Sag height is the ride height of your quad with you and all your riding gear sitting on it.   Basic adjustment as follows:

You will need to find the total suspension travel of the axle you are working on. This can normally be found in your owners manual.
Find two points on your bike that you can take consistent measurements from. The points need to be directly above and below each other. The top of your tire and the bottom or your fender make good spots, or, any other two points that you can measure accurately. (see pictures for examples) 
First...lift the quad so the wheels are no longer touching the ground and measure the distance between the two points.

Second...sit on your quad with all your riding gear (don't forget your filled Camelbak) and measure the same to points. The "difference" in measurements is called the Sag Height. Your sag height on the rear should be approximately 25% of your total shock travel. If your total travel is 10 inches, your sag height should be 2.5 inches. Your sag height on the front should be about 20%

Next...adjust the preload rings on your spring until the proper sag height is obtained.

This is the procedure for standard travel or stock shocks only. Long travel, Sag Control or Zero Preload shocks with or without aftermarket arms will not need to be adjusted in this manner.

Example: (these measurements do not match pictures!)

First measurement: 28"
Second measurement: 32"
Sag height: 4"
 

In the above example, if your total suspension travel is 16 inches, your sag height would be perfect at 4 inches.