A few notes, though everyone is touching on important things:
Many MUs aim at reaching a certain "critical mass" wherein the game can sustain its activity on player inertia alone, so that staff don't overwork themselves into burning out. Catering to only one sort of player ("story players", "XP players", "TS players", "combat all-the-time players") will usually not allow you to reach that critical mass. There are always exceptions, so no one needs to roll out their list of examples.
On @Seraphim73's Karma idea, and touching on some of @Pandora's critique of it: it's not bad. I would aim for a middle ground. Pick a number of "areas" a character can be skilled at (I will go with 6 and all my examples hereon will work off of that)--say, "combat", "academicism", "mechanics", "socializing,", and "sorcery"; then create some subgroups--("combat with swords", "cavalry combat", "war strategy,") ("history," "physics," "chemistry,"); ("automobiles," "crafting weapons," "improvisational mcgyvering"); ("throwing parties," "animal husbandry," "manipulating allies,") etc, etc.
Then have a character pick 1 Area they are good at, two ares they're okay at, two areas they're very average at, and one area they're bad at. We will give these ratings: 4, 3, 2, 1.
- This is your multiplier. This is the value of each spent Karma point. Someone good at combat will get a lot more value out of spending 1 Karma point than someone who's average at it (twice as much, in fact) but if they are low on Karma points, and that other person isn't, they might just lose a fight against an inferior opponent anyway.
- It's also the value of the Karma points you get per failure. Since in this type of system confrontation is basically a bidding war, you usually spend a lot of Karma when you eventually do spend it--so when you fail at someone, you get a number of Karma points equal to the value (so if you're good at combat and get your ass kicked in a duel, you gain 4 Karma points; but if you're bad at combat, you only gain 1).
- This number is also the amount of days/weeks/months/[time period decided by the game devs] you have to wait before you can gain Karma by "losing" in this particular area again. For example: you are good at combat--but you lost a duel. Sucks. But you get 4 Karma! However, you can't gain Karma from losing a duel again for another four days. If you DO, you get a Tick. Five Ticks, and your rating in that area goes down. You're obviously not Good at combat, you're just Okay at combat.
- On the other hand, if you're really badf at combat, you can lose a duel every other day and get 1 Karma point each time, since you only have to wait a day to pass. Combat isn't important to you, and being bad at it is part of your character, so you're consistently playing that aspect of your character.
On a tie, the character with the most amount of applicable sub-specialties (as exemplified above) can decide the outcome--they can lose on [OOC] purpose (barely), or declare themselves the winner (barely). Their specialization gave them the upper hand or made them too cocky, or whatever other justification they want to cook up.
If both players have the same amount of sub-specs that apply, they can bid Karma again. If it ties again, roll a single die or flip a coin, or whatever other method you want to break a tie.
You can only ever have 1 Good area. If you drop from Good to Okay, you can work your way back up to Good by spending Karma points to succeed without failing. Five successes in a row can raise you a level.
Through losing levels in Areas, you can't havemore than 6 Bad Areas (because there are 6 areas, but if you choose a different number, that number). You can't have more than 5 Average Areas, you can't have more than 3 Okay Areas, and you can't have more than 1 Good Area (all this working within the '6 areas' example).
Your absolute best spread is your initial one; but this system allows you to switch. Maybe you want to have your initial combat dude become a sorcerer, etc.
Some things can cause you to drop in quality. If you lose an arm, your Good Combatant probably becomes an Okay Combatant, at least until they find a way to overcome their missing limb, etc.
It's not perfect, but it would force people to focus on playing up their flaws and rationing out their "moments of awesome".
Last thing: more and more I am largely an advocate of XP being a player-gained thing and not a character-gained thing. I am so tired of the math games. You want five characters? Fine. You get to spread all your XP however you want among the characters. The person with 1 character is obviously going to have a more concentrated spread (i.e. only one character) but will also only have that one character. We give XP for people doing cool things, and this would also pretty much get rid of a lot of people's concerns (those who value XP anyway) when it comes to character death.
I can't tell you how many times "but all my XP, I had like 3000 XP on this character and now they're dead! What a waste!" Guess what, now it weas all YOUR XP and what you spent on the character has been funneled back to you and you cans pend it however you want. Make a new character, buff some of your other ones, I don't care.
Again: not perfect, but so much simpler, and directly rewarding to the PLAYER, and not the abstract concept of character they created to represent their power fantasies.