you.  That's why planet populations can grow so quickly.  The planets are considered to be filled with an unspecified population that isn't part of the empire.

So, you don't massacre the entire population; you just exterminate the citizen-soldiers of the enemy, who apparently either fight to the last or retreat back into the native population to avoid paying your taxes.