My idea for the referral system would be quite simple and benefits both people with paid and free accounts. So, you hand out your code to someone. Whoopdeedo, they sign up for a paid account at some point. For which you are rewarded by being given x free months onto your account. Perhaps the possibility of levels of referals?
Just think this may go some way to promote LJ in the face of things like AOL's new venture and the google thing that was about a while back. And yes, it will promote LJ as people will activly be persuading people to get started on LJ in return for such rewards as free months.
As ever, eloquently worded and not spell checked.