In your scenario, the 7 seed would have home court and the Knicks would have lost HCA and ended up against the Bucks. It's also fun because if a 2 seed ended picking a 6th seed, that 6th seed might feel disrespected and it would lead to an interesting series.This would be fun. Suddenly the #7 seed who won the tourney gets to pick the 8 seed, while the 1 plays a team like the Heat or whatever instead.
It has to be interesting. Direct cash payments to players might be interesting from a competitive standpoint for the tournament itself, but is overall not an interesting reward. There are still no stakes for the fans. Not feasible by the CBA but some kind of creative salary cap exception would be interesting. Draft is interesting too but that costs you the incentive for the players themselves. Ultimately may require a mix of incentives—or I guess just some unrelated CBA concession to the players.
It's great because it literally forces a team to pick another team to play, basically saying "yeah we are going to beat you."