This is merely convention and not in any way required. Some games, like Beneath a Steel Sky or The Dig, forego this to have a more proportionate character but mainly it's an issue of getting more details to the face for expressiveness, especially in the case of games like Monkey Island 1 and 2, where Largo's stickup couldn't be portrayed as humorously if Guybrush didn't wipe away tears after having all his riches stolen, or make that look of embarrassment when his spittle dripped down his lips. It's one of those low-res 'tricks' pixel artists use to get more out of the small resolution than would be reasonable if, for example, they made the entire body 100% proportionate. I tend to use this for more light-hearted games or when I want characters to show expression without the use of a dialog portrait.
