Assigning only small amounts of XP and loot to NPCs that aren't intended to be fought is probably the best solution. It still gives players the flexibility to play how they want, but it doesn't reward senseless violence or penalize those who opt not to kill needlessly.
I do feel tougher opponents, such as the guards, should be rewarding to fight, I feel the guards are in a good place of difficulty versus reward.
My party would generally complete all quests associated with an individual and then kill them (at least, we killed all guards). This was for the extra XP and loot, which was sometimes sizeable, such as the case of killing the 1st guards encountered on the beach.
The main exception to our killing was individuals who were shopkeepers, as killing them would prevent us from getting new items offered each level.
I am very pleased that killing shopkeepers no longer rewards ALL items they had been sold, this was very abusable in DoS1.
