It will shrink the recordsize down to the filesize in intervals of the logical blocksize, so for ashift=12 that would be 4KB.
So a 9KB file would actually need 12KB (if it is completely uncompressable), a 720KB file would get a recordsize of 720KB (if it’s not compressible).
Actually I read that this dynamic recordsize should work without compression too but I was unsure about it. But since compression doesn’t really take much performance (even less with lze iirc), it’s not a problem and compresses logs nicely.