It's a relative number, so if you set VM1 to 1000 and VM2 to 100, VM2 will be able to effectively allocate only 1/10th of CPU resources compared to VM1.
I use 1000 as a default, set my priority VM's (like database server) to 2000-3000, and the low priority ones to 200-500.
Two important assumptions:
1. If I understand correctly CPU UNITS does not intervene until there are free cpu cycles, only if all CPU becomes allocated.
2. According to Proxmox staff CPU Units works across the kernel scheduler, meaning it affects OpenVZ and KVM virtual machines as well, respecting each other.
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