The question was like this - there is a proposal to reward the better performers in the team to motivate everyone to perform better. However one of the team leads suggested that if we reward some people, the others will get demotivated. What should we do?
The principle of rewarding someone who is performing better is right simply because this person is putting in more effort and getting better results. Such people should be rewarded for two reasons 1) they perform even better 2) others try to emulate them.
As far as others getting demotivated is concerned it is a culture issue. We need to build a culture where everyone in the team celebrates each others win. In fact we have the top performer share his/her success story and how they made it happen.
Lesson - It is easy to not to anything in which case we demotivate our champion players. But the right thing to do is to create a culture where everyone is pushing one another and everyone is celebrating each others success. Promote a healthy competition where the team wins.