This is a particularly difficult topic to figure out. I'm not sure the best method to run these contests. I think that large rewards for top 10 writers is a better format. You won't be able to please everybody unfortunately but those who wrote well should get rewarded more than those who wrote not that good. I didn't win your first contest that I entered, the Cotton Coin contest, I didn't even make it in the top 10 if I remember (I could be wrong, I know I didn't win though). I felt I had a good entry but at the end of the day there were other entries that were just better. I think having a similar format to those contests is good; you had a lot of entries but had some people judge the entries to narrow them down and help you figure out what ones to read and what ones to not.
My thoughts - can't please everybody, if there are truly quality writers that are entering your contests they will do it. Reward the good writers well and reward the decent writers less but not nothing.