I think it works something like this. Lets just say an attack would ordinarily deal 100 damage to your shield at shield level 0. At level 1, it will inflict 75 damage(blocks 25%). Now, if you put a second point into it, it will reduce that 75 damage by another 25%, meaning at level 2 that attack will deal 56 damage (75 x .25 = 18.75, 75 - 18.75 = 56.25) to your shield. Here's a table.
Shield 0 = 100% of damage dealt directly to shield
Shield 1 = 75%
Shield 2 = 56.25%
Shield 3 = 42.15%
Shield 4 = 32.05%
Shield 5 = 24.04%
Shield 6 = 18.04%
Shield 7 = 13.5%
Shield 8 = 10.1%
Or, you could look at it in terms of percentage of the damage negated based on level, like this.
Shield 0 = 0% of damage negated
Shield 1 = 25%
Shield 2 = 43.75%
Shield 3 = 57.85%
Shield 4 = 67.95%
Shield 5 = 75.96%
Shield 6 = 81.95%
Shield 7 = 86.5%
Shield 8 = 89.9%
I'm not entirely sure that this is how it works, just my best guess...but it seems correct. Basically, the more points you assign to the skill, the less effective the skill becomes with each additional point. IMO, its a waste to put more than 3 or 4 points into this skill, since a steel shield (800hp) with 4 points into the skill basically has more than 2400hp!