It's just a very old figure, but wasn't very noticeable in the first two films, as they were shot in standard definition. However, with the use of a new high definition camera, it became much more obvious. The creators considered using a newer head for the film, but instead decided to keep the original head.
It is not mentioned in the film that his head is particularly damaged, but it is said that Mike was in the S.A.S. so he could have received the injury during his service.