They're paying you to ally because your power rating is far ahead of theirs - so the AIs are basically recognizing that you could stomp them in a war even though you choose not to, and thus they decide to give in and cooperate without forcing you to kill them. The alliance victory makes sense in theory, but there are some issues with it.. I would say that these issues have more to do with the power ratings and diplomacy in general, though, not the alliance victory per se.
Problem one is the power rating calculation is woefully inaccurate; it's weighted heavily for population and sheer number of troops, without caring as much about technology or equipment or experience/levels. It thinks enough (and not even very many) naked club-wielding militia > a level 30 sovereign with the best quest gear. Meanwhile the combat system favors the sovereign - and that's not a bad thing imo, the power rating just needs to realize it. Problem two is diplomacy in general hinges too much on power rating, which would be a problem even if it was accurate. AIs will never consider, say, teaming up against a stronger player, they just gang up on the weakest player and effortlessly give in to the strongest player.
Anyway as everyone has said, the easy way to circumvent these issues is to find a difficulty level where the AIs can roughly match your power rating. That way none of the diplomacy wierdness associated with dramatically different power ratings comes into play, the diplomacy AI is actually pretty sane when power is equal.