Paid links don't merely reference paid directories, but also might consider paying a web master for his time to download and edit a relevant page of his site.
Directories like Botw also charge a review fee, but shouldn't be put into the same bracket as PHPLD's.
DioBach is right about the link brokers, and Text-Link Ads took a hit recently from the Big G. Have a look at the webmaster guides - http://www.google.com/support/webmasters/bin/answer.py?hl=en&answer=35769"
In my view, Google will not penalise your site for having spammy links to your site, it will only discount the links (pass no link value). If you, however, are selling links or 'excessively' reciprocating just to get higher rankings then the fruits will only short term and you will get whacked.
Quoting philhancox: "But is paid link building what most seo companies do?":
Good (ethical/ Best practise) link builders, like my company, will mix free, paid and reciprocal links to high profile websites, directories and blogs only. However our focus is firmly rooted in increasing traffic/ conversions as opposed to being obsesses with pagerank. So whilst other
SEO firms might submit to 1000 directories or outsource their link building overseas, we feel its a lot better to focus upon quality - both in your website and the prospective link partners you approach.
I'd be interested as to how long your companies rating last, as Google is getting smarter in sniffing out those spammy paid link truffles....
Si
ALSO...
I wanted to say that Link Building should be a continual process, and should be part of a coordinating online marketing campaign, which might consider social media marketing, PPC and first and foremost sorting out any 'on the page factors'.