[The following is based on my experiences in 3.5e, but from what I know about Pathfinder it should be trivially adapted. Also, I apologize in advance for what I'm certain will be a post filled with incorrect terminology -- I've been playing 4e for quite some time now, and it's been even longer since I last sat down with 3.5e.]
If you think Diplomacy is broken at level 5, just wait until you get to the Epic levels! This is where we were when my DM decided to address it.
They way he approached it was to completely ditch the static DC list -- static DCs make sense for climbing ladders (which don't typically get harder as you get higher in level), but they don't make sense at all when you're dealing with more and more experienced and powerful individuals; just like AC and other such things, as the CR goes up so, too, must the DC.
So he sat down and took the table of Diplomacy skill DCs and turned them into situational modifiers. I think he started with "Neutral" granting a +4 (reasoning being that changing people's minds is not easy, even if they don't dislike/distrust you), and then each step toward Hostile added an additional +2, while each step toward Friendly added a -2.
The resulting modifier was then used on the NPC's own opposed Diplomacy roll. Thus the table of Diplomacy DCs that is so trivial for PCs to game was gone, replaced by opposed checks to modify a character's attitude.
But he went even further. Between each stage on the "trust continuum" (i.e. Friendly, Neutral, Hostile, etc.), the DM added a "half step"; a successful Diplomacy check would move the NPC's attitude half a step, not a full step, thus requiring 2 successes to effect a change in the character's attitude. (When an NPC is on one of these "half steps", his/her attitude is the one "rounded" toward neutral; thus an NPC is effectively Neutral across 3 distinct "steps", but 2 "steps" for all others.)
Finally, he added one more thing: Continued successful/failed checks could move an NPC further than the ends of the "attitude spectrum", although no further mechanical advantages were earned. What it did do was make it less likely for the NPC's attitude to be changed later, by simply keeping track of how many "steps" would need to be adjusted.
These were the mechanical changes he house-ruled into Diplomacy. He also required certain role-play elements to also be met before a Diplomacy check could even be attempted -- the Halfling Bard walking up to the dragon and rolling an impressive 34 Diplomacy is just wasted effort if said dragon isn't even listening! There were also common-sense limitations imposed: a dragon who's entire life is centered around accumulating his horde is not going to just give it up, no matter how many Diplomacy successes the Bard accumulates!
There has been no clarification on the ambiguous "as if you had used Diplomacy" language. In general it's accepted that you can lay the Charm Person spell on someone, improve their attitude further with Diplomacy, and since those are two separate effects, when the spell fades they're left with however many levels of attitude improvement the Diplomacy did. As the Charm hex is of small benefit (1 level improvement) and short-lived (albeit a standard action and near undetectable), I see no reason not to allow it. Do note that the Charm hex works on animals and humanoids but Diplomacy only works on humanoids (whose language you can speak) so you'll need Handle Animal to get more out of animals.
Also if you're going this route please notice that before Helpful, there's additional checks required to get them to do things (with the Charm Person spell these are replaced with opposed CHA checks):
If a creature’s attitude toward you is at least indifferent, you can make requests of the creature. This is an additional Diplomacy check, using the creature’s current attitude to determine the base DC, with one of the following modifiers. Once a creature’s attitude has shifted to helpful, the creature gives in to most requests without a check, unless the request is against its nature or puts it in serious peril. Some requests automatically fail if the request goes against the creature’s values or its nature, subject to GM discretion.
What are attitudes?
There are only a limited stances or attitudes a being can have towards each other in the Pathfinder and d20 rules. This list is displayed under the definition of the skill as well as in Ultimate Combat under performance combat.
How this is determined, is often based upon a combination of the creature's entry in the Bestiaries (for example the Pegasus), campaign notes or the performance combat rules (for crowds). In the end, it is a GM choice based on circumstances and player behavior/attitude.
As a rule of thumb, most animals and humans are indifferent if the PCs (or other humans) haven't done something, while aberrations often are hostile.
It should be noted, that the GM does not need to inform the player about the attitude of an NPC and thus the DC of Diplomacy rolls, but often enough it is clear or just requires a simple spot motive roll.
What do attitudes mean?
Now, here things get a bit problematic, as they largeway go into the GM-Fiat-Land[Rule #0], and there are many places the attitude plays a role in Pathfinder - actually all the social interactions hinge on it, and they determine if an encounter is handleable with words (unfriendly and better) or demands a combat (hostile).
First of all, it should regulate the general behavior of an NPC to the (N)PC it has this attitude towards. A hostile being will attack, an unfriendly dog will bark or growl while an unfriendly guard might fine or arrest you for minor things, as long as you don't look like you'll question his authority and resist. An indifferent shopkeeper will not grant a discount, as that would harm his business. A friendly guard will give a warning after a tiny misdeed and protect you (as this is his job), but he might also arrest you because it is "best for you". A helpful ranger might share his prey with the hungry PCs without asking for payment and take some larger inconvenience for doing this (angering his landlord for example).
This attitude should be reflected in the behavior of the characters, but it doesn't need to be the same for all interactions: Grumpy-Guard, unfriendly to everybody below or equal to him, is also a brownnoser and helpful to his superiors. Or Captain Carrot Ironfounderson is helpful to a point, that it becomes inconveniencing to let him help you.
A good help is this thread on the messageboards of Paizo. I quote:
While D&D 3.5 as itself isn't a hard rule base for Pathfinder, it might be helpful for an aspiring GM to determine 'basic actions' someone is willing to perform based on it.
Now, where does this draw in rules wise?
There are a lot of feats, class features and spells that alter the attitude. One of the most prominent is charm person. All these usually pull from the attitudes above, but there are some applications besides these one can think of.
Something I haven't had yet looked into is one of the newer 'core' books: Ultimate Intrigue came out this April, and it is pretty much about social environments, at least judging from the index I looked on. Sadly it is not on the PRD at this time (Nov 2016), but what I got from skimming a few reviews tells me that the concept of a "social statblock" is in there, giving more pointers on how to approach people or what might result in which attitude they have to other characters, or how they behave in certain situations.
The rules in it can be found on the unofficial d20PFSRD however.
The attitude is meant to be a roleplaying hint about the standing or a NPC to others. Mainly for the GM its exact results are quite a lot GM-Fiat and just have to follow Rule #0 and Best JudgementTM.