Experience points are one of the most classic staples of roleplaying games. They're the primary means by which characters advance. They've also been nailed down and blamed for encouraging all manner of bad roleplaying experiences, such as grinding to reach new levels, or story-dumping for "roleplaying XP". So, what to do with XP? The best answer, probably, is to take a closer look at what it is, and what you want it to do in your story.
What XP Does
XP gets you stuff. That's really it. XP, in a nutshell, is what advances your character, giving capabilities to them as they journey onward. XP can mark ability advancement, character advancement, or both.
Why Give XP?
Let's take a look at the reasons behind giving out XP, for a handful of systems.
Dungeons and Dragons: Get XP for beating encounters, and sometimes for doing roleplaying stuff, but the latter is a house rule.
World of Darkness: Get XP for achieving character milestones, such as contact with supernaturals and victory over said supernaturals, or advancing the story and theme.
Mouse Guard: Get XP for doing things which build up your character, and which create drama. You also get XP for showing up.
With that examination done, we have a little bit of data, which I'll expound upon...
What Does XP Do?
These systems answer the question above in different ways. The answer to "what does XP do?" will shape the entire game experience, and is perhaps one of the most fundamental questions to answer, in terms of setting up a game. (I'm aware that this is more of a GM issue, but players should know it too) XP is the primary award that most games hand out to players, and so it's their primary motivation. This will be their go-to when all else fails, and it will always be around in their mind.
Let's see what each of these systems encourages through their awarding of XP. D&D is the most straightforward: awarding XP for beating encounters encourages a mindset geared towards beating encounters. Unsurprisingly, this is what a lot of D&D boils down to, mixed with a healthy dose of "just have fun". World of Darkness encourages characters to engage their environment, and to think about the world that's presented, and (particularly in recap sessions), this works somewhat, from my experience. Mouse Guard...well, that game is chock-full of ways to increase drama and character development, so I don't know if the XP awarding helps that much, but the goal is definitely to build characters.
What Do You Want?
In the end, it all comes down to a simple question: what do you want the characters to be doing? Experience points are a bit like the carrot on a string: where they lead, characters will often follow. As long as the carrot is made apparent, of course.
Most people reconsider experience points when they're dissatisfied with the way the game is advancing. One common complaint is that it becomes a hack-and-slash game. To that, the answer is simple. Stop giving XP for hack-and-slashing. Give XP for the achievement of goals, for example, and if that involves combat, so be it. Though combat might carry over its own side effects. Are the players too obsessed with following a plot that they forget to develop characters? Give XP for times when they create conflict from character motivations. You get the drill.
Just keep dangling that carrot, very visibly, and it should work. Hopefully.
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