Fear is effectively an aura with the fear value being the area of effect. Units hit by a fear effect will get a penalty to their morale. Also all squads of whom one or more units have been affected by fear will take a morale check and if they fail rout. A unit can only be affected by one fear aura per turn and a squad will only take one fear-induced moral check per turn. The morale debuff decays at a non-linear rate.
Famously not even Illwinter knows the exact mechanics of how Fear works.