First, addressing the OP's concern: I think level-freezing has the side benefit of making advanced Refine Runes more accessible--I don't think it's the main incentive. I doubt swapping out rewards will reduce the number of level-freezers.

Edit: After reviewing the other comments, I realize now that, while my perspective is valid and relevant, It misses the main intention of the topic--the improvement of a flawed event. So I'd like to suggest that (as some others have) to make it power-based, but there are a couple things I'd like to add:
1) I think it should be modified to compensate for rare event ninja too. A 60k player with only starter ninja cannot win against a 50k player with edo deidara, susanoo itachi and shark kisame.
2) A player can't change their level much in the 5-10 minutes between registration and starting the event--but they can easily change their power and ninja. Therefore, I think that a player's power and ninja should be "locked in" during registration--much like the Matsuri--and the calculation for field selection be based on that.

Secondly, and more importantly...

I disagree with the underlying motivation of this issue. Level-freezing isn't an unfair exploitation, it's a solution to the larger issue of whales creating a gap between pay and free players that renders the latter's gaming experience, an impossible struggle to not be the former's constant victims. Level-freezing makes the game playable for everyone. If you remove, or discourage, this approach to playing, you then make this game less playable, and dimini*s lifespan further.

Additionally, I see all too often players that recklessly level too quickly without regard to the consequences. I've had level 70-75 players with 30k power whine about losing all the time in pvp events and approach me asking me for advice. It's hard to tell them, that they made a mistake and it's too late to fix it, but it's the truth. It's also the reality for most games. You can't just dive in to really difficult areas of a game before you're ready and expect to succeed.

Level-freezing is a timeless, smart technique to give yourself the time you need to prepare. In fact, I whole-heartedly think level-freezing should be encouraged. It takes a considerable amount of discipline, patience and strategy. For example, daily rewards (or perhaps the Jonin medal benefits) should provide the option of getting experience or coins, to make freezing more effective.

I support the Winner's bracket idea. It works well from my experience

I used to play a football-management game called Goal Nation, that had a similar concept to Arena/Bonds here. It was divided into 2 month seasons, at the start of which you'd be initially placed into a random "league". Twice a week you'd compete against 1 of the other 16 players in the league. At the end of a season, the top 5 performers would be transferred to a higher tier league and the bottom 5 performers would be transferred to a lower tier league. Higher tiered leagues offered better prizes for being promoted at the end of a season--usually rare upgrade items and coins.

With the high volume of players, this made the leagues extremely balanced. It had it's drawbacks as all approaches do. If you were a terrible player and most of your league quit the game or was inactive, you'd often win and be promoted, even if you weren't ready for the next tier up. Likewise, if a league was really packed with strong pay players and you narrowly lost every match, you'd be demoted and completely wipe out the lower tier. Despite this though, it largely worked.

I often toyed with the idea that this could work for our servers...but i think Naruto players place a great deal of value in the comraderie with the other players there and within their groups--too much to want to work amongst all new players every 2 months

But I do think it's a workable option for Sage World. The whole point of it is fair competition. If you're out for easy wins, then you've lost perspective, and maybe you should do a bit of self-reflecting about why you play games with others--cause preying on the weak isn't a meaningful way to sustain fun or achieve happiness--just my opinion.

If you're strong player, you should be challenged by other strong players...If you're a weak player, the only way to improve is by testing your team against other weak players, so you can truly see what does and doesn't work for you. A promotion/demotion system is among the best ways to ensure everything remains fair I think. It can't be exploited by alts or level-freezing whales. Further there a remains an incentive to go to stronger brackets...since the higher brackets would offer better prizes. A level -freezer would have to ask if sandbagging or otherwise camping at a lower bracket would be profitable in helping them progress