I'm DMing Without XP, and my Players aren't B*%@#ing about It

I have received some ... dissenting opinions in response to my post "Eliminating XP."  The general theme of these responses is that XP are a good way to reward characters not only for the typical reasons, but also for ingenuity and playing in-character.  I attempted to advance the idea that these could be rewarded using game mechanics other than XP.  However, my initial post doesn't really go into this--it glosses over it with links to another post wherein Hero Points are discussed in an epilogue.  I have since made an effort to gain some experience with this type of play, and will share with your my experience and insight.

As most of you should be aware, I have been running a Pathfinder campaign since last fall. In this campaign, I have chosen to avoid experience points.  My regular players include two D&D veterans, two players with only a couple of years experience, and two brand new initiates into RPGs.  When I informed them that I would be awarding experience levels based on attendance and participation instead of combat, no one complained.  When I told them they would receive Hero Points as rewards for special actions, they didn't really know what I was talking about.

Character Concept & Party Bonding

"You wake up and find yourself in a cell with three strangers.  The last thing you remember is being attacked by a group of thugs ..."

"The bartender tells you that the hooded man at the corner table is looking for a few good adventurers.  It looks like three others have already found their way to his table.  He noties you looking, and beckons you over ..."

"As a member of the local adventurer's guild, you have been given an assignment to work with three other apprentices ..."

Just throw the party together on the first day, and they'll get along fine--each with his or her own agenda, each optimized to survive alone.  If the party doesn't get along, you penalize the players for not acting like a team.  Except, they aren't a team--they just met, and know nothing about each other.  While I have often use this method in the past, I would like to repent of my ways and move on.

The system presented in FATE is a great way of not only conceptualizing characters, but also unifying a party.  So, I figured I would adapt something like it as "Step Zero" in the character creations process in my games of 5th edition.  To do this correctly, the entire player party should be present without having yet created characters.  Players should have an idea of what they want their characters to be, but should not have put anything to paper yet.  For the party to be cohesive, every element should be fleshed out together.