I don't like difficulty settings, they feel too fake to me. I'd rather have a game with one difficulty setting whereby the mechanics allow me to choose between "hard but rewarding" options and "easy but unrewarding" options. That way also you can constantly choose the difficulty and have the game adjust accordingly.
Odin Sphere I think does difficulty badly, you can choose a setting and switch it at any time and you aren't rewarded for playing on hard in the long run. So there's really no incentive to use the harder settings, because there is no defined state of "completed on hard mode".
Although I don't like difficulty selection, Ys Origin does it right, the game is all about doing multiple playthroughs. On most difficulties you get SP from enemies in order to learn abilities, and the further through the game you get the more SP they give you. On nightmare mode, enemies give only a couple SP no matter where you are in the game, so getting enough SP to get the mid-to-higher skills is insane. However if you complete the game once on any setting with all 3 characters, for every character you complete if with on each setting you complete it with, you start off with a bonus 10,000 SP. The idea is to build up on those easier difficulties so that when you start nightmare mode you have a chunk of SP that you can spend. This also changes how you play the game, because usually you'd choose what order to get the abilities to get as you play through the game, but with the bonus SP feature on nightmare mode, what you are choosing is not the order of abilities over time, but rather a defined set of abilities that you will keep throughout the entire playthrough. Ys Origin takes difficulty selections and integrates that into the game.
I also quite like how Kingdom Hearts does the EXP growth thing, where you can choose between either leveling up fast early and then super slow, or leveling up slightly above average the whole way through (or in between). That way it's as if the game is making you choose between that which is better for simple game completion or that which is better for post-game content (though I wish the game was more clear in this). When I get the PS3 version, I'm going to choose the "level fast early" option for my speedrun playthrough (since there's a trophy for it).
