Just to update this thread with what I discovered after playing around
with the values;

The "hotSpot" tag withing IconStyle does not do what had I first
imagined, that is, work like a html hotspot on an old-fashioned image
map.

It contains settings which allow you to specify the position your icon
lines up against the lat, lng point on the map it is fixed to.

I had created quite small icons to compete for users attention roughly
at the same level as the Google bus stop icons on the map base, they
held information but it was more "supporting information", hence their
size of 12x20 pixels (with their shadow).

This worked very well in Gmaps V2, and I can simulate it in V3 as
William points out their live clickable area extends to 32x32 pixels.

So if you are in the same boat creating an icon less that 32x32, open
up your original image, put it onto a 32x32 transparent square, slide
the shadow under your icon (you might as well), save it and put it
online where Google can get to it. Manipulate the hotSpot values if
you need to nudge the icon in any particular direction otherwise it
fixes itself at bottom-left-corner.
http://code.google.com/apis/kml/documentation/kmlreference.html#iconstyle

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