Setting the height of your pickups at first thought seems like an elementary adjustment with few pitfalls. However, as you will see below, it can be quite a complex adjustment to get right and exactly to your tastes. There are also a few ways you can go wrong - particularly with certain types of pickup. This is a skill everyone should learn to do themselves, as the exact settings are down to personal choice, and depend on what you want out of your pickups. In the words of John P Sheehy (who I don't know from Adam, but he puts it so well!): "Having a tech do this is like having you mechanic adjust the seat in your car for you." Warning: This is a long article. Looking around, I noticed there was no single source that had all the details, so decided to write one. Those seeking Instant Gratification™, should jump straight to the second part: Setting the Height.

Effects of Pickup Height

Volume
This is the most obvious effect from changing the height of your pickups. Closer to the strings and the pickups will be louder, further away and the volume decreases.

Fret Buzz
The pull from the magnets has yet another side effect - string crashing, which causes fret buzz on guitars with lower action. The pull of the magnets changes the vibration pattern of the strings, pulling them down closer to the frets. Aside from the audible fret buzz, this can also affect sustain. Once again, this is not a problem with pickups that have low gauss magnets.

Compression
I believe (not everyone agrees with me though) that when a pickup is driven harder by moving it closer to the strings, it actually compresses the pickup's output a little, making your quieter sounds stand out more, and cutting down a little on the level of louder playing. This effectively compresses the signal into a smaller dynamic range. While a little compression can be a good thing, some players have reported that this makes string noise stand out too much for them with high gain settings.

Comfort
When the pickups are set really high, they can interfere with playing, getting in the way of plectrums and especially fingernails (for those of us who play with nails).

String to String Balance
With vintage style single-coil pickups that have staggered polepieces, the volume levels between strings can differ substantially. This is particularly a problem with the G string which is an unwound string in modern sets - while the vintage magnet stagger caters for a wound string. Lowering pickups a little helps minimise this problem, evening out the string-to-string balance.

Setting the Height

It's all a Question of Balance
The secret to setting the heights properly is first setting the pickups to work together well, with balanced volumes on all switch settings and also from bass to treble side on the same pickup. Once this is done, the heights can be adjusted up or down together to find the tone you are looking for. For this second part, it's useful to have a rough idea of what you want from your instrument. There are two extremes:

While you may play a style of music that leans towards one or the other extreme exclusively (Death Metal vs. Jazz), most players are going to need to be a bit more flexible and settle for a balance between the two.

Note: As with virtually any guitar adjustments, always make sure the guitar is tuned to pitch before you start. There are good reasons for this - trust me.

From the Neck Down
First make sure that the neck pickup is not causing any major problems, such as Stratitis, fret buzz or affecting the sustain too badly. You start with the neck pickup as it is more prone to causing these problems than the other positions. The easiest way to approach this is adjust it up until it starts causing problems, then back it off slightly until they clear up again. Keep the treble and bass sides level with each other for now.

'Nother Note: To check for these problems, play the last frets on the fingerboard (closest to the body) and specifically the lower thicker strings - which have more mass to be affected by the magnets. The low E string played at the 21st/22nd fret is always a good indicator of trouble.

Now set your middle pickup (if you have one) slightly higher than the neck pickup and the bridge pickup slightly higher than that. Immediately check that no problems have surfaced and, if they have, lower the neck and middle pickups slightly until it goes away. As with the neck pickup, keep the treble and bass sides level with each other for now. Now you should have your rough starting point.

Pickup to Pickup Balance
Now it's time to set the heights so that the volume between pickups is balanced to taste. In most situations, you don't want your volume to change too much when you switch from one pickup to another. One exception to this is if you want a volume and drive boost from the bridge pickup when used alone for solos - then you will set this one pickup to be louder than the others. Even then, it's useful to start with all the pickups at a similar output level, and then raise the bridge pickup to taste after the initial setting.

Note: If all the pickups have the same power output, and are set to the same distance from the strings, the neck pickup will always be the loudest pickup, followed by the middle, with the bridge pickup being the quietest. This is not due to the pickups themselves, but rather that the strings are less constrained the further from the bridge they are, able to vibrate freely. This is also why the tone changes, becoming bassier further from the bridge and why the neck pickup is more prone to Stratitis. Many modern sets of pickups have a more powerful bridge pickup to help balance bridge to neck levels.

1. Play full chords using all six strings and sustain them while you change from one single pickup to another and listen for any volume jumps or drops.
   
2. Avoid all the two pickup sounds for now (such as switch position 2 & 4 on a Strat and the middle position on a Les Paul).
   
3. Adjust pickup heights by turning screws one full turn at a time on both screws belonging to a pickup. Remember your neck and middle pickup heights should already be as close to the strings as possible, so lower whichever one of the two is loudest.
   
4. Finally raise or lower the bridge pickup to balance levels with the other two.

Bass to Treble Balance
To set the bass to treble balance, use the following method:

1. Set the selector to a single pickup, and alternate between playing the bass three strings and the treble three. I use a reggae type bass-treble "skank", but single notes could work just as well.
   
2. If the bass side is too loud (most likely), lower the bass side screw a half turn and raise the treble side screw a half too.
   
3. If the treble is louder, lower the treble side only.
   
4. Once you have done this with all the pickups, do a quick final check of pickup to pickup balance again.

Tone to Taste
Now that you have everything all set up nicely with an optimum balance and maximum height possible, it's time to set the height so that the tone and output level are what you want.

To do this, lower all the pickups together, turning every screw by the same amount until you get the tone and output level that you like.

As mentioned in the first part of this article, backing off the pickups will sound smoother and warmer with a "woodier" tone. The tone will have more character, complexity and dynamic range, as well as having better string to string volume balance.

It is also possible to experiment with your pickup to pickup and treble to bass balance at this point, depending entirely on what you want from your guitar. Remember, this is an entirely personal setting, and there are few "wrong" setups.

Manufacturer's Recommendations
The manufacturer's recommendations are just that - recommendations. It is usually a middle ground starting point from which you can feel free to deviate. In fact, Fender's recommendations do not even take into account the pickup position. I have included them here for completeness and a rough starting guide.