I come from a journalism background and am very interested in the dying style of narrative journalism, or creative non-fiction. I was discussing a project with a potential editor and said I didn't want to do any composite characters because, while I get that narrative techniques (scenes, dialogue, plot) are the crux of this type of writing -- it's still non-fiction. She seemed to think that composite characters are the norm and expected which just makes me shudder a bit. What do you think? Are composite characters in a non-fiction piece ethical?
I would encourage you not to do something you find unethical. The writing will suffer, and it probably won't be worth the rewards to put out a product you regret.
I think this article on the subject of creative non-fiction is a good one. The "cornerstone principles" it describes are:
Do not add. This means that writers of nonfiction should not add to a report things that did not happen. To make news clear and comprehensible, it is often necessary to subtract or condense. Done without care or responsibility, even such subtraction can distort. We cross a more definite line into fiction, however, when we invent or add facts or images or sounds that were not there.
Do not deceive. This means that journalists should never mislead the public in reproducing events. The implied contract of all nonfiction is binding: The way it is represented here is, to the best of our knowledge, the way it happened. Anything that intentionally or unintentionally fools the audience violates that contract and the core purpose of journalism to get at the truth. Thus, any exception to the implied contract even a work of humor or satire should be transparent or disclosed.
Going by these rules, I would say that if the work purports to be nonfiction, any fictional elements within should be declared as such. This might be as simple as a little blurb at the start or end of the book. The amount of detail in such a disclosure would largely depend on what satisfies your own ethical sense of being honest to the reader.
Ask yourself this: "If someone were to write a detailed analysis of how my account differs from actual events, would any of it make me ashamed or embarrassed?" If so, you need to remedy that by adjustments to the text, through disclosure of these differences to the reader, or maybe even by giving up the project.
I can see where your potential editor is coming from - a few years ago there were a slew of stories about supposed memoirs being half fictional and half true. It certainly makes an interesting piece when authors do that, and it can be done quite well.
The catch is, that's not non-fiction. It's something halfway between fiction and non-fiction. For writing like that we ought to revive another old genre - the tall tale.