How are you being punished for playing well?
Well part of the attraction for RPG's is that you can either
1. Progress along the storyline as normal and everything is generally balanced around what your skill level "should" be by the time you get there.
2. Work a little harder, grind a little more, Min/Max your gear and stats and being able to feel like God manifested on earth eradicating everything in your path.
3. Decide to go ahead and check out area's currently beyond the scope of your character to see how long you can survive without the proper gear/levels. And then feeling HUGE walloping gobs of satisfaction when you beat something you aren't supposed to be able to kill yet, and end up getting some nifty piece of gear that you can't use for 2-10 more levels.
Games that auto-adjust everything to always be at (1) where everything is always near your ability cheats you of (2) and (3).
You never get a sense that you are becoming more powerful by beating enemies you shouldn't be able to beat, or absolutely creaming monsters that you have been fighting the past 10 levels.
That's why I absolutely hate games like Oblivion. Freaking waste of money for me. And yes, I know there are mods available that "fix" this, but the original experience has already ruined the game for me, other than the great visuals.
Regards,
SB