When in this mode, polygons will be moved, rotated and scaled as a whole.
For Splines that are made up of numerous Spline segments, the segments will be modified as a whole and each segment will be viewed as a separate Clone.
When applied to polygons, individual polygon points are moved, depending on the influence a given Effector has. This effect can only be applied to polygons with an active falloff for the PolyFX object (not only for the Effector).
For Splines, each internal segment between two Spline points will be recognized and treated as a Clone. Any existing Effector scaling can then effect the segments.
The effect shown in the image below can be achieved by enabling this option, which results in a continuous Phong shading effect (all polygons (i.e. S) were scaled in the Transform tab):