Judging from the access logs on dd-b's server, it appears that it just has to exist at the root -- www.yourwebsite.com/favicon.ico -- and that's all you have to do. They say you're supposed to put <link rel="shortcut icon" href="favicon.ico"> in the header of your base HTML page, though. In any event, you just do it at the root and it takes effect for the lower-down pages.

We have all these "file not found" instances in the error_log because of it...