A first it asks for your Mac sign in password. with that entered you get the screenshot I posted. If you try to move it back the the activated position it bounces back, with the text message you see.
I just got off the phone with Apple support. The lady took me through signing out of iCloud and signing back in. She also showed me how set the Mac so it does not need sign in credentials unless I log out of my account, or reboot it. After I logged back into my iCloud account, which was a multi step thing, the watch successfully paired up with the Mac. The log out/in was not in an easy to find place for a person that has not dug into the innards of macOS. I learned a great deal today.