The following method of setting saddle height is not the only method around but it is the most popular among experienced coaches and riders in the US and Europe.
1) First adjust the saddle angle. It should be level or very close to level, with no more than 2mm slope up or down at the nose.
2) Put on the shoes you normally ride in. Don't forget to lightly grease the seat post and binder bolt. Have a binder bolt wrench ready (usually a 5mm Allen).
3) Mount the bike and sit comfortably, leaning against a wall. Apply a brake with one hand (or mount the bike on a turbo trainer).
4) Placing your HEELS on the pedals pedal backwards at 30+ rpm without rocking your pelvis (very important).
5) Adjust seat height so the gap between pedal and heel at bottom dead center is:
5B) ONE HALF TO ONE CM. for experienced riders (50+ mi./wk.),
5C) ONE HALF TO ONE AND ONE HALF CM. for endurance cyclists (250+ mi./wk.).
NOTE: Modify these recommendations if your soles are considerably thicker at the cleat than at the heel.
Though it can be difficult to make an accurate measurement without a mirror or friend to do a visual check of your heel and pedal at BDC, it is often easier to go by feel, raising the saddle by 2mm at a time as your heel begins slipping as the pedal traverses bottom dead center.
Roger Marquis (www.roble.net/marquis)