I found a solution to my dillemma: Scale the heightmap so that in effect the heightmap represents linear distance as opposed to degrees of lat/lon. As a quick recap, my heightmap was build using elevation samples every 9 AS (arc seconds = 1/3600th of a degree) latitude and longitude wise. 9 AS is rougly equivalent to (30.87*9) 277.83 meters latitude wise everywhere on the globe. But longitude wise, 9 AS is only equivalent to 277.83 meters on the equator longitude wise. But my heightmap is based around Mt. Raininer USA and according to Google it is located at the lat/lon pair (46.8529°, -121.7604°). Therefore, 9 AS at that latitude is equivalent to
(277.83 m)/cos(46.85 deg) = 406.237246926 m
Moreover, assuming we want the heightmap to represent a linear distance equivalent to 501x501 9 AS posts, then we need to rescale our heighmap along the horizontal (longitude) axis by this much.
((406.237246926)/277.83)*501 = 732.551778821 or 732 if flooring.
Bottomline, we need to rescale our image from the 505x505 original dimensions to 732x505 dimensions. This meant time to get help from our friend Imagemagick.
convert Rainier_505.png -sample 732x501\! Rainier_732x505.png
However, -sample simply repeats some of the columns in order to achieve the size requested. This ends up creating the following 'banding' looking lighting artifact:
convert Rainier_505.png -resize 732x501\! Rainier_732x505.png
The resulting heightmap here has its additional columns interpolated smoothly in order to avoid the banding problem illustrated above. A result of that is shown below.
Therefore my correct z scaling factor should be (9848 * 100)/51000 = 19.31
In summary, scaling factor (which I hope is correct this time) is (277.83, 277.83, 19.31). In order to position my landscape so that ocean level is at 1000 units I offset the landscape on the z-axis by 9482/2 = 4924 units/meters.
Finally, the image comparsion below shows the difference in realism that can be achieved by adding normal textures and ambient occlusion textures, per layer, to the landscape material.