Georeferenced terrain should automatically scale properly in all dimensions. What you may be seeing is *incorrect* height scaling when georef is not being used, in other words it is a correct height but relative to the area covered it is too tall, but when goereferenced it actually covers the appropriate area for its height; the height doesn't change in that case, just the area covered. I am just speculating here though.
TER format maintains terrain scales correctly (or should do), unlike pretty much any other image format, so that's why TER would generally be preferred; it has terrain-specific meta data basically. TIFF is an occasional exception when you're referring to GeoTIFF, but WorldMachine does not output GeoTIFF. But if you're using WM, something to be aware of is that WM's TER export is... well, I'm not sure it's fair to say it's "broken" per se, but it definitely doesn't work as the TER format was intended. This is why you sometimes get very weird vertical scaling. In that case you can look at the total height range of your exported terrain *in World Machine* and then use a Heightfield Adjust Vertical to set the correct range.
- Oshyan