So, that's what I've been doing wrong all this time?
I'll have to try that next session.
And you know... A Gygaxian relic sounds like a cool item to base a campaign around. "You must collect the Gygaxian relics before it's too late, lest the world fall once more into chaos."
Ok, as far as leveling goes, here's one for you. No leveling. Everyone starts with a static amount of skill, and will only progress minutely as the game continues, expanding themselves through items (Given by NPCs, must be RPed for), blessings (given by NPCs must be RPed for) and plot moments.
What I did for xp was to request a list of everything the player thought that they did that was of some merit, or made the game better. It took a while, initially they were writing things like "critting 2 zombies in a row". But eventually, I got them to realize it was about decisions at the table, and got some things like "Tried really hard to curb my OOC comments" and "I didn't keep complaining about how stuipd our plan was" and "talked the princess out of running away". I also keep a list of notable things. Then, for each event, I assign a certian amount of xp. Typically, the lowest were 5 xp, and each other is worth some multiple of that (how much more is "Making sure the fighter didn't kill himself in the brothel" worth than "I got some pie"?) There were also shared story bonuses.
In one session, a particular character managed to double his xp through having a great session. And it wasn't htat he stole the show, but rather that he tried damn hard, and was always lending a supporting hand.
edit: Now in defense of D&D's leveling system, it is based directly off of the game's prime activites. Dungeoneering and slaying monsters. The fact that the game is able to be useed for so many other things is just a testament to one of two things:
1) The game is a well designed system, flexable enough for use in multiple circumstances
2) When you've got a hammer, every problem's a nail.
You be the judge.