I added a Launcher for a third-party application (in my case, Eclipse). It just so happens that Eclipse comes with an icon, a 256x256 XPM file. Unfortunately, if I select this as the icon for my launcher, it takes over the panel, presumably because it tries to display it as 256x256. I have verified that this happens with both horizontal and vertical panels. All of the other icons (which come from system icons) seem to scale nicely as I adjust the "Row Size" and "Number of rows" (which, incidentally, should be labeled "Column Size" and "Number of columns" since I happen to be working with a Vertical panel, but I digress...) so I would think that the icon should be scaled to the "Row Size" value (minus whatever padding is needed, etc...)
Created attachment 4953 icon.xpm Attaching the icon, just in case anyone wants to play around with it
Duplicate of bug #9615. See also upstream bug : https://bugzilla.gnome.org/show_bug.cgi?id=686514
This was fixed in 4.14 (I tested it with your attached icon.xpm) - please test and if you can still reproduce reopen the report.