We still seem to be having trouble achieving a balance with champions.  In earlier betas we used them almost exclusively in massive stacks of level 20+ death, decked out in every piece of loot we could acquire.  In 0.86, unless you like 1/2 or 1/3 experience penalties, you only use one at a time and you can only equip 4 extra items.  While I think that these are generally good changes, they create a situation where champions are always attainable, just not useful.  Using more than one at a time kills the experience, and experience is king.  I tend to hire whatever champions I come across just to keep them out of the hands of my competitors, but I can't actually use 10 champions.  Not as real champions anyway.  The extras just sit around in my cities as defensive fodder, increasing my faction power rating so my neighbors don't get uppity.  This is no life for a champion.  But what is the answer?

First, I would suggest that the experience penalty, while effective at killing the hero stack of doom, is a bit too steep.  It effectively nerfs using more than one champion at a time.  It should be viable to have two heroes working together.  It is also still possible to power level trained units by putting as many as possible in an army.

The experience distribution should be one that takes into account the level of the participants on both sides.  Perhaps modifying experience by 10% per level difference of the highest level troops of both sides.  Since heroes are immortal, they will likely be the highest level troop, and will limit the experience of the other participants.  This would encourage using equal (or lower) level troops and champions to maximize experience.  Add an extra reduction (or bonus) of 15% per champion on your side, and I think you would have a fairly balanced system.  Lets try some examples:

Enemy:  100 exp base value, highest level: 5

Situation 1:  army with 2 champions, highest level: 4
Exp = 100 exp + 10% (level difference) - 30% (2 champions) = 100 - 20% = 80 exp

Situation 2: army with 1 champion, level 7
Exp = 100 exp - 20% (level difference) - 15% (1 champion) = 100 - 35% = 65 exp

Situation 3:  army without champions,  level 3
Exp = 100 exp + 20% (level difference) = 120 exp

Enemy: 300 exp base, 2 champions, highest level: 7

Situation 1:  army with 2 champions, highest level: 4
Exp = 300 exp + 30% (level difference) = 390 exp

Situation 2: army with 1 champion, level 7
Exp = 300 exp + 15% (+1 enemy champion) = 345 exp

Situation 3:  army without champions,  level 3 (Ok not likely)
Exp = 300 exp + 40% (level difference) + 30% (+2 enemy champions) = 510 exp

With some playing with the numbers, it looks like it could work.  You could get more detailed and accurate, taking into account (level * number of figures, ie. squads), averaging the levels instead of taking the highest, and giving higher level units a larger share of the exp.  Maybe also allow for 1 free champion on your side.

Second, I can hire as many champions as I want and they are free forever.  This doesn't seem right.  One of those should change.  If champions are to be free troops, then the number you can hire should be tied to faction prestige or the "greatness" of your kingdom.  This could lead to a situation where early on you can't just hire everyone, and later in the game you encounter a hero with skills that you really want, but you already have the max number of heroes for your prestige level.  Do you ditch one of your heroes in order to free up more "glory" for this new prima donna?  If not that, then the hero limit should come from an upkeep cost like normal troops. 

That brings up another interesting issue.  What if you do want to disband a champion, but keep the stuff you gave him?  Or what if you want to leave some equipment behind for other heroes to use.  I think some kind of additional shop screen where you can drop equipment that is either city-based, or kingdom wide would allow you to dump champions, as well as alleviate the "traveling item shop" that champions cart around with them now.

Lastly, the misc item limit of 4 items currently seems too low, probably because it is only reasonable to actively use a couple champions.  If the experience issue were dealt with to make multiple champions a bit more viable, this would probably seem less of an issue as the equipment would actually be used by more champions.