Preparing for a challenging task can increase physiological arousal, in particular when potential incentives are large (e.g., a solo musical performance in front of an audience). Here, we examine how potential reward and its influence on arousal, measured by pupil dynamics, are represented in the brain while preparing for a challenging task. We further ask how neural representations during preparation relate to actual performance. Trials resulting in performance failure were characterized by increased pupil dilation as a function of increasing reward magnitude during preparation. Such failure trials were also associated with activation of the right amygdala representing pupil dilation, and the left caudate representing reward magnitude. Notably, increases in functional connectivity between amygdala and caudate preceded performance failure. These findings highlight increased connectivity between neural regions representing reward and arousal in circumstances where reward-driven arousal impairs performance.