I thought WoW's loot system worked well enough. There were guaranteed item drops and everyone was rewarded badges (tokens) for beating the fight. The tokens could be used to buy the items needed to trade in for the class equipment or equipment for different equipment slots that were unique and didn't drop from any of the dungeons.

I think I'd prefer to see it work this way rather than offering people lesser quality gear, but this would probably also pigeon-hole the dungeons into having longer retry timers. If there were no timers, hardcores will run dungeons for 12 hours a day and be geared up within a matter of weeks and then complain about being bored. (I have nothing against hardcores or how fast they gear up by the way, I'm just making a general statement as to why timers would have to be in effect)