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The first thing to determine is whether you really need a pen name. If your real name is fine, it's probably best to stick with it. The following reasons are common ones to choose a pen name:
1) Your real name is hard to remember and/or spell correctly.
2) Your real name sounds silly, stupid or obscene. If your real name suffers from any of these problems, you'll have a harder time getting readers to accept your work.
3) Your real name is the same as, or similar to, another author or a famous figure.
4) You are reclusive or fear fame, and want to make sure that regardless of how famous you might become, people won't recognize your name everywhere you go.
5) If you are already an established author, you might want to use a pen name because of issues similar to brand name loyalty. For example, if you are a woman and have a change of name because of marriage, you might want to continue using your former name as your pen name. Also, some authors find that their work sells better if they have a different pen name for each genre. If you have built a reputation for writing standard detective fiction and you now want to put out a fantasy detective novel, loyal readers may smear the new book because it disturbs their expectations. Readers of detective fiction don't normally like fantasy elements mixed in, so in this case you need to attract a new audience from the fantasy community without the burden of your prior readers giving the new book a bad name. Also, you need a separate pen name for any subject with a "taint" to it (such as erotica) if you want people to take your literary fiction or nonfiction seriously. Even Anne Rice uses a separate pen name for her erotica, though her more usual vampire novels always sit close to the border between horror and erotica.
6) You are working in a field (such as romance) where books written by a certain gender sell far better, but your name is obviously the wrong gender. Also, some female authors want a gender-neutral pen name because sexism can still impact sales, in any genre.
In my case #1 was the main reason. Everyone is constantly forgetting my name. I've got one of those Russian last names that ends in "sky" and is nearly impossible for anyone to spell correctly. It might have lent some weight to my name if I were writing mathematics textbooks, but in any other genre it's a liability. And, as long as I had to get a pen name anyway, I figured that I might as well go for #6 as well. Studies show that sexism is still a strong force in the book market. Readers, especially boys and young men, tend to choose a male author's name over a female author's name.
Fortunately, the studies also show that these sexist readers tend to assume that any gender-neutral name is male (this is why the author of the Harry Potter books uses initials instead of her first name- her publisher wanted her to avoid the sexual bias so common in boys). Therefore, a well-chosen pen name can always counteract this force, and female authors don't have to stoop to using male pen names like they used to in the old days (think "Andre Norton").
The most important consideration is making your pen name easy to spell and remember. A two-syllable first name and single-syllable last name seems to be a particularly potent combination. A number of famous authors have had this formulation, many of them even by accident. Stephen King would be a good example of this.
The other truly important consideration is to resist the temptation to make your name too fancy or cute. If you work a pun into your pen name or try something like making your last name "Bug" if you write pest control manuals, it is likely to backfire. Likewise with bizarre, showy names, last names that rhyme with your first name, or names that sound as if you are descended from Bavarian royalty.
On a writer's bulletin board I frequented, one writer was talking about adopting the pen name "Rogue Storm." This is a prime example of a name that is too showy. Fortunately, many other members of the board soon told this writer to skip it (one biting comment said "Rogue Storm is fine... as long as you're two different X-men at the same time").
It is also a good idea to get into the first half of the alphabet. There aren't many famous authors with last names from N-Z, because these books never get in the first portion of any book display, and they also tend to be put on lower shelves, well below eye level. Also, if you are not fussy about your last name, it can be helpful to arrange things so that your books will be situated near the books of a bestselling author. For example, if you write horror novels, "K" would be a good first letter for your last name, especially if you were sandwiched between Stephen King and Dean Koontz.
If using this technique, you need to be near long-term bestselling authors. If you choose someone who has a hot bestseller right now, but who might be forgotten in a couple of years, you lose the chance to continue profiting from this technique in the long term, and you might not profit at all if your first book hits the bookstores after the buzz about the other book has died down.
Simply choose a pen name that is easy to remember and spell, doesn't have too many syllables, sounds nice, and hasn't been used before. "Hasn't been used before" is quite important (especially if you don't want to get sued). Try doing a search for your prospective pen name while browsing large online bookstores, such as Amazon.com and Barnes & Noble. When I search for "Jamie Hall" on Amazon.com only one book pops up: mine. Once you get published, you want this to happen with you too. This is particularly important if you think that you will end up depending heavily on the Internet for sales, or if you will be relying on special orders from bookstores. If bookstores have trouble looking you up in their computer systems, or online buyers keep confusing you with some other published author, you will lose many potential sales. I came across an example of this with a guy who was on a mailing list with me. One of his books was published under the pen name "Richard Lee." It sounds good - easy to spell and remember, fits the rule of a two-syllable first name and one-syllable last name - but it was a disaster. When people searched for "Richard Lee" on Amazon.com, he was several pages back, because it was such a common name. His real name was "Walter Anderson." Because this name is easy to spell and remember, gets him into the very beginning of the alphabet, and probably isn't too common as "Walter" is such an unpopular name, it probably would have been best for this author to always publish under his real name.
I tried to adhere to as many of these principles as I reasonably could when choosing my pen name, Jamie Hall. It has only three syllables, is easy to spell and remember, and has a gender-neutral first name. Hopefully, it will serve me well.
It wasn't my first choice. For some time I was planning to use the pen name "Candice Silverstone." Fortunately, I decided to use it as my online screen name whenever I went to Internet chat rooms, posted my fantasy art online, or otherwise interacted with strangers on the Internet. I was really attached to this pen name, so it took me a couple of years before I gave it up. It had a few too many syllables, and people weren't sure whether to spell the first name "Candice" or "Candace," but these weren't the worst problems. I kept getting two types of comments. One was that people would bring up frying pans all the time. Apparently, there is a brand of cookware or a type of non-stick coating with a brand name of "Silverstone." The other type of comment was when people would get really excited and ask me if I was related to the actress Alicia Silverstone. When I told them I wasn't and explained that "Silverstone" was my pen name, they always seemed really confused. After a couple years of getting mixed up with frying pans and famous actresses, I finally gave up that pen name and began to study the principles of creating an excellent pen name, bringing me to where I am today.
If you want to test your pen name for possible problems, using it as a name on the Internet is an excellent way to test it. If people react strangely to it, you'll realize it right away.