The DROOP pot (potentiometer) on a generator AVR controls the amount reduction in excitation from no load to full load. For a standalone generator this would result in a voltage reduction, for a generator in parallel it will reduce the reactive power absorbed by the alternator. 

Also see, what is droop on an AC alternator.

How do you set the DROOP potentiometer on a generator?

For setting the droop on an AVR, always refer to the manufacturers instructions. Some common AVR types are listed here. Some digital voltage regulators may have the potentiometer turned off in the software, so it may have no effect.

In a standalone application, adjusting the droop is unlikely to do anything as a Droop CT may not be fitted. Setting the droop for units in parallel needs to be done correctly, so don't adjust the droop unless you know what you are doing. You should check the instructions for the alternator before adjusting the droop and you may need additional tools and  items to set it correctly.

If you have another voltage problem check the alternator voltage diagnosis section first. 

Normally (again check the handbook) you only need to turn this very slowly, its normally clockwise to increase the droop and anti-clockwise to decrease it. The AVR terminals are LIVE, so ensure you are qualified and take precautions, such as using an insulated screwdriver.