To better understand why leader‐member exchange (LMX) differentiation in teams may be detrimental to individual and team performance, we propose that member's perception of LMX differentiation (PLMXD) is more important than statistical measures of LMX differentiation. Specifically, we hypothesize a multilevel model in which relationship conflict and procedural justice (climate) mediate the relationship of individual and collective PLMXD with individual and team performance, respectively. Using a sample of 235 individuals in 53 teams, we found individual PLMXD was negatively related to individual performance through relationship conflict perceptions, controlling for LMX. At the team level, collective PLMXD was negatively related to team performance through procedural justice climate and relationship conflict, controlling for a statistical measure of LMXD. Theoretical implications and directions for future research are explored.