This Mishnah in Maseches Shevuos, chapter 8, mishnah 4, does not deal with an unpaid watchman or with any other kind of watchman, but with an ordinary person who steals an item from his fellow.
The first case - denying the theft:
The owner of the ox comes and claims: "Heichan shori shegonavta?" - "Where is my ox that you stole?", and the other one answers: "Lo ganavti" - "I did not steal it" - and then witnesses come and testify that he did in fact steal it. This is the classic case in which the Torah obligated the thief to pay double.
And if he not only stole the animal but also slaughtered it or sold it, the Torah adds an increased payment:
A sheep: fourfold payment - four times the principal.
An ox: fivefold payment - five times the principal.
The second case - he admits to the theft but denies the slaughtering and the selling:
Witnesses came to testify against him, and he says: "Ganavti, ach lo tavachti velo macharti" - "I stole it, but I did not slaughter it and I did not sell it" - in this case he pays only the principal. He does not pay the double payment, because he admitted to the theft on his own, and one who admits to a fine is exempt from the fine.
And even though he denies the slaughtering and the selling, and his denial is not true - for in reality he did slaughter it or sell it - nevertheless he pays only the principal. The reason is that the Torah obligated a fourfold or fivefold payment only, and there is no category in the Torah of a threefold or fourfold payment. Therefore, since there is no obligation of double payment here, there is likewise no fourfold or fivefold payment here, and the only thing he owes is the principal.
In summary: in this Mishnah we learned the law of the ordinary thief: one who denies the theft and then witnesses come - pays double, and if he slaughtered or sold, he pays four for a sheep and five for an ox. But one who admits to the theft and denies the slaughtering and the selling - is exempt from the double payment under the rule that one who admits to a fine is exempt, and consequently he is also exempt from the fourfold and fivefold payments, since there is no payment of three or four, and he pays only the principal.