Minor unlockables might be nice. Things like extra optional levels, other challenge games, etc. Though if you can reach the highest one, you ought to get something nice. I mean come on, you worked for it right?
What about this idea; each Xp rank knocks, like, 2% off the Xp required for each level. So you level up a tiny bit faster. Thus my guy (a Demon) would get a net 6% discount on his levels. I don't know if that's even worth it though; I don't like the idea of killing 40 Cacodemons in melee just to get an extra 2% faster leveling...maybe it could ramp up slightly, say 1% for the first two, 2% for the next, etc... Random ideas from an outsider, aye, but it doesn't seem like it's too much and it's not too little either...
Also, I just re read a few parts of the conversation... I'm sorry, but I don't see how unlockables are a "mandatory penalty". It's a reward for a player who spends lots of time playing the game. Now I agree, if it were too dramatic it would be pretty stupid. Yes it's mandatory. If you want it you have to earn it. So you don't want to spend the time to kill all those mancubi? Then don't. But that other person, who's played the game a few billion times and DID manage to kill them... well, he should get something for it right?
One more idea. A purely cosmetic reward. You rank up, you get some points to spend on your "character", to give him a background, a history, etc. Some background traits might take more points than others, some might exclude others, some might lead to others. Thus purely optional. If you don't want to make your guy into a character worthy of Chuck Norris, no worries. You still get the same game as Chuck Norris does.