So, from my experience:
1 - One can absolutely set the size-values of the height-rvt too high. I am using a 2k heightmap on a landscape 2033x2033 and have size settings of 10, 1, and 2. If I set the values higher than this, I can see the same stair-stepping you are getting on your lighting (and the mesh). I believe very high values will be more viable when nanite comes to landscapes/VHFM.
BTW, I can also confirm at higher resolutions there is also a significant performance penalty. I can step up a few values from the above settings before I get the stair-steps but the visual fidelity is only visible EXCEPTIONALLY close.
IMHO, there is surely a ‘sweet-spot’ you might have to fiddle to find. Larger tile-counts are better here vs larger tiles. Since the heightmesh uses a tiled-lookup, more tiles means better granularity (smaller sections) of landscape it has to troll through. This helps reduce unwanted overhead for stuff you might not see.
If I had to guess, the stair-steps are an artifact of setting the resolution of the height-rvt to something beyond the pixel-size of the source texture, but I’ve not tested…
2 - DeriveNormalZ works best when used before rendering to the RVT. Whenever I used DeriveNormalZ after sampling the RVT (in an effort to save a channel), I kept seeing artifacts pop up. I don’t believe that the RVT/VT’s are well suited to feed DeriveNormalZ. Unsure if you are using here but it had similar visual effect as what you showed.
3 - Otherwise, make sure you are using worldspace normals when using RVTs.
4 - The collision is a bit mucky since the mesh is not 1:1 with the landscape, which is why it’s best used for small details, rocks, etc. You can always make your landscape larger than you need and scale it down to increase the vertex-density (on top of import settings). However, the fact that you can clip through the mesh, helps let things like deform-able snow and the like work.
Finally, admittedly, I am working in 4.26.2 as my heightmesh and/or material seems to break in v5. I realize this is not apples to apples with what you are doing, but the suggestion I made should still apply. I feel v5 is just-slower in many things out of the box…