How tightly you want to fit in your boat is a matter of personal preference based on your comfort level and the degree of control you require. Obviously, ease of exit is a concern. Most individuals find that it is much easier to wet exit a tightly fitting boat than it is to exit it sitting on the ground dry. Once you pop your spray skirt the water tends to lubricate the surfaces and once you are inverted, your body is pretty much weightless underwater. Still, after any changes that make your outfitting tighter, you will want to practice wet exits in a safe environment with an assistant near at hand.
In order to effectively brace and roll, you need to have the motions of your knees and hips translated to the boat without a lot of slop. This means that you must be able to brace your knees firmly up against the bottoms of the knee hooks, and the sides of the kayak must make firm enough contact with your hips so that you cannot lift your butt up off the seat more than an inch (at the most) without the boat coming along. Although you must be able to brace your knees firmly against the braces, your legs don’t have to be permanently jammed against them. Adjust your foot pegs so that by pushing with your forefoot you can push your knees firmly against the braces. Then when you relax your feet, you should have a little room between the thigh braces and your knees. Adjust your back band so that when you push with your feet you cannot force your bottom back on the seat pan.
I would ditch the happy bottom seat. The hip pads are really not effectively shaped for good control and are not easily modified. The padding on the seat bottom may also be raising your center of gravity too much and forcing you up too high against the thigh braces. I would suggest trying a set of pre-shaped minicell foam hip pads of the type that were widely used in old school whitewater kayaks. Here is a video showing how those look and how they are installed:
Note: instead of the H2 glue suggested in the video, I would use DAP Weldwood contact cement (flammable variety in a red and black can) which is cheaper, just as effective, and available just about anywhere including Walmart. Use at least two layers of cement on the foam, and I would lightly sand the back of the foam pads before applying the adhesive.
As you can see from the video, the pads are thicker at the top and provide contact at the top of your hip. Usually the pads are made too thick for most people and need to be trimmed down. Start sanding down the aft portion of the thick part of the pad first, and check the fit as you go. If you trim off too much, you can glue a thin sheet of 1/4" thick minicell to the pad and start over. If you find the plastic seat pan to be too hard after removing the happy bottom seat, you can also use 1/4" thick minicell to make a seat pad. Just make a template of the seat pan out of some packing paper, trace it onto the minicell foam, and cut it out with a scissors. Glue it in with Weldwood contact cement as for the hip pads.