Hong Zhou's answer is good, so far. Here are some more details:
When using shared memory you might want to consider it first, because it's a very much limited resource and it's not unlikely for kernels to have very specific needs that constrain
those many variables controlling parallelism.
You either have blocks with many threads sharing larger regions or blocks with fewer
threads sharing smaller regions (under constant occupancy).
If your code can live with as little as 16KB of shared memory per multiprocessor
you might want to opt for larger (48KB) L1-caches calling
cudaDeviceSetCacheConfig(cudaFuncCachePreferL1);
Further, L1-caches can be disabled for non-local global access using the compiler option -Xptxas=-dlcm=cg
to avoid pollution when the kernel accesses global memory carefully.
Before worrying about optimal performance based on occupancy you might also want to check
that device debugging support is turned off for CUDA >= 4.1 (or appropriate optimization options are given, read my post in this thread for a suitable compiler
configuration).
Now that we have a memory configuration and registers are actually used aggressively,
we can analyze the performance under varying occupancy:
The higher the occupancy (warps per multiprocessor) the less likely the multiprocessor will have to wait (for memory transactions or data dependencies) but the more threads must share the same L1 caches, shared memory area and register file (see CUDA Optimization Guide and also this presentation).
The ABI can generate code for a variable number of registers (more details can be found in the thread I cited). At some point, however, register spilling occurs. That is register values get temporarily stored on the (relatively slow, off-chip) local memory stack.
Watching stall reasons, memory statistics and arithmetic throughput in the profiler while
varying the launch bounds and parameters will help you find a suitable configuration.
It's theoretically possible to find optimal values from within an application, however,
having the client code adjust optimally to both different device and launch parameters
can be nontrivial and will require recompilation or different variants of the kernel to be deployed for every target device architecture.