It just occurred to me that the last episode's title, 'Michael's Gambit' is as intentionally misleading as everything else on the show. Consider the following:
After the reveal, Michael is still pretty damn pleasant for an exposed demon. He's nowhere near as bad as the "Bad Place" crew.
Michael is always fastidious and polite in the office flashback and only talks badly about people in his presentation, where he's trying to get Shaun to sign off on it.
Michael also never unjustly criticizes the cast: Chidi's work IS garbage, Tahani IS insensitive, Jason SHOULD be locked up for the safety of society, and he really did seem to enjoy Elanor's company when she was his assistant. He didn't have to enjoy Karaoke that much.
He did not need for one second to add all those exotic yogurt flavors. And he could have made the damage done to the neighborhood last a lot longer to guilt trip Elanor, or tempted her a lot more to where Chidi would have an actual breakdown because he thought the Elanor would destabilize the neighborhood into total collapse. This would not have been hard at all. And yet he didn't.
Most importantly, Shaun was with him when Elanor dropped the ball.
I'm not saying Michael isn't a demon, but he doesn't have the stomach cold-blooded torture, and he's not nearly as petty as knocking over the cactus indicates. He's so low in the hierarchy because he's seen as a sensitive weenie and has to act like an asshole to be taken seriously. And considering these are flawed, medium people he selected for his neighborhood, I think that was a deliberate choice. He's saving them from a fire and brimstone hell they don't deserve. He might have fun pushing their buttons, but he never goes out of his way to make them feel truly miserable. Even the swinger's couple ultimately relieved tension instead of making it worse.
I think therefore, Michael's Gambit pretending to be truly evil in from of his boss, and erasing everyone's memories was how he was keeping them from being reassigned to someplace much worse. It's not completely altruistic, as he does enjoy prodding these people, but he does have genuine concern for them after coming to know them and their potential. To acknowledge this however, would cause the entire project to be shut down.