I was doing RAW for combat + RP bonus + card bonus (from SabreCat's Purple Index Cards; posted in 4E houserule forum).
That got to be a bit to fast (leveling around 1 per 1 & 1/2 sessions), so I hacked combat xp in half and doubled quest values to focus more on RP aspects of the game. The main issues was that I couldn't keep up with the Parcel system. For example, my group had 2 combats in all of 5th level, so I still owe them 3 magic items and about 1k gold.
My group likes RP, so they were mostly fine with this (our 5 hour session Sunday featured exactly ZERO combats).
Edit note: to answer the second question, a new PC joins at the lowest PCs level with minimum XP for that level. So, if a party has 3 8ths and 7ths, they would come back as a level 7 PC.