I've been playing around with this and I use adwlauncher. What I found so far is, using a jpeg, you need 800x640 in a 1600x640 canvas. I then select the file with my file explorer (I use ES File Explorer) and choose View picture, the default photo viewer with the S7, set as, and drag the frame to select the entire image (1600x640) and hit save. Degradation of the image is minimal, the textures I created in Gimp look great, even in portrait. I've played with image files with some success but need to look in to it a little further. I imagine the dpi of the image and quality of the source are very important.
Thought I should add that the problem with this has obviously been the landscape/portrait rotation of the launcher makes backgrounds a bit more complicated.