I am not sure why people are so obsessed with vardiff. Changing the difficulty of submitted shares does nothing to find blocks faster or slower. I was fine at middlecoin with diffs of 1024. The pool doesn't get paid by shares, it gets paid by blocks. I just like the website here better.
Because we have one crappy card, and 516 is too hard for shares.
Over time you will find that a higher diff will average the same income as a lower diff. Look at your WU stat in CG Miner, this shows you your Work Utility per minute.
CG Miner docs give the description of WU as "WU: The Work Utility defined as the number of diff1 shares work / minute (accepted or rejected)."
Your WU will never match your hashrate, but it should be close, a difference of about -10% isn't too much to worry about.
Remember you would need to find 2 x 256 diff shares in a minute to achieve the same WU as 1 x 512 diff share a minute. So yes you may find less shares, but they are worth more to you.