The following command will create a root directory "." and put all the files from the specified directory into it.
tar -cjf site1.tar.bz2 -C /var/www/site1 .
If you want to put all files in root of the tar file, @chinthaka is right. Just cd in to the directory and do:
tar -cjf target_path/file.tar.gz *
This will put all the files in the cwd to the tar file as root files.