The Compensate Activity invokes the Compensation Handler of a Compensatable Activity ( i.e. any activity that implements the ICompensatableActivity interface, although usually would be a Compensatable Sequence Activity or a Compensatable Transaction Scope Activity). It can only be inserted within a Handler and would generally follow the Compensatable Activity it intends to trigger. That Activity is set in the TargetActivityName property.

For more information see Compensatable Sequence Activities and Workflow Basics.