"Gamesmaster Discretion" is always something that gnaws on novice Gamesmasters. GMs need coaching too, almost as much as players do, because GMs aren't just the world builders and runners of stables of NPCs, monsters and villains: they are also judges and arbiters, and that "discretion" thing can be exasperating if a novice GM isn't exactly sure what mechanic to apply, because it isn't actually written down anywhere.
GMs are responsible for two aspects of Adventurer growth: character improvement and character development. Character improvement is simple mechanical bookkeeping - acquisition of wealth, physical and mental development, recovery from injuries, and Improvement Rolls and acquired Hero Points, not to mention improvement of skills, new skills, spells and Heroic Abilities.
Character development is something else. Character development is where the Adventurer learns something about his place in the world, acquires and loses friends, mentors, Allies, Contacts, Rivals and Enemies, learns how to handle tragedy and loss and generally grows as a person. This is story-related, and it can only be measured by how greatly your guy has changed after, say, a dozen individual Adventures and a few Quests, compared to the callow youth he was with a gleam in his eye, his Dad's old war sword strapped to his snakehips, a half dozen silvers in his pocket and fresh new shoes on his feet from his mother.
Apart from the purely mechanical aspects of handing our IRs and HPs, in general if your guy does something noble, surprising, uplifting, hilarious - or conversely, something nasty, sneaky, downright despicable - that changes the way everybody sees your guy, then that's the point where you, as GM, should feel free to hand out the IRs and HPs, because the Adventurer will have changed, grown (or degenerated), and both IRs and HPs are tokens marking these turning points in the evolution of your characters.
Roleplaying's come a long way from just killing random monsters, collecting XPs, gathering dropped treasure and levelling up. Legend, in particular, has a goal for your Adventurers, and it's right there in the subheading. Forge Your Own Legend. Your Adventurers aren't just on a crusade to get their Sorcery skill to 150% so they can cast devastating touch-range spells for 1 Magic Point. They're there to become legendary, or to die trying. IRs are a measure of how competent your guys become, but HPs measure how heroic they are - how far they have come to doing just that, forging their own Legend; how much they are willing to push through hardship and failure, defeat and humiliation, pain and loss and suffering, to come up out of the darkness, crawl on bloodstained hands onto the top of the mound of the corpses of their enemies and scream defiance at the gods - and let the gods themselves know fear.
To borrow from B5, your guys should be like John Sheridan, or conversely like Londo Mollari or Vir. One ascending towards the light; the other, crawling inexorably towards the darkness of his own damnation, a damnation that is written in the stars themselves, and in all the crawling shadows.
This is where your Gamesmaster's Discretion comes in. This is not written as such in the rulebook, but it's something learned through experience. GMing is a skill, too. You must learn to judge when it's right to hand out a HP or an IR to each player, above and beyond the basic points they acquire for just turning up and warming the seat. And the rewards can be given for events which are meta, too - out of character events, which have to do with the gaming group rather than with the development of the story.
If they unexpectedly bring an extra pizza to the session (e.g. it wasn't their turn to bring in the food that session, or it was their turn and they decided to buy two instead of just the one) feel free to drop their guy a free HP just because they did something for the group's enjoyment of the game. If they do something so hilarious that the group will be talking about it for years to come, give everybody's guy a HP - and give the poor schmo, whose dice never seemed to roll anything but fumbles that night, 2 HP.
Such a development can be rationalised as your guy emerging, bruised and battered, from a quest in which he barely managed to keep his head, and vowing never to let anything that bad happen to him ever again, and then coming home to find that, for a time, he can do no wrong because word has spread of his heroism, rather than stupidity or sheer bad luck; and the free HPs represent how the community now see him as a heroic figure. HPs, in this respect, measure how the community sees your guys, rather than a source of rare Extra Special Magic Dots to spend to unlock new achievements. HPs are a measure of how his war stories will be able to buy him free hot suppers in posh establishments for years. And in the end, they are the syllables of that last scream of defiance to the gods at the end of his campaign, when his Legend crystallises and he meets his fate.
That is what HPs should mean to you, as the GM. Hand them out when they have meaning.
