It's the former. The fleet size option applies a multiplier to fleet point gains. Normal is the default, small is .75x and large is 1.25x. So with small, you'll get -25% fleet points overall and with large you'll get +25% overall. This is applied every time you research fleet upgrades, so if you were going to gain 100 FP and you're playing with Large, you'll gain 125 instead.
Hope this makes sense 
