Below is an excerpt from Lexile's website describing the method in more detail:
Lexile Measures Help Readers Grow, and Help Parents and Teachers Know
Teachers and parents can best serve a student's literacy needs when they treat him or her as a unique individual, rather than as a test score or a grade-level norm or average. The reading abilities of young people in the same grade at school can vary just as much as their shoe sizes. However, grade-leveling methods commonly are used to match students with books.
When a Lexile text measure matches a Lexile reader measure, this is called a "targeted" reading experience. The reader will likely encounter some level of difficulty with the text, but not enough to get frustrated. This is the best way to grow as a reader—with text that's not too hard but not too easy.
When you receive a Lexile measure, try not to focus on the exact number. Instead, consider a reading range around the number. A person's Lexile range, or reading comprehension "sweet spot," is from 100L below to 50L above his or her reported Lexile measure.
If a student tackles reading material above his or her Lexile range, consider what additional instruction or lower-level reading resources might help. Ask him or her to keep track of unknown words, and look them up together. Or take turns reading aloud to each other to chop up the reading experience into smaller portions. Likewise, you can reward students with books that fall below his or her Lexile range for an easier reading experience.
For more information visit www.lexile.com