There are 2 notification modes for backups. The first one is the 'old' one (legacy-sendmail), which will just send an email to the specified email address in case of failure or always, depending on the setting.I have the same issue, even after the current update (8.1.3).
I have 2 different scheduled backups, both set to notify on failure, and both email all the time.
I just did a manual backup of something and woke up with an email. The setting is set on auto, for manual backups, but I've never received emails before.
There is also a new setting (notification-system), where instead of sending an email to the configured address, the system will publish a notification to the new notification system. The decision if and where the notification will be routed is determined entirely by the notification system configuration. The old 'on-failure'/'always' setting has no effect there (which is not super obvious in the UI I admit, but there are already some improvements for that in the pipeline [1] that have not been merged yet.
The 'auto' setting is a bit of a hybrid, it will use the old system when an email address is configured, and a new system if not.
So I assume, that your backups do not have an email address configured, and thus the new system will be used. The default built-in configuration for the notification system is to send all notifications to the email address for root@pam.
[1] https://lists.proxmox.com/pipermail/pve-devel/2023-November/060801.html