They didn't necessarily think that giving him a big head would be scary, but that if they dehumanised him further than just covering his face he'd be scarier. And they were right, it was scarier than just a man in a mask. People know how to kill a man...but very few know how to slay demons.
but... man... seeing a dude, standing htere, totally motionless behind those bars in a mask (when we first see pyramid head)... that would be a whole lot scarier, i do believe...
that's just my two cents though, cause i love the theories you've given