The people Picker settings are configured in the Web.config of the web
application.
Having said that, when you say the people picker is working fine in the web
application I assume you mean when you assign people to the web application as a
site collection administrator or through web application permission policies.
When you use the people picker to do these choices you are actually in the
central admin web site which is a different web application and web.config than
the one you are adding the people to. So I suspect something is wrong in the
people picker settings in the specific web.config for XYZ.com that isn't wrong
for wherever your central admin web site is.