Compensation in psychology means trying to make up for something that you lack or feel bad about. For example, if you feel bad about being short, you might try to become really good at basketball so you can feel better about yourself. That's a form of compensation.
It's kind of like when you're playing a game and you're not good at one thing, but you try really hard at something else to make up for it.
People use compensation to try to balance out their feelings of inadequacy or inferiority. They may try to improve in other areas or build up other aspects of their personalities to make up for what they perceive as a weakness.
For example, if someone feels like they're not very smart, they might try to become really funny or kind so that they can feel like they have something valuable to offer.
Compensation can be a good thing if it leads to positive growth and development, but it can also be problematic if it leads to a lot of stress or pressure to be perfect in every area of life.