Compacting is one differentiation strategy. Before you teach a unit, you give a pre-assessment and find out a handful of your students already know most of what you're going to teach them, several of them know some of it, and some are going to need a bunch of help. You tailor your small group instruction and the work you give students based on assessment results.
This is interesting, but not exactly what I've understood compacting to be - the way the term compacting has been used where I'm at is to refer to teaching new material at an accelerated rate. It's not easy to actually pull off unless you have a class that is all-gifted kids, and even then each child most likely varies in their ability to learn at different rates. I do know that compacting worked great for our ds in after-schooling math when he was in elementary and not allowed to accelerate at school.
polarbear