Is there any way to spare Lord Paladius without leaving him in control of the cult? It strikes me as somewhat odd that the light side choice is murdering him, exile or something would make more sense.
No, there is not. You either kill him (light side) and fulfill the bargain Zash brokered with those two to have them lead the cult, or you spare him, make him lead the cult in your name (dark side) and step the other two in the back.
Paladius is a, big, fat, irredeemable sloth and a monster who benefits from having the poor people of Nar Shaddaa worship him and gives death to those who defy him. You can't just kick his butt and tell him to ****, he's got too much pull on Nar Shaddaa and sparing him would make him a potential threat for the Inquisitor later in the story.