It is somewhat common, but mostly unethical. Some companies do this without the intention of hiring and paying for a top candidate, but maybe they can get, essentially, a free solution to a very specific, discrete problem, or at least can reverse engineer the right direction they should be going based on the work that this candidate produced for them.
Completely agree with Erik - if they want you to produce work product for them, they should be compensating you for your work.
Stop asking design candidates to redesign your product. It's unfair and unethical