Ok, first you have to get everyone in the game to come to some point to meet up, like in town. Offer gold or items if you want to, that usually works. Once everyone has gathered in the meeting place, have them all go hostile with eachother.
Once you've accomplished getting everyone together and hostile, have them all use the waypoint to go to the same place, or just leave town, and form a circle. Now, one person runs around outside the circle, as many times as they want, until finally they hit someone with a melee attack. Now that person has to hit them back with a melee attack before they can run all the way around the circle and take their spot.
It's like duck-duck-goose, except more fun. Now, if the person who gets hit can hit them back before they make it around the circle, then the person who is trying to make it around the circle is out of the game. The circle should get more and more spread out as the game progresses, until finally 2 people remain, at which point they are the winners. You can modify the rules so that there's a way to pick one winner at the end, but that's up to you.
Of course, you need to pay the winners whatever you said you would, and it helps if you're supplying them with health potions to make up for the damage they take. If anyone gets out of line, have everyone teach them the meaning of punishment, although that's usually not a problem.