Alright,

I usually disable this option at the menu as I haven't seen any positive affects from it. Usually just 'you declared war on my vassle' and isn't it easier just to conquer them rather than vassle them?

What's everyone else do?

Generally, I'll completely conquer rather than accept Capitulation. And I don't think I'd EVER accept regular Vassal.

The main criteria for me accepting Capitulation is that the 'subject' has no more cities near my borders (i.e. those that remain are on another continent or there's a 3rd Civs territory between my land and what remains of his/hers).

In a recent game that ended with a SR Vict., I had 3 Capitulations and 1 total annihilation. The 1 Capitulation was from Augustus, even though he still had about 6 very strong cities and I had no intention of taking him out. I had "cleaned his 3 cities near my territory, and was asking for Peace so I could focus on the SS, and he offered up Capitulation.

BTW, it seems that the negative diplomacy modifier for taking Vassals may have a cap. Even though I had 3, I'm pretty sure that Hatty and Mansa only showed a -1 for rivals becoming my Vassal.

The negative diplo penalty varies depending on the quantity and the quality of the vassals, I capitualated mao ounce and he had three cities which basically formed my border with the Khmer, I had something like 30 cities at the time, and I didn't receive a neg diplo with anybody.

gdgrimm is right about not accepting a voluntary vassal though, it can be of some limited use in a few situations but in general is best avoided. Capitulated vivs are of much greater use to you in the long run.