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Hard question. But here's what Search professionals do.... The one, best reference is to see if they are members of the largest most reputable group of Search professionals, SEMPO (the Search Engine Marketing Professionals Organization. Their directory of member companies is here: http://www.sempo.org/directories/ You can find one in your areas with that link. It's not an endorsement but it's very helpful. What else can you do? Here are some RED flags - don't work with any vendor that says they guarantee or promise the top spot or even the first page. Either they can't deliver or they will get you rankings for keywords that don't prove value, such as for your brand name. SEO's for small businesses are typically small businesses themselves, so get local references. Ask for five and call at least three. Remember that you don't need just traffic, you need "quality" traffic and that's what makes a good SEO. Ask the references if they get more SALES as a result. As a fall-back, call your yellow page provider. All of them have an SEO program (AT&T, Yellow Book, Verizon etc.). They are reputable and have generally good results. You can also use Web.com, Yodle and Reach Local. They are national companies and have average results (see links below). They will also give you a good idea of what the right rates should be... Good luck!
I think i know exactly what you are looking for. For my websites I use a company called RankPay and they do performanced based SEO. Not only is it relatively cheap depending on your keywords, but YOU DON'T PAY UNTIL YOUR SITE IS RANKING! I've got a bunch of sites ranking with them for extremely competitive keywords. It was pretty easy for me to choose them because there is literally no risk involved. You dont pay a dime until you start ranking. RankPay website: http://bit.ly/eNhQ4q