One idea shared with me was to actually give a picture of the gem to the player. If it's a semi-precious stone you most likely have one or can buy a small bag of them for a couple dollars. Gems are shiny. Really shiny. It's something you don't appreciate when the DM says "you have a 300 GP ruby" until you are looking at a $300 ruby. Beyond rubies, what does an adventurine look like? There are thousands of valuble stones you can use to add flavor.
I think the reason many GMs only go for gold and XP is the same reason you don't carry around a Rembrant three vassals and a cottage, it's inconvenient for the players and the GM. Most players just go and sell the art, at less of a value than they would get if it was just gold. Tracking NPCs is irritating for players (particularly those that don't have them) and in the adventuring lifestyle the die quickly. I've found that players who care about their characters will BUY clothes appropriate to their location to fit in with the locals. I do, however, like the idea of giving out potion recipes that have minor effects.
This is simply fiendish, a good puzzle. I always feel cheap when I have puzzles which revolve around the english language though, because in many RP settings there are dozens of languages. Who is to say Common is even something we can understand? Anyway, a minor quibble on a great work.
I agree the story is the high point of this, not because the story itself is particularly novel, but because of the way in which it is told. It carries atmosphere and plausability, the description of the sea witch was what really got me.
I'm personally not fond of the item, as others have said there are many objects that drive a person mad with desire for it. It is well presented, and its incarnation as a teddy bear adds that nice creepy feeling. I do wish it weren't pink, that just screams "I have something wrong with me and you should pay attention!" The detailing of the deamon is nice as well, and actually provides some reasoning beyond "he's an evil deamon".