The following is an exact quote from Microsoft®:
"For Internet Explorer 5, the required size of a shortcut
icon is 16x16 pixels. To create the icon, use an icon
editor, such as the one included in Microsoft® Visual
Studio® or one of the many other icon editors available.
Regardless of the program you use, make sure you set the
editor to create an icon that is 16x16 pixels. Otherwise,
the icon will be ignored by Internet Explorer."