Thanks for the feedback.
If uploading a larger watermark (I've seen yours as a "bleed" and wondered about that) is OK, then the comments in the template that the dimensions must be exact for that file aren't quite right. It's OK as long as it's square and you take your chances with the design if you make it larger and don't take into account it'll be cut off?
I might just redesign my watermark a bit if it's the correct behavior that the PNG file is never scaled regardless of the size on the image page.