Dude kill them all or they will come back later to haunt you.  And don't worry the AI is finding plenty of champions to make it a fair fight later on.

Again, MoM's system was simple, elegant, and it worked perfectly: as you became more powerful and famous, heroes started showing at your door to offer their services.

As it's been said elsewhere, heroes standing there with a lock on their heads is certainly not the way to go, for all the reasons discussed (though locks add colour to the map!!!). Something different is needed. Quests would work, but I wouldn't want ALL heroes to come from quests. A mixed system, maybe?

Hmm, some ideas:

• If you slaughter the other side's unrecruited hero, diplomatic penalties apply. For example, Kingdom kills Empire unrecruited champion "-1 You've killed our faction's champions". In addition, the opposite could be true, other Kingdoms might like it so +1 or w/e.
• Introduce early game defenses/bonuses to unrecruited champions so slaughter doesn't happen until closer to midgame - gives factions early game the chance to recruit. Maybe raise the hero level so that is recruited later and has the power to fight off early game attempts on his/her life.
• Treat heros like a lair - maybe champion minions travel out and attack opposing faction.

Isn't this how it was in WOM? I remember the cutscene you used to get when you killed a neutral champion. I did it anway 

Also mostly agree. Personally favoring the Heroes from Quests approach (making their significance to the game and the story told in it even more personal).
(A quest for each hero would remove a double-layer mechanics at the same tech where 1 layer would be enough. Might even save resources for memory ect and increase the number of possible quest-spots on the map. Heroes are often found in inns aren't they? )

If the MoM-System could also be implemented I would sure be all for it...

Otherwise giving heroes of opposing factions an army (appropriate to their level) for defense sure would be an option (sounds a bit complicated to implement.)

Or just make all of them hire-able for all factions (also makes the whole thing more simple and elegant while axing a tagged-on feature which doesn't play very fun... Heroes are hard enough to hire as is and mostly random which levels you get even from your starting spot...)

All 3/4 options sound reasonable and more fun than the current form of implementation with me clearly favoring the first option (simplicity + gameplay gain seems the hugest there, also seems like one of the more simple options to implement. )

They have to be one side or the other if they have Death or Life magic. 

You should not be able to get close to Legendary weapons just by killing an unsupported champion with hardly any hitpoints and no spells.  Agreed it is fun, but reward is way higher than the minimal risk you take attacking (and defeating) the opposing hero.  I think it would be better if they started a mini-faction, since normally the only way they can be killed is by defeating the entire faction they are on, and you could argue that they should not be able to be killed in a very easy fight before they even join a faction.

I like the idea of hiring champions from a city or tavern, the way HOMM does it - and as quest rewards would be great too.  And in HOMM, you can also rescue heroes from prisons - maybe in FE a hero could have been captured and you have to beat a powerful entourage - and this would require other balancing to make sure that 1. the guardians are tough (can't be wiped out easily), and 2. the hero reward is worth it.  Maybe the monsters could also be paid off with a high amount of any collectable resource, like gildar, diplomatic capital or even mana, and/or finely tuned diplomacy skills (obtained from diplomacy techs in the Magic tree)?  Although it probably would be better if the monsters don't also join you - getting the hero *and* the monsters would be a bit much.

This also relates a bit to Heavenfall's implementation of Dungeons in WoM, however there could be a specific quest for a specific hero in a specific, customized Dungeon that has some RPG elements - stat-based choices, resource-based choices, tech-based choices.  And because it's a dungeon, you could definitely have monsters allowing your hero to go free if you have the right stats, champions, traits, spells, resources or techs and them just disappearing into a tunnel (which they then collapse conveniently behind them ) and so you don't get the monsters as well.  (Having the monsters on the adventure map would cause a problem as where do they go if you convince them to free the hero?  If you defeat them they would disappear, but paying them off or convincing them to leave would pose a problem.)