Engine knock, also known as "ping", spark knock, or detonation, is a phenomenon that occurs inside the combustion chambers when a portion of the air/fuel mix is ignited under extreme heat and pressure, burning more rapidly than it should for creating optimum power on the piston's downstroke. The result is a harsh detonation as the air/fuel mix explodes, colliding violently with parts of the engine such as the head, piston, cylinder walls, etc., as well as the original portion of the air/fuel mix that was ignited by the spark plug.
Knock can occur at different intensities depending on conditions inside the combustion chambers. It can be caused by various things, including low octane fuel, lean air/fuel mixture, higher boost (smaller SC pulleys), increased engine load, and restricted engine air flow, and all of these things may act to influence each other. Perhaps the two greatest direct causes of knock are: A) excess heat and B) a lean air/fuel condition. Warmer outside air temperatures, "hot" air intake designs, higher engine/transmission temps, incorrect spark plugs, and simply racing the engine at high RPMs can also contribute to heat build-up and knock.
KR stands for knock retard. Knock retard is the PCM's response to detected knock, which results in retarding of ignition timing. KR can be measured using an OBDII scan device. KR is measured in degrees depending on its level of intensity. The more knock that is detected, the greater the response by the PCM in dealing with it. As timing is pulled, power output is reduced. For obvious reasons, zero degrees KR is optimal, but this is not always realistic due to the nature of the engine's operation. Because our cars are supercharged, the effective compression inside the cylinders is much higher than with normally aspirated engines under increased throttle, thus we are prone to knock much more than NA engines when under loads. In fact, it is normal for a SC 3800 V6 to be on the verge of knocking during WOT (wide open throttle), or under heavy load conditions, such as pulling up a grade in overdrive. In order to take advantage of the extra air from forced induction (supercharging), knock is a sort of necessary evil, but you don't want very much. Ideally, you want to get the most power possible before engine knock ensues.
Even a stock vehicle can exhibit knock during WOT at times. If your engine is knocking slightly, say 1-3 degrees, you probably won't notice it, because the PCM uses microphones to listen for these sounds and then takes quick action to correct with KR. A small amount of power will be lost, but it is very small, probably in the area of 5 hp. Higher levels of KR above 4 or 5 deg may require extra response from the PCM to control the knock. When this happens, the engine could lose a noticeable amount of power, and a "ping" sound may actually be audible is extreme cases. When you use premium fuel, cooler plugs, a colder thermostat, or a cold air intake (CAI), you may notice restoration of lost power due to the reduction of existing engine knock (the only way to verify is to monitor KR using a scan tool).
Modifying the engine to run at higher levels of boost (swapping to smaller SC pulleys) can yield considerably more power output, but requires added effort to keep knock and KR under control. Running extra boost will increase heat and test the PCM's ability to deliver the needed fuel. Further lowering intake temps (IC), maximizing engine air flow (rockers, cam, exhaust), and tuning the PCM's fuel curves (PowrTuner) are just a few ways to help keep knock levels in check.