If true, the node's Z index is relative to its parent's Z index. If this node's Z index is 2 and its parent's effective Z index is 3, then this node's effective Z index will be 2 + 3 = 5.
So, really, when checked, it lets you easily organize the z-index of a hierarchy of nodes relative to their parent. Then, you can easily adjust the entire hierarchy relative to other objects in the world simply by changing the z-index of the parent node(s) (and all the "relative" children will adjust automatically).
Really, it's just a convenience mechanism. You'll need to decide if it's helpful or not to use it in a given situation.