Unfortunately, the damage has already been done. Many players, including myself, would prefer to stray far from any product or game that even considers the usage of generative A.I. in any context, be it in development or marketing.
The right thing to do, @Nemo, would absolutely be number 2. To change it into a non-AI/handmade creation contest, because artists absolutely deserve that share of $75,000 more than anyone. For all the hard work, effort, time, and passion they put into their work. All art forms, be it drawing, animation, 3D modeling, are all underrated, underpaid, and under-appreciated. With the rise of generative AI use, this is especially relevant. Seeing or hearing about AI posts that have leeched off the efforts of real people is a direct insult to those who choose to create, let alone seeing their favorite game devs encouraging it! It's beyond insulting and hurtful to know that you guys embrace how AI harmed the creative process.
Heck, instead of a $75,000 contest, maybe put it towards commissioning hundreds of real artists to draw or create real drawings or models of the Party Animals cast and showcase it (with credit) for everyone to see what people can do! That would be really cool. Either way, I hope you know what the right thing here is to do, and to prove it.