Compensation means that you are slightly increasing the effective length of the string to be greater than the "scale length" - this corrects for the effect of the change in path of the string when it is depressed to the fretboard. As Alain said, this means that for a 650mm scale length you actually place the saddle about 652mm or 653mm from the nut.
You have probably noticed that the saddle of a steel string guitar is slanted to provide a greater amount of compensation on the bass strings compared to the treble strings. This is necessary because of the big difference in string gauge between the bass and treble in a set of steel strings, and also the high string tension. However, in classical guitars, with nylon strings, it is usual to have the same amount of compensation for every string. Therefore, classical saddles are not slanted, they are at right angles to the path of the strings. So, you will want to have the saddle slot cut straight across the bridge, not slanted. Then the bridge position needs to be worked out so that the saddle is at scale length plus about 3mm (same for all strings). You shouldn't use a steel string style bridge, with a slanted saddle slot, to do a classical set-up.
You then check the intonation for each string. If it needs slight alteration you can change the shape of the saddle a bit to bring the break angle slightly forward or back on individual strings. If you are very clever you might compensate at the nut instead (look at examples by Trevor Gore or Nigel Forster), but most builders find that the standard set-up gets them close enough to the mark.
Mark
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